Fidelity Says This ‘Stable' Investment Is Surprisingly Risky — What's Really the Safest Buy?
Newer investors are often looking for the next big growth vehicle that can skyrocket your wealth the quickest. But slow, stable and predictable growth is a sweet spot investors should not overlook, such as that offered through both Treasurys and certificates of deposit (CDs).
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Both of these investment options have the potential to yield a guaranteed income without risking your initial investment if you keep them invested for a set time or 'maturity' period. However, just because an investment is stable, that doesn't actually mean it's without risk.
Fidelity broke down the difference between the two investment options, to determine which one is truly the safest investment. Here are the key factors you need to consider.
While earnings on any kind of investment are great, they feel a bit less so when you have to pay taxes on those earnings. Here's an area where Treasurys have a benefit over CDs. While the interest from any earnings on CDs are taxable, Treasurys are exempt from state income tax. So, investing in a Treasury can actually play into a tax protective strategy if you live in a high-tax state, particularly if you are in a high tax-bracket.
From a tax perspective, if deciding between a Treasury and a CD yielding about the same APY, it probably makes more sense to go with the Treasury.
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If you're making great earnings on an investment but don't have access to the funds, known as liquidity, this can be an issue. Both Treasurys and CDs share the same problem of locking in your funds until a 'maturity' date, which can be anywhere from a few months to a couple of years, on average. You can potentially sell both products before their maturity dates and receive a lower amount than what you'd get if you remained invested, but Treasurys have a more liquid market, according to Fidelity, making them easier to sell before their time if you need the funds faster. Once again, this gives the Treasury a slight edge over a CD.
People often choose both CDs and Treasurys because of their low risks, so long as you stick with the maturity period. They both come with a fair amount of security in how they're backed. CDs are issued by banks and insured by the federal government's FDIC insurance (up to $250,000 per bank, per person). Plus, you can purchase them from different banks to increase the maximum protection — meaning if you bought one for $250,000 from Bank A and another $250,000 from Bank B, you'd be covered for $500,000.
Treasurys are backed by the U.S. government with no limit. That means the government will do whatever it must to make sure they can pay you back at the time of your maturity. Thus, Fidelity suggested that Treasurys are a better choice for those who have large amounts of money they want to put in low-risk investments. If you have smaller amounts of money, it's probably about equal in terms of risk and safety to do a CD or a Treasury.
The last deciding factor is when and how these investment products pay out. CDs have different rates and payment intervals, often between several months and a few years, so you could receive your payout in as little as six months, say. Treasury bills, on the other hand, can be invested for longer periods of time, as many as 10 to 30 years, which CDs do not offer. And, Fidelity pointed out, the Treasury market offers another product known as Treasury Inflation Protected Securities (TIPS), which also offer protection against inflation, something CDs don't do.
While CDs are still a safe and stable option, especially for those investing smaller amounts, Treasurys have advantages that make them better for those with larger amounts to invest.
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This article originally appeared on GOBankingRates.com: Fidelity Says This 'Stable' Investment Is Surprisingly Risky — What's Really the Safest Buy?
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