Is There a Safe Investment?

With recent stock market gyrations and our entire financial system on the brink of collapse (at least according to the blaring news headlines), all this turmoil makes you want to hide in a corner somewhere. So what do you do with money you have invested, and where do you put any new money you may have saved?

Conventional market wisdom says that you should not panic. If you avoid the temptation to cash out at what is likely to be a market bottom, you may be richly rewarded sometime in the future. In fact, this may be a great time to add to your investments, particularly those that are sound and which have been beaten down with the rest of the market.

But conventional wisdom makes no sense if you become obsessed with losing your hard-earned savings and experience nightmares of having to stand in line at the soup kitchen to survive after all your cash is gone. If you are a Chicken Little type of person, you want to put your money where it is guaranteed to be safe, and that does not mean under the mattress.

Here are three safe havens for your money:

1. Certificates of Deposit. CD rates are moving up and offer a good compromise between yields and the length of time you need to keep your money locked up. Check out the best one year CD rates at bankrate.com, which also rates the soundness of the lending institution. A recent look at the top shows that GMAC bank is offering a 4.35% APR on a one-year CD (minimum $500), with a four star rating. Yes, GMAC is part of General Motors, which has seen more than its share of instability, but keep in mind that their CDs, along with almost all CDs from issuing banks, are FDIC-insured for up to $250,000. If you like walking into a local bank and live in Joe SuperSaver’s Raleigh area (or in one of many other cities in the eastern U.S.), Fifth Third Bank is also offering a great deal on FDIC-insured CDs at all their branches. You can get a 4.00% APR CD for 9 months and 4.35% APR CD for 13 months, with a minimum deposit of $5000.

2. On-line savings banks. Just like CDs, on-line banks are also FDIC-insured. The rates are a little lower than with CDs, but you can get access to your money with no early withdrawal penalty. Check out the best rates at bankrate.com. Joe SuperSaver has had an account with FNBO Direct (First National Bank of Omaha) for some time; this bank is consistently near the top of the highest yielding accounts in the country (current APR 3.50%, minimum to open $1.00). The bank makes you jump through hoops to complete the on-line application, but it does protect you from possible fraud. You get your money into and out of the account by linking it to your brick-and-mortar bank checking account, with a usual turnaround of around 3 business days to transfer into or out of the bank.

3. Money market mutual funds. These are great vehicles for parking your cash when the fund is part of a family of mutual funds or the cash fund for a brokerage account. Joe SuperSaver wrote about these cash funds in a previous post, and continues to recommend the very safe Fidelity Cash Reserves (FDRXX, 2.55% yield), Vanguard Prime (VMMXX, 2.25%) and PayPal’s money market fund (PAPXX, 2.47%). Because investors in a well-known fund actually lost principal (the normal fund price of $1.00 dropped to $0.97 because of extensive Lehman Bros holdings), the ensuing panic forced the US Treasury to step in. While details have not been worked out as of this writing, a new insurance fund will be created to guarantee money market mutual fund deposits for a period of up to one year. Early indications are that the insurance limit will be greater than $100,000 and that a pass-through fee will be charged for the insurance.