Double Your Returns At No Risk

Expert Jean Chatzky tells how to get the most out of your investments.

Jean Chatzky
Photograph: Christopher Griffith/Gallery Stock

Is it worth it? Let’s say you maintain a $20,000 balance. In a year, you’ll earn $860 in interest. If you’re a frequent debit card user and bank online anyway, why not? These accounts have the same FDIC protection offered by any local bank. To find one that works for you, go to checkingfinder.com.

Nontraditional Certificates of Deposit

These days, the average CD isn’t worth it. A better bet is to look at introductory teaser rates (which you can find at bankrate.com) from banks looking to boost deposits with an appealing deal. “This is a very competitive market,” explains financial adviser Jonathan Pond, author of Safe Money in Tough Times. “Sometimes the CDs you see advertised are a lot more attractive than you can get locally. As long as they’re FDIC insured, you don’t have to worry.”

With all CDs, think about laddering them. Here’s how it works: Divide your money into, say, five pots, and invest the chunks into CDs that come due over each of the next five years. That way as interest rates rise (and they have nowhere else to go), you won’t have to wait a full half decade to take advantage of the higher rate; you’ll be able to roll over the CD that matures next. This strategy will also give you more access to cash if you need it. Check out the following two CD types that you might not have heard of before.
 

Step-up

These new products are longer maturity CDs that offer an escalating return for every year you hold the certificate. They might pay one percent in year one, two percent in years two and three, and four percent in the fourth and fifth years. They are FDIC insured, and although you buy them through your brokerage firm, the issuing bank pays the commission so you won’t have to. If you want to pull your money out of these early, you’ll need to go back to your broker. Pond explains there can be a secondary market for these CDs, and your broker can (for a commission) find someone else to buy what you want to sell. “But you might get whacked on price,” he says. “If interest rates rise and you have a CD at two percent when the going rate is four percent, no one will want to buy it. So you shouldn’t buy with the intention of selling early.”
 

Structured

The returns on this type of CD are tied to an index (such as the S&P 500) or currency movements or inflation. You’re guaranteed not to lose money if the index goes down, which is comforting; but if it goes up, you’ll generally reap only part of the gain. For example, if the S&P goes up by 12 percent, explains Maryland-based financial adviser Susan Fenimore, you may get seven percent. This means you’re never exactly sure what you’ll be getting when you buy it; if you only break even, there’s a chance your portfolio may not keep pace with inflation. Still, you have the possibility of a greater upside return. Fenimore also notes, “The principal of some of these instruments is FDIC guaranteed, others are guaranteed by the bank. Make sure you understand what you’re buying.” Choose the FDIC option.
 

Short-Term Bond Funds

For Jonathan Pond, it’s simply not acceptable to allow his clients to park cash in a money market account earning well under one percent. “I just won’t let them do it,” he says. Instead, Pond directs them toward short-term funds that invest in municipal and corporate bonds; these can earn a four to five percent return. You can buy them through any brokerage firm, but as with all mutual funds, it’s a good idea to check the fund’s rating on morningstar.com. Some funds are better than others.

You also need to understand that these are riskier than the other options I’ve listed. Although bond mutual funds are less risky than stock mutual funds (and short-term bond funds are less risky than intermediate and long-term bond funds), you can lose money if bond markets go down. “It’s very rare that they’ll lose money in a given year,” Pond says. “They may not make as much as they’re expecting, but that’s a price worth paying for that four to five percent average return.”
 

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