Sept. 18, 2008 -- There is an old axiom in the investing world: the greater the risk, the greater the return. But in today's down market, risky investments stand to lose the most amount of money. So what's a nervous investor to do?
Financial planners counsel that in the long run, diversifying your investments – holding everything from stocks to bonds to commodities to cash and more – is still the smartest strategy to get the best long-run returns that will let you afford your retirement, even in a volatile investing climate.
But if you're looking for a safe place to stash your cash in the short term and are willing to accept minimal returns, and run the risk of missing out when and if the markets do rebound, here are some options.
Savings and Checking Accounts
Chances are you're already making use of this haven: a savings or checking account at your bank.
"It's the safest place out there right now," said Katie B. Weigel, the founder and managing director of LongPoint Financial Planning in Concord, Mass. "Hold on to your cash, put it in a savings account…I think that's the simple answer."
There has been a lot of news about commercial bank failures recently -- and 11 have shut their doors so far this year -- but most deposits in bank checking and savings accounts are insured.
Since the Federal Deposit Insurance Corporation, more commonly referred to as the FDIC, was established 75 years ago, no consumer has ever lost a penny of their insured deposit at an FDIC-backed institution. The basic insurance protects up to $100,000 in deposits at each institution for each type of ownership category. That means one individual could be insured for up to $100,000 for a single account and another $100,000 in a joint account with a spouse or somebody else. There is also a separate $250,000 insurance limit for retirement accounts, including IRAs, Section 457 plans and Keogh plans.
The biggest downside to checking and savings accounts is that the interest rates they pay may not be enough to beat inflation.
Certificates of Deposit
You can also find Certificates of Deposit or CDs at your bank. When you purchase a CD, you're putting your money into a deposit account for a fixed period of time – six months or a year, for instance, and earning interest for that period. Like checking or savings accounts, CDs are also insured up to $100,000 by the FDIC but they often feature fixed interest rates that exceed those of checking and savings deposits.
The catch is that if you try to withdraw your money before the CD's date of maturity, you'll be charged a penalty. Advisers also caution that sometimes, a fixed rate on a CD that seems like a good deal at first could later lag behind interest rates offered on checking and savings accounts if those rates rise.
Roy T. Diliberto, the chief executive officer of RTD Financial Advisors in Philadelphia, advises that those investing in CDs with the intent of cashing out soon afterward "ladder" their investments by choosing CDs with staggered maturity dates. Someone, for instance, who plans to invest for a period of four years but also needs to have cash on hand during that time could put portions of the total in a one-year CD, a two-year CD, a three-year CD and four-year CD.
That way, he said, "you always have money coming in each year."
U.S. Government Treasury Bills and Bonds
Through U.S. Treasury bills, notes and bonds, consumers essentially lend money to the federal government and get a fixed rate of return. Treasury bills, commonly known as T-bills, can take up to a year to mature; Treasury notes take one to ten years to mature; and Treasure bonds take at least ten years to mature.
Their fixed rate of return and their backing by the federal government make Treasury securities attractive to conservative investors, with the short-term flexibility of three-month T-bills proving especially popular this week: Investors yesterday were actually so nervous, they were willing to pay more for the three month bills than they would get back once the bill matured: For example, they could buy one for $101 and get a yield of $100 back at a later time. A small loss later, some reasoned, was better than a larger one.
Yields for T-bills depend on demand – the more people buy them, the lower their yields drop. By early this afternoon, three-month T-bill yields were back in the black at 0.05 percent – better than yesterday's yield, but still a pittance.
"Rates are quite low right now," said Glen Thomas, a portfolio analyst at Sterling Financial Planning in Sparta, N.J., "because of the turmoil in the marketplace right now. A lot of financial institutions and institutional investors are participating in this flight to quality."
Money Market Mutual Funds
Money market mutual funds are funds that must follow stringent rules – they invest in debt and other securities that, usually, can be sold off easily. Unlike mutual funds, they don't invest in stocks.
"Money markets have historically been very conservative, safe investments," Thomas said.
But investors became more wary of money market mutual funds this week after the Reserve Fund's Primary Fund, the very first money market mutual fund ever established, had its value fall below $1 a share, thanks to investments in the debts held by now-bankrupt Lehman Brothers. Investors who put money in this fund are now sitting on a 3 percent loss.
The decline in the Primary Fund is only the second time in history when such a fund has actually lost money. The other instance was in 1994 when the Community Bancshares fell. The fund was liquidated and investors ended up losing about 4 percent of their money.
Thomas and other experts said that despite this week's discouraging news, they still consider money market mutual funds to be safe investments – just do your research first. Ask the fund to mail you a prospectus or look for the document on its Web site to view the individual securities that make up each money market fund.
Potential investors "obviously need to do is a little more due diligence than they obviously would have to do in the past," said Diane Pearson an advisor with Legend Financial Advisors in Pittsburgh.
Some folks might also be tempted to put their money in gold, silver or other commodities. The price of all has recently spiked – in the last two days the price of gold has surged by more than $100 an ounce.
"It has been a phenomenal hedge this week," Pearson said.
But financial experts caution that prices on gold and other commodities remain volatile. Thomas said that if the financial markets recover, the price of gold could decline significantly.
"I wouldn't necessarily consider it a riskless place to put money," he said.
"Somebody who doesn't have the knowledge or the time to investigate this on an ongoing basis," added Pearson, "may not want to jump into it."
With reports from ABC News' Charles Herman.