$afer Havens When Stocks Slide

Early Show Financial Adviser Ray Martin Points To Some

(CBS) 

Auction Rate Resets

These are tax-exempt funds that provide higher yields than money market funds, but only allow investors to buy or redeem shares on a set schedule -- typically every seven, 14, 28 or 35 days. These so-called money market alternatives are professionally managed funds that own underlying bonds with maturities of between five and 30 years. Investors are assured that the price per share will be maintained at $1 and the rate of return is reset each time the fund is open to new purchases or withdrawals. The safest resets are the seven day variety, since investors are given the opportunity to redeem shares one each week. Tax-exempt yields can range from 3.9-to-five percent, depending on the underlying investments and issuer. Since tax-exempt resets typically own insured municipal bonds and they do not invest in mortgages, they are viewed as relatively safe, but there is no guarantee that you will never have a loss.

Certificates of Deposit

Certificates of Deposit are typically issued by banks and are usually backed by FDIC insurance, providing investors with blanket protection of up to $100,000 per account and up to $250,000 in retirement accounts, against losses if the underlying bank fails. So if a regulator closed down a bank, the FDIC would immediately pay off insured deposits, usually by transferring balances to another bank overnight.

It's important to know how the $100,000 per account rules for FDIC protection work, so you can maximize the FDIC protection over more of your deposits and CDs. For example, a husband and wife can each have $100,000 in accounts separately titled in their names, another $200,000 in an account titled jointly, and each have up to $250,000 in their own IRA. Then, all assets totaling $900,000 in these five accounts, even at the same bank, would receive FDIC protection.

With the Fed lowering short-term interest rates, yields on money market funds have slipped and are likely to continue to fall. But CD yields have fallen by a very small amount, since banks that need to attract deposits to boost their reserves and back their loans view paying higher rates on CDs to depositors as a lower cost of borrowed money for them. Investors seeking safe havens for their cash for awhile are advised to consider locking into yields on one-year CDs, where you can still lock into rates of up to five percent. But when you do this, make sure to ask if there are any fees for redeeming a CD before its date of maturity. Typically, there is a penalty of forfeiting up to three months of interest if you do that.

A lot of folks think they need to open an account at a bank to buy a CD, but that is not true. At many brokerage firms, you can also by FDIC-insured CDs right in the same account where you have your money market funds, stocks and bonds. Ask your brokerage firm to tell you about its supply of newly-issued CDs, and ask what is available on the resale or secondary market. Currently, you should be able to find one-year CDs with rates of five-to-5.25 percent. Also, search sites such as www.bankrate.com , www.money-rate.com and www.quicken.com for some of the highest yielding CDs available.

Treasury Bills, Notes and "TIPS"

With the backdrop of the subprime mortgage crisis, write-downs by large financial firms, and a faltering US economy and stock market, some investors' ultimate concern may be the return of their money. If you are in this category, then the safest investment is U.S. Treasury bills. Treasury bills, also called T-bills, are sold in maturities ranging from a few days to 26 weeks. T-bills are sold at a discount from their face value so, for example, if you buy a six month T-bill for $986, you will receive $1000 when it matures. The difference between the purchase price and the amount you receive at maturity is the interest.

Treasury notes, sometimes called T-Notes, are issued with maturities of two, five and 10 years and earn a fixed rate of interest every six months until maturity.

Investors concerned about rising inflation can purchase Treasury Inflation Protected Securities, or TIPS, which pay interest semi-annually with a rate tied to the increase in the CPI-U inflation index. Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. So, as inflation rises, every six months your TIPS will also increase by the stated rate of inflation. You also will get an additional, fixed rate of interest on your TIPS, which is paid every six months.

Because Treasuries are guaranteed by the full faith and credit of the U.S. government, they are considered the safest investments. For this reason, the yields are low. The current yield on the 26-week T-bill is about 2.7 percent -- more than the yield on the two year T-note, so it would not be advised to lock into two-to-five-year, longer-term treasuries at this time.
T-Bills, T-Notes and TIPS can be purchased in increments of $1000 and are available at most brokerage firms, or directly from the U.S. Treasury if you open a Treasury Direct account. To learn more, the best site to check out is www.treasurydirect.gov.

[cranedata]

Dear Ray-
Your statement about some people "getting burned" by money funds closing is incorrect. No investors in money market mutual funds have lost any money and no money market mutual fund has "closed" or halted redemptions. There were a couple cases of private "enhanced cash" funds freezing redemptions temporarily, but no money funds have been impacted. Please correct this misinformation!
Sincerely,
Peter Crane
Publisher, Money Fund Intelligence
http://www.cranedata.com

[nova-2008]

Mr. Martin,
First, what do you think about internet banks; those offering higher interest rates on CDs. Are there any that you would recommend, or offer advice as to which to stay away from?
Second, one of the banks I deal with says they''ll have promotional interest rates on CDs this April. I had a substantial sum invested in a CD that just matured at 6.5% APY and am looking for a new home for it. I''ve moved it to a money market account for the short term, at 4.2%, compounded monthly. Best rate for 1-year CD I''ve seen so far is 4.7%. In your opinion, is it worth keeping my funds in a money market until April and see what happens, or do you think it best to lock into something now?
Thanks.