Safe Bets for the Risk-Averse

Safe Bets for the Risk-Averse

Certificates of deposit aren’t the only alternative for conservative investors

You can always stash your money in the proverbial mattress, where it will not earn any interest at all. But for millions of risk-averse investors, certificates of deposit, or CDs, have seemed a preferable choice. Conservative by nature, CD investors tend to be attracted by the promise that they can’t lose their principal, which is covered by federal deposit insurance, to $100,000 per account.

Until interest rates tumbled, CDs were a respectable way to go. Yields, while never robust, were at least decent by conservative standards. However, the average yields on six-months CDs, among the most popular with individual investors, had fallen to 2.81 percent, about par with the then inflation rate. Once taxes were taken, the return was a negative number. Rates have since climbed up a bit.

CDs are not, however, the only alternative for the risk-averse. Of course, other investments carry additional risks. For example, even when sold by banks, mutual funds don’t carry federal deposit insurance. And the values of stocks and bonds rise and fall with market conditions, which can cut into your investment principal. If interest rates rise just one percentage point in a year, the price of a 30-year bond will fall more than 11 percent. On a bond with a 7 percent coupon, an investor’s annual return would be a negative 4 percent.

New York, Grand Terminal. Photo by Elena

If you stick with CDs, you may be able to find better yields by looking beyond your local bank. Otherwise, here’s a quick look at some things to consider before rolling over another CD.

Short-term Bond Funds: The net asset value of the shares varies with the underlying value of the bonds, and the total return falls if interest rates rise. But the variation is much smaller than with longer-term bonds.

Tax-exempt securities: If the yield on a short-term municipal bond fund is 4 percent, it’s equivalent to a taxable yield of 6.25 percent for an investor in the 36 percent tax bracket. Again, the shorter the term, the lower the risk.

Conservative Stock Funds: Funds that invest in utilities are generally stable and pay decent dividends. Yield-conscious investors tend to like them. In addition, several fund companies offer asset-allocation funds, in which the fund manager decides how much of the portfolio to put into stocks, bonds, cash, and other investments. Another choice: equity-income funds, which invest in stocks that pay chunky dividends.

Money Market Mutual Funds: Money funds sometimes yield even less than six-month CDs, but they’re completely liquid.