After the past few weeks, most investors are wondering: Where is the best place for my savings? Are Serta mattresses best, or should I stuff it in a Sealy Posturepedic?
First of all: Putting all your money into the mattress isn't the best strategy. But if you're sick of losses and want a safe place for your money, we have suggestions.
Safe investments aren't as safe as you think. For example, suppose you put your cash into an average one-year bank CD, which yields 2.31%. The consumer price index has gained 5% the past 12 months. If inflation remains at current rates, you will have lost money to inflation, even after interest.
Even if inflation returns to normal, you probably won't beat it with a 2.31% return. Consumer prices have risen at an average 3% since 1926, says Ibbotson Associates, a Chicago research firm. And, if your CD is in a taxable account, you'll owe on interest.
Sure, you say, but even a measly 2.31% return is better than the stinking 13.7% loss the Dow Jones industrial average has doled out this year. True. The Dow would have to gain about 16% to get back to where it ended 2007. Typically, it takes two or three years for the stock market to recoup bear market losses. At 2.31%, however, it would take you about six years to make up a 13.7% loss.
But it's a good idea to have some money in a safe, easily accessible account even when the stock market is roaring. For example, you should have an emergency savings account, just in case your car's infindibulum goes all to flinders. And you should have a portion of your investment portfolio in cash, in case you spot an interesting new investment.
Current savings yields are tiny. The average money market mutual fund, for example, yields 1.84%. But money funds with low expenses can be a good deal. Fidelity Money Market fund, for example, yields 2.49% and charges 0.42% in expenses. Vanguard Prime Money fund yields 2.21% and charges 0.24%, says Morningstar, the Chicago fund trackers.
Money funds invest in short-term, high-quality investments, such as bank CDs and Treasuries. If rates rise, your yields will rise, too. But money funds aren't insured.
If you need a guarantee, consider insured bank accounts. The Federal Deposit Insurance Corp. insures accounts to $100,000 and retirement accounts to $250,000. You can boost your FDIC insurance at the same bank by titling your accounts differently. For example, you could have a $100,000 CD in your name and another one in a joint account and be covered by FDIC insurance.
Credit unions often pay higher yields because they are non-profit organizations and because they don't pay federal taxes. Credit union deposits, like bank deposits, are federally insured.
You can find banks with the highest yields at Bankrate.com. Banks that offer the highest yields are often desperate for new deposits, and desperation isn't what you want in a bank. Both Countrywide and IndyMac Bank offered high-yielding bank CDs before they collapsed. Investors who stayed within the FDIC insurance limits got their money back. But when a bank fails and is merged into another, the acquiring bank may not continue your high yield. If the FDIC takes over your failed bank, your earnings stop.
If you buy insured CDs through a broker, you're also covered — with one twist. It may take you longer to get your money back than if you had invested directly with the bank, says Laura Bruce, senior reporter at Bankrate.com.
The quandary with CDs is what maturity to buy. No one wants to lock in today's rates for a long time, but rates could always go lower. The best solution is to ladder your CDs. If you have $30,000, for example, divide it equally among a six-month, a 2½-year and a five-year CD.
If rates rise, you can roll over your six-month CD at higher rates. If they fall, you'll have locked in current rates with your others.
You can also ladder Treasuries, which you can buy directly from the Treasury with no fee. See treasurydirect.gov for details. Interest from Treasuries is free from state, but not federal, income taxes.
At today's rates, you won't get rich from CDs and Treasuries. But at least you won't get much poorer.