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INVESTING: Interest on CDs slides, leaving some investors scrambling to find safe havens

In September, the rush was on. With financial goliaths collapsing and the nation's financial leaders warning Congress of grave consequences, investors grabbed money and ran for the closest bank with FDIC-protected certificates of deposit. The ide...

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In September, the rush was on. With financial goliaths collapsing and the nation's financial leaders warning Congress of grave consequences, investors grabbed money and ran for the closest bank with FDIC-protected certificates of deposit. The idea was to safeguard money fast, think about options later.

But now, 12-month CDs are coming due, and risk-averse investors have a problem: Where should they put the money when CDs are paying so little?

Last year, investors could have safety and find CDs paying close to 5 percent. This year, many 12-month CDs are paying less than 2 percent and even five-year CDs aren't likely to pay much above 3 percent.

Martha Pomerantz, portfolio manager with wealth-management firm Lowry Hill in Minneapolis, has been trying to talk individuals into moving some of the cash they will not need for living expenses into stocks. She said many large-company stocks are attractive, despite a sharp climb in the market. Relying on 2 percent or 3 percent interest in CDs and Treasury bonds is going to be a failed long-term strategy for people who need growth, Pomerantz said. But watching the problems last year has scarred some people, and they can't stomach the stock market.

Kraig Kast, managing trustee of Atherton Trust in San Diego, said he is using CDs for ultraconservative investors. For those who want to protect their money, he puts 35 percent into one- or two-year CDs, 45 percent in U.S. Treasury bonds and 20 percent in corporate bonds from large firms that make necessities consumers use even in a recession.


For the CDs, Kast searches for small, family-owned banks with a long history of conservative practices and little exposure to commercial real estate loans. He then divides money among various regions.

Safe choices are important for investors with holdings exceeding the usual $250,000 limit on FDIC insurance. Check a bank's health at; click on "bank ratings."

As Kast becomes more certain about a recovery, he said he will invest some of the corporate bond money in strong industrial company bonds for a higher yield. Cautious investors should stick with bonds rated no lower than A; AA or AAA are preferable.

To be less tied to today's low rates in CDs and Treasuries, Pomerantz suggests creating a five-year ladder of securities that mature at different times. Such a ladder would include five CDs, so an investor would have the opportunity to exchange a low-interest CD for a higher-paying one if interest rates go up.

Here's a possibility:

A five-year CD yielding 3.3 percent.

Four-year, 3 percent.

Three-year, 2.7 percent.


Two-year, 2.3 percent.

One-year, 1.7 percent.

This is not a time to lock up low-interest bond investments for many years, said William Dennehy, senior fixed-income portfolio manager at Northern Trust. Rather he suggests conservative investors hold bonds that will mature in about five years or less.

To provide diversity in portfolios and some extra yield, Northern Trust short-term government bond fund manager Daniel Personette holds mostly Treasuries but adds government-supported mortgage-backed securities and Fannie Mae and Freddie Mac debt securities, known as agencies.

With government backing, these are safe investments now. But some backing is set to expire at the end of this year, and questions remain about what to do about Fannie and Freddie.

Personette said investors could become reluctant buyers of agencies and mortgage-backed securities as changes play out, but he sees no evidence of that. If investors become skittish, that could affect the value of the bonds and bond funds invested in them.

Bond funds -- even with the safest bonds -- can drop in value if interest rates climb, but Personette said that's less likely in a short-term bond fund that stays away from bonds that mature in more than five years.

To protect against inflation, Dennehy suggests Treasury inflation-protected securities, known as TIPS. These bonds, sold by the Treasury, are backed by the government and designed to pay more interest when inflation rises. Adjustments are made to the bonds every six months based on inflation.


Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery." Readers may send her e-mail at .

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