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Options for the "timid investor"

Chris Farrell May 23, 2011

Question: I have always been a very conservative investor (nothing more adventurous than shopping for CD rates). I’m retired and have sufficient income flow from a retirement plan, social security and a 403b annuity, but I am really unhappy with my IRA which is all in CDs. The rates are almost invisible now and way below inflation so I have been asking the custodian (a credit union) about investment opportunities they can offer and my question is twofold: (1) What would you recommend for the timid investor who wants to at least keep up with inflation, and (2) since there must be a lot of people like myself testing the waters, what scams might be going on? Gary, Curlew, WA

Answer: I understand your frustration about low interest rates on your savings. My main advice is to stay financially conservative with your investments, however. You haven’t had any experience with higher risk securities, such as stocks. It’s all too easy to get whipsawed by volatile markets during the inevitable market mood swings. The search for higher yields means embracing greater risks.

So, to protect yourself from financial scamsters and rookie mistakes I would stick with reputable institutions and blue chip investments. What might that mean?

One optionfor the “timid investor” portfolio is U.S. Treasury Inflation Protected Securities, better known as TIPS.

The creditworthy security is the long-term savers’ friend. One of the biggest risks faced by savers is that inflation will erode the value of their money over time. Inflation-indexed bonds come in 5, 10 and 30 year maturities. TIPS offer a fixed interest rate above inflation, as measured by the consumer price index. A number of investment advisors have cooled on TIPS recently because of their low yield,–including a negative yield on the 5 year TIP! I took a look at the trade-offs in this Makin’ Money blog post.

You’ll barely earn a fraction on your money by putting it into short-term Treasury bills. But if rates go higher in the coming years you’ll be able to quickly reinvest at the higher rates. That’s why I still like T-bills.

Blue chip municipal bonds are another classic alternative for safe money. The bonds offer a nice after-tax yield for anyone in a high income bracket these days. Problem is, the tax-exempt market is no longer a dull, plodding place for risk-averse money. Many investors fear widespread municipal bond credit downgrades and even defaults with the difficult financial straits of state and local governments.

Does anyone else have other suggestions for earning a higher yield while keeping money safe?

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