WASHINGTON — Risk is out of the question. But the safest investments deliver almost nothing — especially now when interest rates are at record lows. So how do you squeeze out a decent return and still sleep soundly?
One way is to replace low-yielding money-market accounts with certificates of deposit. You’ll earn more interest, and if you choose a bank CD backed by the Federal Deposit Insurance Corp., your investment is covered.
The downside is that your money is tied up for the term of the CD, typically from three months to five years.
But you can keep your CD investments somewhat more liquid by building a "ladder." Start by putting equal amounts into CDs with different maturities. As the first CD matures, reinvest the money into a new CD with your longest chosen time horizon. That way, you will regularly unlock some of your money while the balance is parked in something that yields more than the shortest-term instruments.
"Rather than shopping for who’s got the best five-year rate, the idea is just to break it up a bit," said Karen Schaeffer, of Schaeffer Financial in Rockville, Md. Many of her clients are buying three-, six- and 12-month CDs "so that when interest rates start coming up again, they’ll always have something coming due" that can be reinvested at a higher yield, she said.
There are also other options:
Ginnie Mae bonds
If you’re prepared for a little edgier investment, consider Ginnie Mae bonds, financial experts said. These are bonds guaranteed by the Government National Mortgage Association and made up of repackaged home loans insured by government agencies such as the Federal Housing Administration. Yes, they’re tied to mortgages, and yes, they conjure up thoughts of woebegone Fannie Mae and Freddie Mac. But unlike Fannie Mae and Freddie Mac bonds, securities insured by Ginnie Mae have always had the explicit backing of the federal government.
The easiest way into Ginnie Maes is through a mutual fund that specializes in them, such as the Vanguard GNMA Fund, yielding 4.96 percent, or the Fidelity Ginnie Mae Fund, yielding 4.85 percent.
"Ginnie Maes would probably be the safest option after a straight Treasury bond," said John Coumarianos, a mutual-fund analyst for Morningstar. "The only risk you really face with them is prepayment because they are mortgages." When home loans are paid off early, that curbs the interest payments to bonds backed by the mortgages.
Corporate bonds
If you’re still hungry for higher yield and ready for another dimension of risk, check out corporate bonds. Their yields have surged to unprecedented levels, but default rates are also rising, which means you’re best off sticking to companies with high credit ratings and stable balance sheets, said financial adviser Frank Ruffing of Farragut Resources in McLean, Va.
AT&T, Hewlett-Packard and American Express bonds are among the issues offering rich yields for the risk of holding them, he said.
"If an American Express five-year note is going to pay me 7.75 percent on my money until July 2013, sure that’s risky — anything can happen in five years. But for it to really be dangerous, you would have to see AmEx get $22.5 billion of market capitalization erased before they got to your principal," he said.
Ruffing is steering clients to the Barclays iShares iBoxx Investment Grade Corporate Bond Fund, an exchange-traded fund. It holds about 100 high-grade bond issues with an average coupon of about 7 percent.
Coumarianos recommends bond funds with a mix of high-quality corporate issues, Treasuries and mortgage securities, particularly for 401(k)s and other deferred-tax accounts. He likes the T. Rowe Price Corporate Income Fund and the Pimco Total Return Fund. He’s also intrigued by the Loomis Sayles Bond Fund, but lead manager Dan Fuss is known to venture into riskier areas such as lower-rated corporate issues and emerging-market debt, so put no more of than 5 percent of your portfolio there, Coumarianos said.
Preferred stocks
If you’re comfortable with corporate securities, another area to consider is preferred stocks. They rank below bonds in safety, but they get priority over common stock when it comes to dividend payouts or, in the case of bankruptcy, the distribution of assets.
Grubb & Ellis AGA launched a no-load fund this summer that focuses on preferred shares in real estate investment trusts, or REITs, which are yielding an average of about 13.5 percent. Favorites of Jay Leupp, senior portfolio manager for the Grubb & Ellis AGA Realty Income Fund, include preferred issues from Public Storage, Vornado and mall operator Taubman Centers.
"Compared with banks and utilities, you’ve got hard, tangible assets that make up 80 percent to 90 percent of a REIT’s balance sheet, so you’ve got assets that can be liquidated if the company does get into trouble," Leupp said.
Bottom line
Most important, spread your money wisely and don’t be afraid to keep some of it in cash, even if the peace of mind costs you.
Other investments may look more enticing. Junk bonds, for example, are offering double-digit yields. But those are the bonds issued by companies with the lowest credit ratings — and the highest probability of default.
