How can I maximize reward and minimize risk?
— -- Q: I want to invest, but I can't afford to lose any money and I want FDIC insurance, too. What options do I have?
A: Let me rephrase your question. You want reward, but no risk. Unfortunately, that's not how investing works.
Investing, at its very core, is a tradeoff. By risking your money, you in turn, receive a chance at receiving a reward in the form of a return. But that means, conversely, if you don't take any risk, you can't expect to receive a return.
What you're describing in your question, not wanting to lose a dime and getting FDIC insurance, isn't investing. It's saving. You want to lock your money up and then receive interest in exchange for lending your money to a financial institution. Saving is very different than investing. You're an investor when you buy an asset and are willing to risk your money in exchange for a dividend, coupon payment or chance at selling the asset for a greater value in the future.
But at its core, saving and investing have very different levels of risk. With savings, you can put your money in the bank, either in a savings account or certificate of deposit, and not worry about it at all. Most banks also offer government guarantees so you don't have to worry about losing even a dime if the bank runs into any trouble. But again, with this low risk, you get a low return.
Investing, on the other hand, can have large returns. Stocks, on average, have returned close to 10% a year on average. But to get those returns, you have had to take enormous risks and endure corrections and bear markets. When you invest in stocks, you're risking your money and there are no guarantees.
Some investors try to straddle the line a bit with government debt securities. You can buy Treasuries and get some shelter from the risk of the stock market. But there are risks, here, too. If there's inflation, and you're locked into a government debt security, your inflation-adjusted returns may be disappointing. Meanwhile, the yields on government Treasuries are currently relatively low. Also, you don't get FDIC insurance on Treasuries, yet they are backed with the full faith and credit of the U.S. government, which is essentially the same thing. You can buy Treasuries for no commission from most online brokers and from TreasuryDirect.com.
The answer for you, may be to consider a high-yield savings account. Banks like Discover Savings and Capital One are offering about 1% interest rates on their FDIC insured savings accounts. That's not a great return, and may even be below inflation rates, but if you don't want to take risk, that's the kind of return you'll need to accept.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
