Q: I need to diversify my cash deposits. Where can I safely deposit my cash?
A: Amid the financial-market meltdown, you are not alone in wondering how to protect your investments. For the time being, cash is king.
For absolute safety, Joseph Birkhofer, a certified financial planner in Houston, points first to bank accounts. Savers got some relief Oct. 3, when President Bush signed emergency legislation that temporarily lifts FDIC insurance on those accounts to $250,000. It reverts to the old $100,000 limit after Dec. 31, 2009. The insurance level on retirement accounts remains at $250,000.
There is a distinct difference between bank accounts and money-market funds, however, since the latter does not carry FDIC insurance, Mr. Birkhofer says.
While money-market funds are generally extremely safe, they often consist of overnight loans among companies, adding some volatility. The highest yields, and highest risks, come from a corporate-tied money-market funds. "Stepping down to a government-backed money-market fund is a wiser move," says Birkhofer.
Another option, he says: short-term Treasury notes and bills. These can be bought directly from the US Treasury at treasurydirect.gov, but the process can be cumbersome. As an alternative, mutual funds made up of these government-backed IOUs are readily available to the public and can be sold quickly.
Repayment of Treasuries is backed by the "full faith and credit" of the US government. For security, it doesn't get any safer than that.
US Savings Bonds also carry that pledge. But Mr. Birkhofer sees them, along with government-issued TIPS – Treasury Inflation Protected Securities – more as long-term positions than an investment you can access immediately.
Another tactic for investors seeking safety is to build a portfolio of bank CDs covered by the FDIC, says Rita Cheng, a certified financial planner in Bethesda, Md. She would vary their duration, buying one that matures in, say, three months, another in six months, and a third in a year. "This gives you liquidity and access [to your cash] every three to six months. This also provides interest-rate diversification," says Ms. Cheng.
According to Bankrate.com, CD shoppers can find rates as high as 4.07 percent on a six-month certificate and 4.35 percent on the 12-month version. Money-market accounts are paying as high as 3.9 percent.
Q: I'm going on 73 and my wife and I are living in a large motor home. We have been traveling for three years seeing North America. I didn't trust the stock or bond markets when we sold our home. We have our $400,000 in Treasuries at 2 percent interest and receive Social Security. What would be a safe way to get a better return?
J.J., via e-mail
A: In your case, Doug DeGroote, managing director of United Wealth Management in Westlake Village, Calif., sees inflation eating into your traveling lifestyle as fuel prices climb. He says that you might consider laddering bonds. This will capture a better return than putting all you money in Treasuries with the same maturity date.
Mr. DeGroote also suggests putting a couple of years of spending in cash and diversifying your portfolio to better handle inflation and taxes. Sit down with an adviser to truly understand the issues that are affecting your financial life before you make any decisions.