During times of financial upheaval, people often exhibit renewed interest in the safety of their investments. A few weeks ago, I wrote an article about CDs issued by a bank headquartered in Antigua. They offered great rates and the CDs sounded safe but they were not insured by our FDIC and, when the bank turned out to be yet another Ponzi scheme, billions of dollars were lost by investors throughout the Americas.

One of the truisms in my world is that risk and reward are intertwined. Safety of principal is relatively easy to obtain through investing in government-issued or -guaranteed securities but finding a combination of safety and increased yield is a little more difficult. For example, locating the highest yielding money market fund might seem like a good approach but those funds are not checking accounts, so are usually not guaranteed. Switching from CDs to government agency bonds gets you higher interest rates but leaves you with unpredictable return of principal. Selecting the “stable value” option in your 401(k) plan might sound safe but be sure to check to see if AIG happens to be the guarantor of the return.

When purchasing something complicated, people sometimes feel overwhelmed and simply depend on the salesperson to guide them. As buyers of Stanford Bank CDs learned, you do so at your own peril.

Anna Quindlen wrote an article in Newsweek about a month ago and I have linked to it because I think it’s worth reading in its entirety. She expresses concern that most people don’t know enough about finances and seem relatively uninterested in learning more. She suggests there’s hope, however, comparing the way medicine was practiced a generation ago vs today:

“Once doctors, like financial managers, were seen as keepers of a mysterious flame and patients as people who should simply do what they were told. Today many more patients think of themselves as partners and work hard to educate themselves about their health and their ailments before having surgery or taking medications.”

Toward the end of the article she confesses that, even while covering the investment beat, she understood little of what she was writing about. That’s quite an admission for anyone to make, let alone a writer for a national publication. Her candor makes for interesting reading.

After eighteen years in the world of financial planning and investments, I have come to believe that there’s no such thing as pure safety or pure risk. Many seemingly safe investment strategies did not behave as anticipated during the recent market correction. Even when things do work as planned, such safe investments have a tendency to offer approximately the same return as inflation, meaning that your assets are unlikely to provide additional purchasing power in the future. An investment strategy which includes stocks certainly entails risks but it also offers at least the possibility of making money with your money.

Most of us wear our seatbelts; doing so is just a prudent step toward completing a trip safely. The first cars didn’t have them and they were not generally available until the late 50’s. Through educational programs and changes in laws, they have become almost universally accepted today. I suspect most drivers also consider their financial lives important and could become comfortable learning more about their investments and trying to make better decisions.

Habits can be changed and lessons learned. Why not read Ms Quindlen’s article, then take steps toward understanding your investments and how they relate to your life goals. There are numerous books available on the subject, not to mention magazines, radio & TV shows and web sites. If you’d prefer your education to be a bit more personal, Jalene and I stand ready to answer questions, offer advice and do our best to help you learn.