||Ask Dr. Don
Taking the risk out of investing
I'm new to investing and have a question about
no-risk investments. Is there a no-risk alternative to CDs (certificates
of deposit) that would offer a better rate of return? Is a person
better off investing in short term CDs until the rate goes back
up? Right now I have 33 percent allocated to stocks and 33 percent
to mutual funds, and I'm looking for a safe place for my other 33
When you're talking about no-risk, you're talking about insured
CDs, U.S. savings bonds or U.S. Treasury securities.
Investors don't like to be long and wrong when
investing in CDs or bonds. If interest rates go higher, then they
may have been better off to invest short-term and wait.
One way to get around guessing where interest rates
are going is to invest in a laddered portfolio of CDs or bonds.
A laddered portfolio is the bond investor's answer to dollar-cost
averaging in the stock market.
Take the money you want to allocate to bonds or CDs
and invest it evenly across maturities out to the longest maturity
that you are comfortable investing in. Then when an investment matures
you replace it with more of the longest maturity you're willing
For example, investing $2,000 each in one-year, two-year,
three-year, four-year and five-year CDs puts $10,000 to work. When
the one-year CD matures you buy another five-year CD. That way you're
not trying to time interest rates and you'll get an average return
For more on how to ladder a CD portfolio, see this
Another way to avoid trying to guess which way interest
rates are going is to buy Treasury Inflation Indexed (TII) securities
or Series I U.S. savings bonds. Since changes in inflation heavily
influence interest rates, buying inflation-indexed securities is
a reasonable approach to managing interest rate risk. Both investments
have a fixed interest component plus periodic adjustments for inflation.
I savings bond is a little more consumer friendly, but the TIIs
are marketable securities that you can buy and sell. TIIs are better
suited to tax-deferred accounts, like an IRA account, because of
how the investment returns are taxed.
When reviewing the investment allocation in your portfolio
you should look at the percentage of your investments held in stocks,
bonds and cash since mutual funds invest in all three. If your mutual
funds are 100 percent invested in stocks then your current allocation
is 66 percent stocks.
You invest to reach a future financial goal,
whether that's a comfortable retirement, college funds for your
children, or a new boat. The further away the goal, the more risk
you can accept in investing for that goal. Consider your investment
horizon when you allocate your investments.
-- Posted: Aug. 8, 2001