Savers not stuck with low CD rates

Don Taylorq_v2.gifDear Dr. Don,
With CD rates so low and CDs paying less than 2 percent, I would like to know what kind of investments the experts would recommend investing in right now. I like low risk and don't want to take a chance in losing my money. What is the next best thing to CDs that is a good investment right now?
-- Bob Banks

a_v2.gifDear Bob,
CD rates are higher than 2 percent; you just have to be willing to invest in a longer-term certificate of deposit. Using Bankrate's CD rate search feature and searching for the highest CD yields available nationally, I see three-year CDs yielding more than 2.5 percent, and five-year CDs yielding about 3.5 percent on an annual percentage yield basis.

Certificates of deposit insured by the Federal Deposit Insurance Corp. are protected against any risk to principal, so you know you'll get your money back. This is also true of shares at a credit union backed by the National Credit Union Share Insurance Fund.

You do, however, face another risk in these investments, and that is purchasing-power risk. If your investment isn't earning a positive return after inflation, your purchasing power is eroding over time. Treasury Inflation-Protected Securities -- more commonly known as TIPS -- and Series I savings bonds protect against the purchasing-power risk but don't provide much in the way of current income.

U.S. Treasury securities are backed by the full faith and credit of the U.S. government, but the value of the Treasury securities will fluctuate over time. You could buy a seven-year Treasury note and earn a yield of 3.22 percent.

The problem with investing in longer-term CDs or Treasuries is that you run the risk of being "long and wrong." If interest rates start heading higher, you'll regret that you locked in at today's lower CD rates and Treasury returns. A laddered approach to investing in CDs or bonds can help you finesse timing issues. Read the Bankrate feature, "How do I: Ladder CDs?" for more details.

If you're frustrated by today's low CD rates, there are a host of investment options besides CDs and Treasuries. However, you have to be willing to accept some risk to principal. When chasing yield, remember that "high yield" investments translate to "high risk" investments.

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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." Read more Dr. Don columns for additional personal finance advice.

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