February 2009 - Special Report: Safe Investing
Short-term T-notes? CDs?
The era of consumption is over
By Catherine Green
Keeping your money under the mattress looked almost like it might be a good idea recently when short-term U.S. Treasury notes, paying no interest at all, were being bought by investors looking for a safe place to park their money.
But, at this stage of our lives, is this a smart investment strategy? Are there other methods to keep our savings safe?
How you decide to handle your finances depends on your circumstances, says John D. Conaway, senior vice president and managing director of PNC Wealth Management for Philadelphia and Southern New Jersey.
Before making an investment, he advises, speak with a financial advisor. No one approach will work for everyone, he cautions, especially since needs vary, depending on, among other factors, how far you may be from retirement.
If you have a 401(k) plan, Conaway advises, you should be aware of how your funds are invested. Most plans offer more conservative options like bond funds or guaranteed investment contracts. In any event, continue to invest in your 401(k) if you can afford to.
Maintain cash reserve
Everyone should maintain a cash reserve, enough to cover expenses for six months, Conaway says. This should make it unnecessary to sell off assets at depressed values if cash is needed immediately.
If you do have discretionary funds, he cites the fundamental rule: "Buy low and sell high."
If you're considering the stock market, Conaway warns against three common mistakes: tying up too much net worth in a single stock; having an emotional attachment that prevents selling a stock; and holding on to a stock too long, simply to avoid capital gains taxes.
"No one can say with any certainty that the market has hit bottom," he said, but when prices are low, it's a good time to buy. For this, he said, it's always best to consult a financial planner.
"A lot of people make more conservative or aggressive investments than they need to," he said. "A financial planner can help them achieve retirement goals."
And if you are retired, have a fixed income, but still feel you'd like to put some of your money to work, what can you do? Bank certificates of deposit (CDs), money market funds or Treasury notes are generally safe investments, he says. Some banks offer higher yields than others, but there may be a penalty if you cash a CD early. Treasury notes fluctuate in value, but currently pay less than most CDs.
Whatever your investment position, Conaway is emphatic on one subject: "Debt is not a good thing."
Short-term Treasury notes and CDs are the safest way to go, financial advisor Gregory Merlino, of Ameriway Financial Services in Voorhees, N.J., agrees. However, he cautions, their yield is fairly low at this time, and when they mature, taxes and inflation can take a toll on the returns.
Diversify your holdings
Investing in the stock market can be profitable, especially when prices are down, Merlino says, but in a volatile climate, he advises mutual funds as a way to diversify your holdings. If during the year you've cashed in funds that you've held for some time, they could be subject to a capital gains tax. This can be minimized, Merlino says, by "tax loss harvesting" — checking your portfolio for possible losses to offset the gains.
"Lower portfolio values also provide one other opportunity," he said. "Converting a traditional IRA to a Roth IRA is much more efficient today than when the Dow was at 14,000."
(Contributions to a traditional IRA are tax-deductible, and withdrawals are taxable. Contributions to a Roth IRA are not tax-deductible, and withdrawals are generally tax-free.)
Era of consumption over
Merlino hopes the recent economic turmoil will bring about a change in consumer habits.
"We've grown accustomed to an era of consumption," he said. "At some point, we have to pay the piper. In the short run, it may hurt the economy — a consumer-led recession as people clamp down on spending.
"But in the long run, if we can improve our savings rate, which has been dismal, that will provide long-term benefits. We do believe that curbing spending at the household level will bring benefits."
Try Treasury bonds
U.S. Treasury EE bonds, described on a Treasury website as "an easy and safe way to save," can be bought online or at most financial institutions or through some employers' payroll savings plans. They pay a fixed interest rate, set each May 1 and Nov. 1. Reflecting economic conditions, the current interest rate is 1.3 percent. Interest accrues monthly and compounds semi-annually.
The bonds must be held for at least 12 months. If they're redeemed within five years, there's a three-month interest penalty. Their 30-year maturity and low interest rates make these less desirable to older investors.
Electronic EE bonds are available in amounts of $25 or more. They are sold at face value, and redeemed at full value on maturity.
Paper EE bonds are sold at half their face value, but can't be redeemed at face value until they have matured. They can be bought in denominations of $50, $75, $100, $500, $1,000, $5,000 and $10,000.
The maximum purchase allowed in a calendar year is $5,000.