Thursday, 3 Oct 2013
If you want to maintain a balanced financial portfolio, you need to have an appropriate balance of investments that have significant growth potential, coupled with less lucrative investments that have little or no risk associated with them. The mix between these two is going to vary over your life – you will typically be less risk-averse as you head toward retirement, but more willing to take chances when you have a long career still ahead of you.
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While a part of your portfolio needs to be low risk, this does not mean that it has to have absolutely no return. There are many investment vehicles which are very secure and still offer better returns than a savings account. Let’s look at some of the most common ones.
There is nothing safer than a traditional certificate of deposit (CD). Here, you purchase a CD from a bank or credit union. You then hold onto the CD until it matures, which can range from as little as 6 months up to several years depending on which term you select. During this time, you will receive fixed payments at regular intervals which are agreed in advance of the purchase. In effect, this is like making a deposit with the financial institution and committing not to withdraw the funds for a fixed period of time. In return for making this commitment, you get a higher rate than you would from a savings account. The investment is also protected by the FDIC up to a value of $250,000 per institution, so it is as safe as investing in the US government. However, you should know that the penalties for withdrawing early can be significant, so it’s best to make sure you’re not going to need the money before the CD matures. You can find more traditional CD info on Go Banking Rates.
You can also invest directly in the US government by buying federal bonds. Probably the lowest risk of these is called a Treasury Inflation-Protected Security (TIPS). There are actually two varieties of these. The first option is to buy a bond that provides a fixed interest rate over the lifetime of the bond. The other option is to buy one that rises in line with inflation – the government guarantees to increase the value of the bond by the inflation amount each year. This can make the investment quite attractive, since even if the bond only comes with a 0.25% interest rate, the rate of inflation is added to that – so you are guaranteed to make a small profit even if inflation skyrockets.
Another option to consider is buying municipal bonds, which are issued by state or local governments when they need to raise money. The advantage of these is that they are exempt from federal tax, and most states and municipalities also exempt them – meaning that the effective return is higher than other equities with higher pretax rates of return. These aren’t insured by the federal government, but, despite lots of media coverage, it is actually very rare for a state or municipality to declare bankruptcy.