Money Matters:  Financial Independence

MAKE YOUR CASH WORK HARDER

Provided 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 investments. 

Buy Bonds
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 rate risk.

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 over time.

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 Consultant