There are two relatively simple rules to keep in mind when it comes to saving and investing.
- The greater the potential return, the greater the risk.
- The longer you will be investing (i.e., the farther in the future your target date - when you will need the money), the greater the risk you can take.
These are not ironclad rules, but they are always good to keep in mind. The first rule says, in essence, that there is a spectrum of investment types ranging from very safe but very low interest to very high risk but possibly very high investment return. Each of us needs to decide where we want to be in that spectrum. The high end is, essentially, a form of gambling. The low end is, essentially, a form of extreme caution. And there is lots of room in between.
The second rule is based on the fact that many good investments are volatile. That means they go up and down in value. But most investments go up in value over the long term. A good example is the stock market - a moderate risk investment option. Although individual stocks may go down and stay down - or go up and stay up - the overall stock market tends to go up over the long run. Here is a graph showing the history of the Dow Jones Industrial Average, which is a good approximation of the overall stock market. The graph shows the total market value for about 100 years. This chart does NOT show the effect of dividends (and capital gains in mutual funds), both of which would make the graph higher and the down periods seem less severe.
As you can see, it has increased in value about 9 times over the period shown, but with plenty of ups and downs along the way. [The chart only shows the market price. If you add in dividends and capital gains, which any stock investor should do when saving for the long term, it is actually even better.] If you look more carefully, you can see that there have been some periods of relatively stagnant or even losing performance, although if you included dividends and capital gains, most of those flat periods would show a modest upward slope, returning about as much as a bank savings account. In a similar way, adding in dividends and capital gains would show the down periods being somewhat less severe). But sooner or later, the stock market has always come back and, over the long term, has performed at a rate of about 7–8% per year when you include those dividends and capital gains. So, if you were investing for a goal that is over 20 years in the future, you could pretty well count on having a better gain by investing in the overall stock market than from any savings account. Probably a substantially better gain.
A good example is the period from 2008–2020 (the far right side of the diagram). The “great recession” of late 2008 dropped stock values in half, but within a few years they had come back and exceeded their previous values. I had a retirement account invested in the stock market and when I retired in 2010 it was near the low point shown on the diagram. But I held on. Including the dividends and capital gains, my account had returned to its prior value within about 3 or 4 years and had doubled by about the 8th year.
Let me answer your question with these two rules in mind.
If you really never want to lose a penny of what you have earned, then you want to be very low risk. The lowest risk options are a savings account or a CD. If the account is in a bank or credit union in the US, the money is insured by the FDIC or NCUA (agencies of the US government) up to $250,000 per account. If you have more money than that, you can split it among multiple institutions, each with less than $250,000. There is a program called CDARS for just this situation - it will automatically spread your money across multiple banks. Also, if you have a cash account at many investment companies, they will deposit your money into multiple banks so as to keep all if it insured.
The next notch up in risk is a money market account. This is a type of mutual fund that is invested in such a way that it is very unlikely to lose value, and it typically pays a little higher interest than a bank or credit union savings account. Any good investment company or stock broker can find a good money market account for you. There are several kinds of protection against loss in such an account, but if there were a major crisis in the financial markets, you could lose some of your money. (Most stock investors keep their cash in money market accounts.)
Next higher risk might be bond mutual funds. These tend to pay somewhat higher interest than savings accounts or money market funds, but with some volatility (not as much as stocks). Within the bond category there are many options, such as short-term, medium-term and long-term bond funds and also junk bond funds. I have listed those in rough order of risk and rough order of expected return, although a lot depends on complicating factors such as current rates of interest and what is expected to happen to interest rates in the future.
Note that I said bond mutual funds, not individual bonds. Individual bonds are riskier than bond mutual funds. That’s because bond mutual funds are invested in a very large variety of bonds. If a few of those bonds default (fail to pay the interest due), the mutual fund doesn’t suffer much because it has such a variety of bonds. If an individual bond defaults, you get nothing.
Next in risk might be balanced mutual funds, which are roughly half invested in bonds and half in stocks. And, finally, you have stock mutual funds, which range in risk from the highly diversified funds that invest in all or most of the overall stock market to highly specialized funds that invest in specific market sectors. As an example of the latter, there are funds that invest in energy stocks. They tend to be more volatile than the overall stock market because energy companies have good periods and bad periods.
There are higher risk options, but I think by now I am well past the range of investment options that might interest you, given your desire not to lose anything.
I will say this. If you never want to lose even a little money, you will be limiting yourself to relatively low-return investment options. This is entirely appropriate for situations where you need the money soon and all at once. But if you need it for the distant future and only in small increments, such as saving for a distant retirement fund where you will withdraw monthly income from the fund in 30–40 years, the recommended strategy is a broadly diversified stock mutual fund until you are within ten years or so of needing the money, and then you start to move some of it over into more conservative investments.
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