Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Safe short-term investments

Dear Dr. Don,
My father-in-law normally invests his savings in CDs (certificates of deposit). Currently central Pennsylvania rates are very low. What would be a better, protected short-term (12-18 months) investment alternative for substantial sums? ($10,000 to $30,000).
Nick Note

Dear Nick,
When safety of principal is paramount, as it usually is for people with a short-term investment horizon, insured CDs or U.S. Treasury securities are the best investments.

The average rates for short-term CDs are low all over the country as the table below shows. Your father-in-law doesn't have to settle for average, so before he writes off CDs as a short-term investment, he should use Bankrate's Best Rates search function to find the best CD rates both in his area and nationwide.

Another way to increase the yield is to extend the maturity of the investments. Many people invest short-term in case they need the money, only to roll the investment over into another short-term investment at maturity.

A good middle ground is to put together a laddered CD portfolio that has money invested in both short and long term CDs. As the shorter CDs mature, they are reinvested in longer term CDs. (See Laura Bruce's feature on laddered portfolios for a review of the topic.)

With a laddered CD portfolio the investor isn't trying to time the CD market, investing longer when they think rates are attractive and staying short when they don't like the current interest rate environment. Instead they invest out to their longest maturity on a periodic basis as the shorter CDs mature, and because of this discipline expect to earn a higher average return then they would by trying to time the market.

An alternative to CDs and Treasuries are single premium CD type annuity policies. They are often competitive with the comparable maturity CDs.

These annuities pay a guaranteed interest rate until the annuity's surrender charges drop to zero. That allows you to then take your money out of the annuity without penalty.

Annuities have more risk than an insured CD or U.S. Treasury security but are still very safe investments. You can shop CD type annuity policies at Annuities Online. Remember that annual expenses and fees will reduce the yield on these investments.

-- Posted: Jan. 25, 2002