Dear Dr. Don,
I have some large CDs coming due right now. With CD rates so low, I'm not sure what to do with them. I usually like investments that are safe and do not have any risk. Do you have any suggestions? What is the next best thing going right now next to CDs?
-- Bob Basis-Point
Conservative investors can easily manage risk to principal by choosing investments with guaranteed principal payment. A deposit insured by the Federal Insurance Deposit Corp. or the National Credit Union Share Insurance Fund is backed by the full faith and credit of the U.S. government.
Treasury securities are also backed by the full faith and credit of the government, but their values fluctuate over the holding period as market interest rates fluctuate. However, the government does guarantee that it will pay the agreed-upon rate when a Treasury security matures.
The following table compares some recent highest CD yields reported on Bankrate with yields on U.S. Treasury securities.
As you can see, CD rates are much higher than the yields available on Treasury securities for comparable maturities. With relatively low inflation rates, and a very low targeted federal funds rate, there's not much news to drive the interest rates on conservative investments higher.
The second type of risk is purchasing-power risk. That's when your investments don't keep pace with inflation. When that happens, you can buy less in the future than you could have purchased with today's dollars. Inflation-indexed investments, like Treasury Inflation-Protected Securities, or TIPS, and Series I savings bonds, protect your portfolio against the loss of purchasing power from inflation. I suggest talking to your tax adviser before investing in TIPS or Series I savings bonds because of the tax ramifications involved in these investments.
If you want to chase higher yields, you need to be willing to take on some risk to principal. That willingness should depend on both your investment horizon and your attitude toward risk. Rutgers has an investment risk tolerance quiz that will put a finer point on your attitude toward risk.
If you're not willing to accept risk to principal, stay in the relative safety of Treasury securities and CDs. If you are willing to take on some risk, you'd be well-served in consulting with a fee-only financial planner who will look at your total financial picture, not just the fact that you have some CDs maturing.
Read more Dr. Don columns for additional personal finance advice. To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money."
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