Many people talk about taking cash and "putting it in a mattress." Few do it. If you want to be as certain as possible that your cash will be there, you should store it in a safe deposit box at a reputable bank. Keep in mind, the value of cash is eroded every day by the ravages of inflation and your money is not FDIC-insured when it is in a safe deposit box.
U.S. Treasury securities are issued by the government and backed by the full faith and credit of the United States. Interest is exempt from state and local taxes, but not from federal. Because of their safety, current demand is high and interest rates are low. A one-year treasury bill pays only around 1.3%. Savings Bonds offer a convenient way for individuals to purchase government bonds.
Bank savings accounts offer some interest (around 2.4% currently), and the convenience of easy access to your money. Some require a minimum balance to avoid fees. You may be able to obtain slightly higher rates with an online bank or by agreeing to maintain a high minimum balance. Make sure your bank is insured by the FDIC. New limits cover up to $250,000 per account.
The good news about Bank CDs is you can achieve a higher rate of interest. The bad news is they are not liquid. You will have to commit to tying up your funds for a stated period of time or risk a penalty. At the end of the term, the bank promises to return your principal, plus a fixed amount of interest. Common CD terms range between 90 days and five years. One year CDs are currently paying an average interest rate of 3.6%. You will want to be sure your CD is FDIC insured.
A money market fund invests in short term debt. The goal is to preserve capital, but they do pay interest. They do not all have the same degree of safety. The most secure ones, such as the Vanguard Treasury Money Market Fund (VMPXX), limit their investments to treasuries. This fund is currently paying only 1.48%. Money market funds are not guaranteed by the FDIC. However, the government recently enacted a temporary guaranty program for participating funds.
A bond fund is a mutual fund that invests in bonds. These funds have varying degrees of risk, depending on the quality of the underlying bonds. The Vanguard Total Bond Market Index Fund (VBMFX), which yielded 4.92% for the past 12 months, is a good option for those seeking an index fund. Many bond fund managers believe that they can beat their benchmark. But actively managed bond funds charge much higher fees. I believe investors are better served by low-cost index bond funds.
A balanced fund combines portions of stocks, bonds and short-term investments in one portfolio designed to maximize returns while reducing volatility. The funds typically maintain that mix all the time (they don't try to time the market) and are designed with average investors in mind. Since I think investors’ asset allocation should change based on when they will need the money, I favor Target Retirement funds (also called Lifecycle Funds). These funds automatically become more conservative as they near their end date.
Next: Conservative Mix
For investors who don't want the one-size-fits-all approach of a balanced fund, I recommend a a portfolio combining three index funds. In a conservative portfolio with low volatility, only 20% of your portfolio will be in stocks (with a 70%/30% split between U.S. and international). The balance will be in bonds. Vanguard is a fund family with excellent, very low cost index funds. Fidelity and T. Rowe Price also have similar funds. Past returns for this portfolio are in the 9% range.
You should be able to handle moderate risk if you have at least seven years before you will need a chunk of your investment money. If so, put 60% of your portfolio in stocks (with a 70%/30% split between U.S. and international). Put the balance in bonds. Rebalance your portfolio once or twice a year to keep your asset allocation intact or change it if your objectives or tolerance for risk have changed. Past returns for this portfolio are in the 10% range.
If you won’t need the money for a minimum of 12 years, you can be more aggressive. You could put 100% of your portfolio in stocks (70% in a U.S. index fund and 30% in an international fund). The historical annualized returns for this portfolio are in the 11%-12% range. This simple portfolio beat the returns of over 90% of professionally managed funds over the long term. Remember, with risk, comes reward. Investors who stay the course and don't panic have historically been rewarded for their perseverance. Next: More on Daniel Solin
Now that you've seen 10 options -- from safest to riskiest -- for where to put your money now, click through our next gallery to see 24/7 Wall St.com's ways to at least partially save yourself during these crazy economic times.