Here are some rock-solid investments that will keep your money safe during difficult times.
It is a troubling time for investors, with both the economy and the stock market seemingly in a relentless decline. Many investors are fleeing the turmoil, moving to super-safe United States Treasury bonds. But Treasuries provide only modest returns. For better results, consider the following rock-solid investments that are suitable for even the most conservative investors.
Bank certificates of deposit
Guaranteed by the Federal Deposit Insurance Corporation, CDs are as safe as Treasuries. Yet at a time when five-year Treasury bonds yield only 2.8%, it is possible to find comparable CDs yielding more than 3.9%. The gap between Treasuries and CDs is wider than normal because of the market turmoil. Suffering losses from mortgage defaults, banks are struggling to raise new capital. To attract deposits, the institutions have raised yields on CDs.
But be aware that there are some tax differences between Treasuries and CDs. Municipalities can tax income from CDs, but states and cities can not touch Treasury interest payments. Because of the tax issues, CDs are particularly attractive in low-tax states, such as Florida and Texas.
Investment-grade corporate bonds
In recent months, corporate bond markets have been shaken by the troubles facing mortgage securities. Investors have been dumping corporate bonds of all kinds. To attract buyers, bond yields have been rising—even for high-grade issuers that are unlikely to default. Issues from such solid companies as Home Depot and UPS now yield more than 5.8%.
To diversify your risk and allow a pro to pick the bonds, consider using a mutual fund. For most investors, the best choice is an intermediate-term bond fund that has an average credit quality of A or higher. A top choice is Dodge & Cox Income. The fund currently has two thirds of its assets in bonds that carry the top rating of AAA. The fund owns high-grade corporate bonds from issuers such as AT&T. Because of its cautious approach, Dodge & Cox has not had a losing year since 1999, when it declined only 1%.
Another strong choice is Fidelity Total Bond, which has an average credit quality of AA. The managers avoid risk by staying broadly diversified, avoiding big bets on any one security or industry. The fund currently yields 5%.
Dividend-paying stocks
When share prices drop, dividend yields automatically rise, and many stocks now yield more than 3%. In selecting stocks, it's safest to choose large companies that occupy secure niches in their markets. Reliable dividend payers include familiar names, such as DuPont, General Electric, and Heinz.
Mutual fund investors should consider large-cap funds that hold solid blue chips. A strong choice is T. Rowe Price Growth, which owns steady performers, such as GE and Procter & Gamble. Another option is the Selected American fund, which seeks growing companies that sell at a discount.
Spreading bets
No matter what you buy, the best defense is to stay broadly diversified, owning different kinds of investments. That way when one security drops, another may be rising. For easy diversification, consider balanced mutual funds, which hold a mix of stocks and bonds. Balanced funds tend to be resilient in downturns while delivering decent results in bull markets. A conservative choice is Vanguard Wellesley Income, which keeps about 60% of its assets in high-grade bonds and most of the rest of its holdings in dividend-paying stocks. Another cautious fund to consider is T. Rowe Price Personal Strategy Income, which owns a mix of blue-chip stocks and investment-grade bonds.
A winning fund
One of the most diversified funds available today is Permanent Portfolio. Manager Michael Cuggino always holds a range of asset classes, including investment-grade bonds, gold, silver, stocks, real estate investment trusts, and Swiss francs. Since the fund was launched two decades ago, every one of its asset categories has experienced both bull and bear markets, but during the bear markets, at least one or two types of investments have thrived.
Cuggino does not try to outsmart the markets by dramatically shifting his bets. Instead, he keeps the allocation for each category within a set range, and he holds onto stocks for three to five years. While bonds can account for 31% to 38% of as-sets, gold can make up 18% to 22% of the portfolio, and stocks comprise 13% to 17% of the fund.
In the stock category, Permanent Portfolio owns natural resources shares along with growth companies (those whose earnings are expected to outpace the overall market's). Holding the two groups provides diversification, says Cuggino, since the natural resources stocks sometimes do well when growth shares are languishing. Natural resources stocks in the portfolio include Chevron and BP, the giant integrated oil producers. Such reliable performers have helped the fund deliver the kind of steady results that cautious investors seek.
During the 1990s bull market, the fund produced stodgy results because of most of its assets were not in stocks. But recently, the holdings of gold and the high-flying natural resources stocks have powered the fund to top returns. The fund has not recorded a losing year since 1994.