It’s been a remarkable spring for the financial markets. While there has been a whiplashing recovery since market lows in late March, many investors feel uneasy about the months and years to come. While diversified stock investments are still a good long-term strategy for many, you may want some stable assets for the next time the market goes on a bender.
I don’t want to mislead you. The search for safe assets that pay a reasonable rate of interest is an arduous one. The loftier the promises of investment returns, the more closely you need to scrutinize them for trap doors and gotchas.
Negotiable CDs. Like the certificates of deposit available at your local bank and credit union, negotiable CDs are FDIC guaranteed. You purchase them in a brokerage account rather than going directly to the banking institution itself. Just like purchasing an individual bond, you can purchase CDs with many different maturities from different banks.
We often use a ladder of negotiable CDs that will mature over the next four or five years. That way when the stock market is having a bad month, you can look over at your steady CDs and be grateful for their steadfastness. Unlike traditional bank CDs, negotiable CDs do not have an early withdrawal penalty. If you need cash before its maturity, you can sell them back in your brokerage account. Before you get too excited, know that current negotiable five-year CD rates are about 1.5% annual interest.
Treasury bonds. Some may scoff at an investment backed by the full faith and credit of the U.S. government, but Treasury bonds are seen by most as among the safest investments. While we used Treasury bonds and their ilk more in times with higher prevailing interest rates, the 0.3% current rate for five-year Treasury bonds lead many investors to keep looking.
Fixed annuities. I realize many of you may be allergic to the idea of annuities and you’re right to be wary. Prospective clients often come to us with annuities in their portfolio. They tend to be larded with complexities and fees. Annuities are a way to save inside an insurance product where you get the benefit of tax deferral. The downside is that most annuities have a rapacious “change your mind fee,” which the industry calls a surrender fee, for many years after their purchase. Often those are combined with annual fees in excess of 3%. So annuity owners are left in a quandary: Do they pay the wretched annual fees until their surrender period runs out or accept the one-time blow of coughing up the surrender fee?
Of course all of this sounds awful, so why would you even consider an annuity? There are fixed annuities that pay over 3% annually with seven-year guarantees through brokers such as immediateannuity.com. If you need to withdraw funds sooner than the interest rate guarantee period, you should be prepared to pay surrender fees. The funds don’t have the same safety as Treasury bonds or CDs. Instead fixed annuities are backed by the insurance company that issues them, along with the state guaranty fund (Colorado residents can find more information at colifega.org). So it’s important if you’re purchasing an annuity that you do so from a company that is financially sound.
You shouldn’t forget that paying down debt is another sure way to “earn interest.” Even mortgage interest is not deductible for most so if you’re making an extra payment on your 4% mortgage, you’re effectively earning interest tax-free on your prepayment. Also those nearing retirement should analyze the case for waiting until age 70 to start Social Security. Depending on your situation, it may be the cheapest safe investment you can “buy. “
David Gardner is a certified financial planner practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice.