Invest like a nervous tightwad

By Kathy Kristof

Oh, sure. They told you to invest like a man. Take some chances. Buy some stocks -- maybe some international securities, too. The wisdom of the Street was that you needed a portfolio tuned to run like a sports car.

But that Porsche portfolio careered off a cliff last year, and you'd like to drive what's left of your investments like a blue-haired old lady heading for Mass.

But how? Is there a way to earn a decent return that doesn't require taking chances? Can you structure a portfolio that presents absolutely no risk?

Yes and no, said Payson Swaffield, the chief income investment officer with Eaton Vance in Boston.

There are several supersafe investments that wouldn't put your principal in jeopardy. But that wouldn't mean you'd get away risk-free. Supersafe investments are usually so low-yielding that they present inflation risk -- the chance that your portfolio might grow more slowly than living costs, eating into your buying power over time.

Still, you can invest like a nervous tightwad. Just don't do it forever.

The nervous-tightwad portfolio

There are only about a half-dozen investments that pose no threat to your principal: bank deposits, including certificates of deposit and money market accounts; a variety of securities issued by the U.S. Treasury; and certain types of insurance annuities. None provides knock-your-socks-off returns. Quite the opposite: You should expect to earn from less than 1% to 5%, depending on the investment and market conditions.

In today's market, you'd want to concentrate on just a few of these -- perhaps a CD or two to get a decent return, an I savings bond to protect yourself from inflation and, perhaps, an annuity to provide retirement income.

What are your options, the risks -- on a scale of one to 10 -- and the rewards?

CDs

No, we're not talking about how people bought music before iTunes. Here, CD stands for certificate of deposit, which is a contract between a depositor and a bank.

You agree to give a bank your money for a set amount of time -- three months, six months, maybe even a couple of years -- and the bank agrees to pay you interest and keep your principal safe until you get it back at the end of the term.

This investment gets a 10 on the safety scale. That's because both principal and interest repayment is guaranteed to $250,000 per depositor (until the end of this year, when insurance limits revert to $100,000). It's not just the bank making that guarantee. The U.S. government is standing behind the bank through the Federal Deposit Insurance Corp., a nifty organization that was created during the Great Depression so that Jimmy Stewart wouldn't have to spend all his time persuading nervous depositors not to give their money to Mr. Potter.

The FDIC makes this investment every bit as safe as a Treasury bill -- an IOU from the U.S. government -- but a CD pays a heck of a lot more.

In today's market, a six-month CD pays an average of just more than 1%, according to Bankrate.com. A five-year CD pays about 3%. You can find high-yielding CDs on the Bankrate site, which also checks that all listed banks are covered by the FDIC.

What's the downside? If you pull your money out before the end of the term, your bank can penalize you by withholding part of your interest payments.

Typically, early-withdrawal penalties sap from one to six months' worth of interest, depending on whether you bought a short-term or a longer-term CD. If you haven't yet earned enough interest to pay the penalty, the bank can take the fee out of principal. If you think you might need to withdraw early, check how much you'd have to pay if you did.

Video: Investors prepare for inflation

One way to boost the interest on your CD portfolio, without making all your money inaccessible by locking it into long-term contracts, is to "ladder" by buying one CD that matures in six months, one in a year, one in 18 months and another in two years. The longer-term CDs would pay more, and you're always getting some new cash to spend or reinvest.

Earlier this year, Bankrate financial analyst Greg McBride says he'd create something that looked more like a fire-escape ladder -- starting a few feet off the ground. The reason: He thought that rates were going to fall further in the short run, so he didn't want to have to reinvest any CD money in the ensuing six months. With rates having drifted lower, time has proved him right.

• Risk: 0. (This assumes deposits are within FDIC limits.)

• Complexity: 1. (You do need to check the early-withdrawal penalties.)

• Reward: 5. (No-risk investments don't score higher than this.)

Continued: Savings bonds and TIPS

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