By Janet Alvarez, CNBC
When unemployment is high, markets are volatile, and the economy is in a recession, you can be forgiven for wanting to stuff all your money under a mattress. Smart investors know, however, that letting your money sit idle can mean missed opportunities for growth and eroded value due to inflation.
Depending upon your particular level of risk tolerance, there are some
safer alternatives that can help keep you manage your money during
uncertain financial times, and meet both short-term and long-term
investing and savings goals.
Considering options for an emergency fund is a good place to start.
For your emergency fund
Lowest risk: High-yield savings account. Many online banks, such as Simple, offer high-yield savings accounts with minimal fees, as do some major banks, such as Citi.
This is the most straightforward and flexible option, albeit the one
with the lowest returns. Choose an account that offers at least 1% APY,
or ideally 1.2%, or higher.
Low risk: Money market account. Some money market accounts
offer rates somewhat higher than the typical high-yield savings account
– some can yield as much as 1.75%. Sometimes, however, there may be
limitations on how many withdrawals you can make in a specified period
of time, as well as higher fees, so read the fine print carefully when
choosing between this option and a high-yield savings account.
Low Risk: Treasury inflation-protected securities (TIPS). TIPS provide a low-risk way to buy a fixed income security that is guaranteed to shield your money from inflation.
Still, selling TIPS can be a two-step process that includes
transferring the security to a bank or broker, and you may not receive
face value if you sell before maturity. This makes it a less-attractive
option for emergency savings.
For your 401(k)
One
of the greatest virtues of 401(k) plans is that most offer a variety of
investment options, and you can modify your allocations accordingly.
The best option for the vast majority of investors is to stay the course
– stay invested, and keep investing to maximize the impact of dollar cost averaging. If you're inclined to re-balance your portfolio, however, you can consider the following:
Lowest Risk: Stable value or money market fund. Putting some money into a stable value or money market fund is the lowest risk option available in most 401(k) plans,
and the closest thing to a cash equivalent. Most of these options yield
around 1% or less, so consider whether you are comfortable with the
possibility of missing out on gains as compared to other investment
choices.
Low Risk: Target-date fund. Target date mutual funds or ETFs
generally include significant stock holdings, so losses are certainly
possible. Still, because of dollar-cost averaging, investing on the way
down (and then back up) into a well-managed, well-diversified
target-date fund can be a sensible choice.
Variable Risk: Bond fund and precious metal fund.
Quality bond funds and precious metal funds are generally regarded as
"safer" investments – the latter especially in times of expected
inflation or general volatility. Still, these investments can lose
value, so choose wisely.
For your long-term savings, investments
When
considering longer-term investments, know that the longer time horizon
means you should be less concerned about the vagaries of the market and
more so with your specific investment objectives and overall portfolio.
For this reason, a discussion of long-term investing strategies designed
to reduce risk is somewhat more complex and individualized. When
considering such investments, ask yourself the following questions:
- When will I need the money, and what is it for?
- Does this investment seem like it is underpriced, and likely to gain as the economy recovers?
- Can I see myself holding this investment for a long time, even if the economy continues in a slump?
- Do I have better investment options that are likelier to satisfy the above questions?
The
easiest answer to these questions are often the safest, but lowest
yielding options. With more risk and uncertainty comes the possibility
for greater returns. The difference between those who choose option A
versus those who choose B makes a world of difference.
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