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TESS VIGELAND: Hey, want a hot investing tip? Come closer. It’s . . . cash.
That’s right. Rising interest rates have become your friend – if you’re investing more money than you’re borrowing, that is. CDs, money market funds, bonds – the whole fixed-income side of the investing spectrum looks a lot more attractive than it has in a while.
So Marketplace’s Steve Tripoli’s here to tell you how to “cash” in on investing’s quiet side.
STEVE TRIPOLI: Frank Lowenthal’s showing me some tools of an investment-picking arsenal in his cluttered home office.
You know, I have multiple computers, and I use multiple Web sites.
He’s a retired suburban Boston engineer who avidly manages his portfolio.
Lowenthal says his computers and Web sites have been dictating big changes lately in his family’s holdings.
LOWENTHAL: If you go back a couple of years, I would say that we were probably 90 percent in stock.
Not anymore – not by a long shot. Lowenthal’s 80 percent in cash these days – mostly short-term certificates of deposit from local banks. He just doesn’t like the stock market right now. But at 62, he also needs some of that money soon.
LOWENTHAL: We have a son in college and he’s gonna go to grad school, so some of it will be used for that. I’m retired, so we may draw on some of that for our income.
Most financial planners would frown on quickly-shifting so much money from any asset class, like stocks, to another like cash. And few planners would recommend an 80 percent cash portfolio like Lowenthal’s for most folks.
But in today’s low-inflation, rising interest-rate environment, financial planner Deborah Neiman says there’s a lot to like about fixed-income assets like cash and bonds – including their set payoff.
DEBORAH NEIMAN: Yields have increased, so now you can find one-year CDs. I think they’re averaging about 4.88 percent nationally/ And that’s attractive – you know for no risk to get almost 5 percent, that’s a nice option.
You can even find safe, one-year CDs paying 5.5 percent if you shop some nationwide financial Web sites, like Bankrate.com.
So, should you be moving some money into cash or bonds? Deborah Neiman says investors should run down a list of standard questions first.
And by that I mean what their goals and objectives and needs are, and their risk-tolerance and time horizon.
Neiman says cash and short-term bonds are good for people drawing income from their investments. They also work for anyone needing the money soon and those going through sudden life changes, like a layoff.
And if you haven’t rebalanced your portfolio lately, that’s another fixed-income opening. You may have more stocks than you want in there because stocks have done so well lately. They may have outgrown the balance you want between stocks and the fixed-income side. So now’s the time to move some winnings over.
But don’t go overboard:
GREG MCBRIDE: This isn’t a way for a 25-year-old to save for retirement.
Bankrate.com’s Greg McBride says chasing safer but lower-yielding fixed-income investments isn’t so safe for those with longtime horizons.
MCBRIDE: The risk is that inflation will devour the bulk of their returns, and leave them with very little in the way of growth in their nest egg.
Even our investor Frank Lowenthal, who’s 80 percent in certificates of deposit now, is a long-term investor despite being retired. That’s because he’s relatively young and hopes to pass his portfolio on to his son eventually.
Lowenthal knows that money has to go back into stocks sooner or later. But for now, he’s comfortable with being so heavily into cash and out of the market.
LOWENTHAL: The danger is that the market may go up, and you’re out of it. But you’re getting a yield with your money. So it’s the spread between what the market might do and what you’re getting in the bank or in your other fixed-income.
So let’s close with a couple of strategy tips. If you’re shopping the Internet for CDs, make sure any out-of-state bank or credit union is federally insured. That means you’ll get your money back if something happens. And remember that most money market or bond mutual funds are not federally insured.
And if a way above-average interest rate catches your eye, beware: There’s usually some hidden risk in that higher rate.
I’m Steve Tripoli for Marketplace Money
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