Today's topsy-turvy economy has panicky investors fleeing like a herd of wildebeests to the relatively greener pastures of fixed-income investments. Not only are returns relatively predictable, but some of these securities have tax advantages, and they usually are less risky than, say, stocks.
The trade-off, of course, is that in lowering risk exposure, you'll likely see lower returns over the long run. That may be fine if your goal is to preserve capital and maintain a steady flow of interest income. But if you're looking for growth, consider investing strategies that match your long-term goals.
Risk tolerance and time horizon play big roles in deciding how much to allocate to fixed income. Conservative investors or those near retirement may be more comfortable allocating a larger percentage of their portfolios to fixed income to minimize risk. Those with stronger stomachs and workers still accumulating a retirement nest egg probably should diversify more.
Either way, be prepared to do your homework and shop around. The financial crisis and housing bust have created volatility that has affected the performance of all asset classes, including those traditionally considered safe.
Relatively safe havens
- Certificates of deposit
- Money market accounts
- Money market funds
- Treasury securities
- Government bond funds
- Municipal bond funds
- Short-term corporates
Certificates of deposit
How they're valued: Certificates of deposit, or CDs, are federally insured time deposits with specific maturity dates that can range from several weeks to several years. Because these are "time deposits," you cannot withdraw the money for a specified period of time without penalty. The financial institution pays you interest at regular intervals. Once the CD matures, you get your original principal back plus any accrued interest. There are several different types, including jumbo, callable and flexible CDs.Risk: CDs are considered safe investments. However, they do carry reinvestment risk -- the risk that when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs with lower rates. Consider laddering CDs -- investing money in CDs of varying terms -- so that all your money isn't tied up in one instrument for a long time. Learn more about CD laddering in Bankrate's Investing basics.
Although CD returns often are higher than those of traditional savings accounts, it's important to note that inflation and taxes could significantly erode the purchasing power of your money.
Liquidity: CDs aren't as liquid as savings accounts or money market accounts because you tie up your money until the CD reaches maturity -- often for months or years. It's possible to get at your money sooner, but generally you'll pay a penalty.