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Q: Dear Dr. Don,
I have about $75,000 I need to invest. I do not want an annuity or stock market investment. In the past, it was invested in a certificate of deposit, but I can't find any decent rates. Not sure what to do. What do you suggest?
— Lana Longbond
A: Dear Lana,
It's a tough call. People who want to avoid investing in the stock market typically are uncomfortable with risk to principal, meaning they want to be sure they get their money back at the end of the investment. CDs fit that bill quite nicely. So do U.S. Treasury securities. With U.S. Treasury securities, the market value of the securities will fluctuate, but you're guaranteed to get the face value of the investment at maturity.
There's another risk when investing, and that's purchasing power risk. That's the risk that you don't earn enough on your investments to keep pace with inflation. What you can buy after cashing in your investments declines over time if your investment yields don't outpace the inflation rate.
Ask yourself what you want to accomplish with this investment. Is it your emergency fund, an income source or an investment to achieve a future financial goal? If you're investing for the future and don't want to risk purchasing power or principal, I'd suggest looking at Treasury inflation-protected securities, or TIPS. Investing in TIPS is a bit of a nuisance in a taxable account, less so in tax-advantaged retirement accounts. That's because in taxable accounts you owe income tax each year on the coupon interest payments and the inflation adjustment to the principal balance.
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You can understand why investors are shying away from the five-year TIPS issue because it is priced to yield the inflation rate less 0.49 percent. The longer-dated TIPS issues are priced to yield higher, but the prices of these longer-dated issues will be more volatile because of the longer maturities.
It's a tough time to be a conservative investor. Yields on safe investments like CDs and Treasuries are low. Investors chasing yield have invested in dividend stocks, short-term bond funds and bank-loan funds (mutual funds that invest in loans by financial institutions) to try and get a yield pickup over money market funds, CDs and Treasuries.
You've opted out of the stock market and annuity products. That leaves you with bank products (CDs), the bond market, savings bonds and possibly a permanent life insurance policy, but you've already indicated that you're not happy with CD yields. The only Treasury securities that currently have the potential to outpace CDs when held to maturity are TIPS. Depending on your age and overall portfolio, you also could consider investing in a permanent life insurance policy. It would build cash value over time and with a long investment horizon, it could rival what you would have earned investing in CDs.
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