The Dumbest Investment You Could Ever Make

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If you're trying get the most out of your portfolio, striving for higher income makes a lot of sense. So why are so many people taking next to nothing for their money right now -- and feeling good about it?

In this time of panic, everybody wants to stay in cash. So many people want it, in fact, that they'll take just about any yield a creditworthy lender is willing to give them -- even if it's so small, it's pretty much worthless.

The trouble, of course, is that in the eyes of most investors, the U.S. Treasury is the only institution creditworthy enough to give them confidence about their cash. And that demand is pushing rates down hard. According to Bloomberg, three-month Treasury bills are paying a scanty 0.03%. That's right -- in exchange for locking up almost $1,000 for 90 days, the Treasury will happily pay you $0.30 in interest next February.

If you're willing to lock up your money a little longer, you can boost your yields -- all the way to around 1% for a two-year Treasury.

Seems silly, doesn't it? But plenty of investors are doing it.

Why they'll take nothing
The credit crunch has big institutional investors scurrying for cover. With asset values plunging, cash has been pretty much the only investment to hold its value in recent months. In addition, corporations want to demonstrate that they have cash on hand to weather the coming recession. As a result, big investors are flooding the cash markets with liquidity.

When you have billions of dollars in cash, your investment options are relatively limited. Often, the Treasury market is the only one large enough to handle the amounts of money a large institution has to invest. And even though the commercial paper market, which was a viable alternative until the recent financial troubles froze it, has started to open up again, it still hasn't mustered enough confidence to cut demand for Treasuries significantly.

With all that demand, bidders looking for Treasuries set rates extremely low. Despite the huge supply of debt being offered by the Treasury to pay for the $700 billion bailout and other initiatives, buyers have thus far overwhelmed the market.

You deserve more than zero
That's good news for the Treasury, since it cuts its borrowing costs. But for investors, getting close to zero isn't the recipe for success.

Luckily, small investors have alternatives for getting better rates on their cash. Here are a few:

  • Bank savings accounts. You don't have to lock up your money to get great rates. According to Bankrate, many institutions currently offer rates greater than 3% for insured savings and money market accounts -- accounts that are completely liquid.
  • CDs. If you're willing to lock up your money for a while, you can get even better rates. One-year CDs are yielding more than 4% at many banks, and you can get more than 5% if you lock in for four years or longer.

Not for the meek
If you're willing to take on more risk, there are other ways to boost your income. For instance, investment-grade corporate bonds have extremely attractive rates right now. They're far from safe, as you can see from the list of issuers below. But the yields arguably make up for that risk. Consider these bonds, with figures from yesterday:


Credit Rating



General Electric (NYSE: GE  ) Capital




Verizon (NYSE: VZ  )




American Express (NYSE: AXP  ) Credit




Merrill Lynch (NYSE: MER  )




Altria (NYSE: MO  )




BP (NYSE: BP  ) Capital




Diageo (NYSE: DEO  ) Capital




Source: WSJ. As of Nov. 20.

Alternatively, dividends on many stocks have become extremely attractive, with the overall market dividend yield eclipsing the rate on 10-year Treasuries for the first time in 50 years. Stocks certainly aren't as safe as Treasuries, but for long-term investors, they also offer the chance at capital appreciation -- something you won't get from a Treasury bill.

Still, even if you don't want to take on any additional risk, there's absolutely no reason for a small investor to accept insultingly low yields on Treasury bills right now. With the same guarantee of safety from an FDIC-insured account, you can get a lot more for your money.

For more on making the most of your money, read about:

At Motley Fool Income Investor, we believe dividend-paying stocks are the key to great overall returns on your investments. Each month, you'll get our most up-to-date stock recommendations, along with other useful information you need to be informed on income investments. Best of all, you can take a look absolutely free with a 30-day trial.

Fool contributor Dan Caplinger has plenty of money in CDs right now. He owns shares of General Electric and Altria. Diageo is a Motley Fool Income Investor selection. The Fool owns shares of American Express, which is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is worth a lot more than zero.

Read/Post Comments (2) | Recommend This Article (19)

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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 November 22, 2008, at 12:42 AM, pauls1966 wrote:

    Very good article- it's so true. It's so easy to beat t-bills right now if you're willing to put your money in FDIC insured banks. And they all seem to be offering very aggresive rates right now. With so many good cd rates out there, it's hard to see why you'd invest in treasuries. I even just swa a new site with bank auctions on cd rates! it was called moneyaisle and it seemed like a good way to get a good rate.

  • Report this Comment On December 05, 2008, at 1:28 PM, petek01 wrote:

    What about TIPS? If one is looking for security, they may still be attractive.

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