Net Gains: Where to Put Your Savings
From CDs to money market accounts, be prepared for so-so yields.
April 16, 2008 — -- All across America, there's a search going on. It's a search for higher yields on savings that don't jeopardize the safety of principal.
For the time being, however, it could be a frustrating and fruitless search. Most bank CDs pay less than 4 percent, two-year Treasury notes less than 2 percent and top quality money market funds somewhere in between.
All the while, grocery bills are on the rise and gasoline prices show no signs of dropping.
What's an investor to do?
First, know your options are limited for now if you're seeking safety at a decent rate of return. You may be tempted to stretch for higher yield, but unless FDIC insured, anything advertising more than a 4 percent interest rate right now is going to entail some level of risk.
"The options are pretty plain vanilla," Michael Chamberlain of Chamberlain Financial Planning in Santa Cruz, Calif., says. "The important point is to not chase a higher yield in an investment that you do not understand."
He cited as an example complex annuities that offer high initial rates but then lock you in for the long term at low rates.
Or consider the example of the Schwab Yield Plus Fund, an ultra short-term bond fund with a stated goal of "high current income consistent with minimal changes in share price." Despite the goal, this fund used by many as a holding bin for short-term cash has dropped about 24 percent this year as a result of large stakes in mortgage-backed securities that have been crushed in recent months.
The Schwab fund held $13.5 billion in assets less than a year ago; now it stands around $2.5 billion, according to Morningstar, as shareholders have fled and some have joined in class-actions against the fund.
This is an extreme example, but Schwab Yield Plus is far from alone among ultra short-term bond funds used by those seeking higher returns than those available from CDs or money market funds. As a category, ultra short-term bond funds were down 1.9 percent for the year through the end of last week, Morningstar data show.
