Where To Place Your Savings: Secure Investment Options

All investors should be mindful of market risk. Managing portfolio risk often means diversifying into both higher-risk and lower-risk assets. As investors age, the case for de-risking their investments grows. Many investors are risk-averse to some degree or the other, which is completely natural.

Whether you’re winding down your risk as you enter retirement age, or want to sock away an emergency fund or simply set aside a portion of your wealth where it won’t accidentally be invested in risk-on assets, these are five of the safest investments you can choose.

Money Market Mutual Funds

A money market fund is a popular, secure option for holding your money in a place where you earn a better return than from a bank or Certificate of Deposit while retaining easy access to your money. When you hear about people “moving to cash” during stock market volatility, this is where that cash is moving to.

Money market funds invest in high-quality, highly liquid assets such as cash, cash equivalents, and commercial paper (investment-grade short-term debt instruments.) Money market funds usually keep at least 10% of their holdings in assets that can be liquidated daily and 30% that could be sold within a week.

High-Yield Savings

A high-yield savings account is another place to hold your savings where you can easily access it. These accounts can pay interest ten times that of traditional savings accounts or more. High-yield savings accounts are a good place to set aside your emergency cash fund while earning far more interest.

Another advantage of high-yield savings accounts is that your money is guaranteed by the FDIC (or NCUA if opened through a credit union) up to $250,000. They are also available through online banks, which may pay a higher interest rate due to their lower overhead compared to a brick-and-mortar bank.

CDs

Certificates of Deposit are another type of savings account offered by banks and most credit unions. CDs are sold in fixed amounts at a fixed interest rate for a fixed period of time. The most common durations are:

• 3 months
• 6 months
• 1 year
• 2 years
• 3 years
• 4 years
• 5 years

Banks like them because the money is locked in for the duration of the certificate, guaranteeing that the depositor’s money will be available for them to make loans until the certificate matures.

CDs are considered one of the safest types of savings accounts. Certificates purchased through an FDIC-insured bank are protected by the same $250,000 guarantee as checking and savings accounts.

Treasuries

Government Treasury bonds are considered the safest investment on the planet. All Treasuries are guaranteed by the Federal government. Not only do banks hold Treasuries as assets, but central banks worldwide hold large amounts as part of their reserves. The US government issues three classes of Treasuries:

• Treasury Bills (T-Bills) are issued in maturities of 4, 8, 13, 17, 26, and 52 weeks.
• Treasury Notes (T-Notes) are issued in maturities of 2, 3, 5, 7, and 10 years.
• Treasury Bonds (T-Bonds) are issued in maturities of 20 and 30 years.

All Treasuries are issued in increments of $100.

T-Bills

Treasury bills are issued in maturities of 4, 8, 13, 17, 26, and 52 weeks. They are sold at a discount to face value (par) and pay out the face value at maturity. This discount sets the interest rate paid. This means T-bills don’t pay anything to the holder until maturity, unlike T-notes or “long bonds.”.

T-Notes

Treasury notes are issued in maturities of 2, 3, 5, 7, and 10 years. The difference in yields between the 2-year and 10-year notes (yield curve) is considered a major bellwether of the US economy. T-notes pay interest semi-annually and return face value at maturity.

The yield on T-notes and bonds is set at auction. This yield can result in the notes or bonds being sold at, below, or above par. The difference between the interest rate set by the Treasury before the auction and the winning yield offer determines the price at which the notes or bonds are sold.

• If the yield to maturity is greater than the set interest rate, the Treasuries will be sold below par.
• If the yield to maturity equals the set interest rate, the Treasuries will be sold at par.
• If the yield to maturity is less than the set interest rate, the Treasuries will be sold above par.
• In any case, the semiannual payments are based on the interest rate set by the Treasury Department before the auction began.

The yield on the 10-year T-note is used as a benchmark for many financial products, including mortgages, loans, and corporate bonds. It is also used as a measure of the health of the US economy.

T-Bonds

Treasury bonds, aka “long bonds” are issued in maturities of 20 or 30 years. They are otherwise identical to Treasury notes.

TIPS Bonds

TIPS (Treasury Inflation-Protected Securities) are government bonds issued with maturities of 5, 10, or 30 years. Unlike regular Treasuries, the principal on TIPS adjusts semiannually to account for inflation, as measured by CPI. The semiannual interest payments are based on the adjusted principal.

If inflation has risen in the previous six months, the principal is adjusted higher. If inflation has fallen, the principal is reduced. TIPS bonds will pay at par or the adjusted principal at maturity, whichever is larger.

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