With the constant fluctuation of economic indicators, often conflicting advice of leading investment gurus, and the legal battles of Wall Street, even the savviest investors are looking hard at their portfolios and re-assessing risk. Consumer indicators are shaky, unemployment (though stabilizing) is at historic highs. But smart investors still have options, and it usually makes a lot more sense to invest your cash wisely rather than hiding it under the mattress. Remember to keep some assets liquid for financial security, although most of the options below have a very short time frame if you need to convert to cash. A carefully researched, planned approach can help you earn a return on your hard earned dollars without getting in over your head.
1. Treasuries (“T-bills”)
T-bills are backed by the government and are considered extremely low-risk investments. These notes are issued to raise funds and pay for government projects, and are some of the most solid investments you can buy. After all, you can choose the maturity date according to your planning needs, and time frames span from several weeks to several years, with varying levels of return depending on the time frame. T-bills are usually offered in increments of $100, and within the past two years the government decreased the minimum investment from $1000 to $100, making these an accessible investment regardless of how much you have to invest.
2. Bond Funds
The principle behind bond funds is basically that of a mutual fund comprised of bonds rather than stocks. Offered by the government and by investment firms, these diversify types of bonds and allow for a higher return. By combining the low risk of a bond with the potential for higher than average returns through different bond vehicles, you get the best of both worlds with a lot of downside protection. Make sure to educate yourself on the types of bond funds as there are a plethora of options out there.
3. Money Markets
Banks are competing hard for your deposited dollars these days, and this is one case where consumers can benefit from the current economic downturn. With so many competing offers, you may snag a higher interest rate on a money market account than some bonds and CD’s. A monkey market account consists of relatively low risk, high quality short term investments (similar in theory to a type of mutual fund). A few caveats- the higher the amount of cash, the higher the rate you’ll likely be offered, and make sure to check to see if the rate is fixed or a ‘teaser’ rate that is only applicable for 90 days (or some other finite timeline). Money market accounts are FDIC insured up to $250,000.
CD’s are notorious for being safe places to stow cash. Rates vary based on time frame, like bonds, but Certificates of Deposit are issued by banks rather than the government, and have a locked interest rate. Typically, there’s only a small penalty if you need to liquidate the CD before it matures. And while rates aren’t as high as the return on stocks or some bonds, it’s still a great way to earn some interest on your cash.
5. 401k/Retirement Accounts
Employer sponsored 401(k) plans offer a place to park pre-tax dollars to help save for retirement. While many employers cut matching contributions during the recession, even a 1% match is free money. Allocate your retirement portfolio according to your risk tolerance. If you’re self employed or your employer doesn’t offer a match, consider a traditional IRA or a ROTH IRA based on your tax needs and years to retirement.