Recs

5

The Better Place to Stash Your Cash

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

When you're saving for a truly long-term goal, investing in stocks makes a lot of sense. But what you choose to do with the money that you don't put into stocks can be just as important as picking winning stocks. Unfortunately, many investors aren't being very rational about what they do with their spare cash, and their bad decisions may end up costing them more than they think.

The bond buying spree
If you look at performance over the past few years, you'd conclude that the best place to invest spare cash is the bond market. The combination of weak economic activity and loose fiscal and monetary policy has pushed interest rates lower, making bonds that investors already owned more valuable.

The problem, though, is that those falling rates and higher returns have pushed the cost of bonds so high that even their best-case returns aren't all that attractive. Five-year Treasury bonds, for instance, yield less than 1.25%. And even if you go into the corporate arena, rates aren't that much better. Wal-Mart (NYSE: WMT  ) bonds yield 1.5% currently, while Home Depot (NYSE: HD  ) debt pays around 2.2%. Only by taking on a lot of default risk can you find outstanding yields; MGM Resorts (NYSE: MGM  ) issued six-year notes paying more than 10% earlier this week, but with the debt expected to carry a junk bond rating of CCC+, investors can hardly call that a risk-free return.

The typical choice investors make when yields are this low is to buy longer-term bonds. But that raises two more concerns. First, even long-bond yields aren't all that high. Travelers (NYSE: TRV  ) issued 10-year bonds yesterday that paid less than 4%. Johnson & Johnson's (NYSE: JNJ  ) 10-years paid less than 3%, and even its 30-year debt carries a yield of just 4.5%. Moreover, those bonds are more sensitive to interest rate increases, which many consider imminent.

Where to find better yields
Even with bond yields so low, many investors see little choice but to take what they can get. After all, a typical asset allocation strategy requires you to keep a substantial portion of your money in bonds, and the older and more conservative you are with your investments, the more you need to keep in bonds.

What many investors forget is that some investments act pretty much exactly like bonds, even if they have another name. One example is the simple bank certificate of deposit.

If you think about it, you'll realize that the lowly bank CD is, at least for small investors, just as safe as a Treasury bond. With FDIC insurance on CDs up to $250,000, you don't have to worry about the creditworthiness of the bank you choose. If the worst happens and your bank fails, then the government will step in and reimburse your lost money.

Meanwhile, the CD has almost identical traits to a bond. You can choose to take interest payments just like a bond pays. When the CD matures, you get your money back. In fact, in some ways, the CD is actually better than a bond, because if you need your money early, you can get it just by paying an early withdrawal penalty. With regular bonds, you'd have to sell them into the secondary bond market, at whatever price a buyer was willing to pay -- which could be much more of a hit than what the bank would charge.

When it comes to returns, though, banks beat Treasuries by a substantial margin. Discover Financial's (NYSE: DFS  ) Discover Bank pays a 2.6% rate on a five-year CD, while AIG's (NYSE: AIG  ) AIG Bank pays 2.2%. It's astounding that you can get an extra percentage point or more of yield over comparable Treasuries. In some cases, it's even more than what high-quality corporate bonds pay -- without any default risk at all.

A bond by any other name
So if you're wondering where the best place is to put your cash, but are worried about a potential bubble in the bond market, take a closer look at bank CDs. They aren't glamorous, but with their yields higher than riskier alternatives, you could certainly do worse.

Many investors are turning to dividend-paying stocks for income. Find the best ones by clicking here to get the Motley Fool's free report, 13 High-Yielding Stocks to Buy Today.

Fool contributor Dan Caplinger loves robbing banks legally. He doesn't own shares of the companies mentioned in this article. Discover Financial, Home Depot, and Wal-Mart Stores are Motley Fool Inside Value selections. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Johnson & Johnson and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy reveals all that others hide .


Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2010, at 12:15 PM, madmilker wrote:

    Chimera Investment Corporation....enough said.

    oh! and a little inside a snuff can.

  • Report this Comment On October 29, 2010, at 8:24 PM, DDHv wrote:

    A book named "CDx3" outlines a way to get better returns than a CD, with almost as much safety. So far it is working well as a cash stash. Preferred stocks that fit the criteria don't come by that often - even with the help of http://quantumonline.com/, there have only been three since the spring that satisfied me.

Add your comment.

DocumentId: 1350259, ~/Articles/ArticleHandler.aspx, 4/20/2014 10:50:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 3 days ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 4:00 PM
AIG $50.82 Up +0.43 +0.85%
American Internati… CAPS Rating: ****
DFS $56.86 Up +0.34 +0.60%
Discover Financial… CAPS Rating: ****
HD $77.09 Up +0.51 +0.67%
Home Depot CAPS Rating: ***
JNJ $98.96 Up +0.21 +0.21%
Johnson & Johnson CAPS Rating: ****
MGM $23.96 Down -0.26 -1.07%
MGM Resorts Intern… CAPS Rating: ***
TRV $86.68 Down -0.10 -0.12%
The Travelers Comp… CAPS Rating: ****
WMT $77.66 Up +0.44 +0.57%
Wal-Mart Stores CAPS Rating: ***

Special Offer for Savvy Investors Like You!

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut semper dui vitae molestie venenatis. Suspendisse.

Enter Email Address:



Privacy / Legal Information
Advertisement