YOUR CASH WORK HARDERProvided by Stuart
Shim, Financial Consultant
Make Your Cash Work Harder
Have today's low interest rates got you down? Are you searching for an
investment that combines safety while offering a better rate of return?
Consider some of these options to help get the most out of your liquid
Bonds can help you achieve a number of complementary objectives.
Among the most important are: preserving capital, supplementing current
income, and enhancing total return. While past performance is no guarantee
of future results, you need only read the financial pages to come up with
compelling enough reasons to consider them for your investment portfolio.
And, because bonds pay interest regularly, they are a good choice for
investors-such as retirees -who desire a steady stream of income.
Depending on your investment objective and risk tolerance, there are a
variety of bond classes from which to choose, including: Treasury and Agency
securities, preferred securities, high-grade corporate bonds,
mortgage-backed securities and municipal bonds, to name a few.
From a yield and safety perspective, municipal bonds are a good choice.
Many investment-grade, tax-free munis are currently earning attractive rates
versus tax-free money market funds and taxable savings accounts. For
example, by moving from cash to a five-year muni, you can more than triple
your income (cash earning 1.10% versus a 5-year muni earning 3.45%). Buying
a 10-year muni yielding 4.25% can more than quadruple your return.*
Munis are not taxed by the federal government, and are generally exempt from
state and local taxes for residents of the issuing state. Since they are
exempt from federal income taxes, if you're in the 28% bracket or above, you
would typically receive better returns with munis than with other
higher-yielding, taxable fixed-income instruments.
If you are in a lower income bracket, consider preferred securities or
Certificates of Deposit (CDs). Preferreds offer attractive yields relative
to other fixed-income securities and common stock equivalents. They provide
a fixed, quarterly or monthly dividend payment structure and offer solid
credit quality (most are rated investment grade). Today, some preferreds
may offer interest rates as high as 7.00%. And, they require a low minimum
investment. A par value of $25, $50 or $100 is typical.
Certificates of Deposit (CDs)
Certificates of deposits are time deposits issued by a bank and typically
pay a fixed rate of interest for a specified period of time. Since CDs are
FDIC-insured, up to a maximum of $100,000 (for each depositor, per financial
institution), including principal and interest combined, credit risk is not
a concern. They are generally offered in multiples of $1,000, while "Jumbo"
CDs are sold in $100,000 denominations.
CDs, with rates of return superior to today's money market funds, currently
provide opportunities if you are working with a short-term time horizon.
While there are many structures available, brokered CDs typically offer more
competitive rates and may yield as much as one percentage point higher than
those offered by conventional savings banks.
Consider a Laddered or Diversified Strategy
Although CDs are not bond securities, they may be included as part of
diversified investment portfolio. And, you can take advantage of both
investment vehicles in a laddered portfolio structure.
With a laddered strategy, your bonds or CDs are staggered to mature in
sequence over a period of time, locking in current interest rates. If a
bond or CD at the shorter end of the ladder matures when interest rates have
declined, the remaining portfolio (assembled in a higher interest rate
environment) would reduce the impact of lower rates on your overall
investment. The reverse is also true. If interest rates were to rise,
maturing assets could then be reinvested at the current higher rates. This
is a rather conservative approach, but is widely and successfully employed
by individual investors since it helps you reduce reinvestment and interest
You can also diversify your holdings by using a wide variety of bond classes
and structures. For example, a diversified bond portfolio might include
Treasury, Agency, and high-grade corporate bonds, mortgage-backed securities
and preferreds. This approach could take advantage of incremental yield by
taking on a variety of risks-many of which tend to cancel out one another
To help manage risk in your investments and stay liquid, consider safer cash
alternatives such as of bonds or CDs. These are by no means the only
options available, but they offer a good start. Before your make any
decision, know your personal objectives and risk tolerance. A discussion
with a Financial Consultant can help you select investment vehicles to help
you reach your financial goals.
Salomon Smith Barney does not offer tax or legal advice. Please consult
your own personal advisors for such guidance.
Bio, Stuart Shim, Financial