YOUR MONEY: Making a big splash with investments means higher risksWhere can you put your money today to get a higher return? That's the question many investors are asking as yields on cash investments sit at rock-bottom lows.
By: Pamela Yip, The Dallas Morning News
DALLAS — Where can you put your money today to get a higher return?
That's the question many investors are asking as yields on cash investments sit at rock-bottom lows.
Unfortunately, there's no easy answer, no silver bullet.
The issue is not just about chasing a fatter return. It's about understanding the trade-offs in doing so.
The cardinal rule, and there's no way around this one: If you want a higher return, you must take on more risk.
And that can be dangerous.
"There's a tendency in low-rate environments for investors to chase yield and, in the process, take on more risk than they've bargained for," said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site. "I don't think that's the territory you want to go to, especially today."
You can't blame consumers for wanting more bang for their buck. Consider these dismal average annual percentage yields for various savings vehicles in Dallas as of Nov. 4, according to Bankrate.com:
Savings accounts: 0.17 percent.
Money market deposit accounts: 0.26 percent.
Six-month certificate of deposit: 0.59 percent.
One-year CD: 0.85 percent.
What's more, the average seven-day simple yield for taxable money market funds sank to a record-low 0.04 percent for the week that ended Tuesday, according to the Money Fund Report.
It'll take a long time for anyone to get rich with investment yields like that.
When deciding where to put your money, a key question to ask yourself is when will you be needing it?
If you anticipate needing the money in a year or so, you shouldn't be risking it in the stock market, experts say.
"Unfortunately, for the person who needs cash, or it's just a short-term investment, there just isn't any alternative but money markets," said Thomas Murphy, a certified financial planner at TEMAA Financial in Dallas.
The starting point for savers, McBride said, is a high-yield online savings account, where top returns range from 1.5 percent to 1.75 percent.
"Those numbers won't knock anyone's socks off, but the money is FDIC-insured, you can access it whenever needed, and it preserves your buying power by staying ahead of inflation," he said.
And there's another advantage to having your money readily accessible, Murphy said: "Liquid accounts, such as savings and money markets accounts, as well as short-term CDs, give investors the flexibility to take advantage of higher returns once interest rates and inflation begin to pick up."
Murphy is having his clients divvy up their money in incremental periods:
- For money they need in six months to a year, he recommends putting "that emergency money in a money market account or checking or savings account. The key point is that it's not tied up."
- For money that may be needed within one to three years, he suggests things such as CDs and short-term bonds.
"Any dollars that you think you're going to need in three years – that is too short a time horizon to be risking it in the (stock) market," Murphy said.
- For money clients don't anticipate needing until after three years, he's recommending a diversified investment portfolio consisting of domestic and international stocks, bonds, real estate and commodities.
"The purpose is to never be in a position where you have to sell in a down market," Murphy said.
If you're not going to need the money soon, you also may want to consider a long-term CD. The average annual percentage yield for a five-year CD in Dallas as of Wednesday was 2.13 percent, according to Bankrate.com.
Financial planner Michael Miller said investors should be careful about selecting bonds with long maturities.
That's because bonds are sensitive to rises in interest rates, which cause bond prices to fall. The longer the maturity of a bond, the more it's vulnerable to rate increases.
The Federal Reserve has kept interest rates at historically low levels and has said it will keep rates very low for an "extended period." At some point, however, interest rates will rise, and investors will not want to be locked into long-term bonds.
"You want to try to match the maturity to the time you're going to need that money," said Miller, a certified financial planner at Miller Premier Investment Planning LLC in Mansfield. "You don't want to go out too long on that maturity."
At Cypress Wealth Management LLC in Austin, Texas, financial advisers structure their clients' investment portfolios to focus on total return, which includes capital gains, interest, dividends and distributions over a given period of time.
"We actually don't structure portfolios specifically for income," said Jimmy Kull, a certified financial planner and principal at the firm. "Instead, we focus on a portfolio's total return so that we don't get boxed into chasing certain high-yielding asset classes just to keep the yield at a certain level."
Last, there's one simple step that you can take to get more money in your pocket: Cut your expenses.
One highly profitable move is to pay off any high-interest credit cards. If you pay off a card with annual percentage rate of 17 percent, for example, that's an automatic "return" of 17 percent.
Where can you get that kind of return these days without shouldering enormous risk?