Expert: Paul Henneman - 9/16/2010

Question
Hello Mr. Henneman! I'm Amanda and I have been saving cash for a long time, and just recently settled an injury suit and doubled My savings. I have appx. 22K. I have never invested anything before, I am rather inexperienced. I want to invest 22k into SOMETHING that is totally SECURE...even if it's low-yielding. Something that will gain high interest. Since I am awesome at saving and very thrifty with My spending, It can sit untouched for at least 5+ years.
Please advise a tight-fisted young woman on how she could best place her money. Thank you!

Answer
Amanda,
   Thank you for your question!
Unfortunately, there is one rule to investing: the more interest you earn on your investments, the more risk you will take. Yes, there are very secure investments you can put your money into, but they will only offer low returns.  Here are a few options:
   The safest, and lowest yielding, secure investment would be a money market account at a major bank.  This is essentially a savings account that earns you some small interest.  If you choose a major bank, it will be FDIC insured, so even if the bank fails for any reason, your deposits are secured up to a few hundred thousand dollar balance. Your funds are very liquid in that it is easy to make deposits and withdrawls, just like a checking account.
   The next up would be a Certificate of Deposit (CD).  This typically has slightly higher returns, but it varies according to where you purchase the CD.  Usually the larger and more established the bank, the lower the rate.  But if you want safety, a small bank with relatively higher cd rates could be risky.  Hundreds of local and regional banks have failed in the last two years.  Larger banks eliminate this risk.
   The final option would be bonds. I don't recommend buying individual bonds unless you really know what you are doing. But, you can buy a general bond mutual fund or ETF (Exchange Traded Fund).  Such a fund could earn maybe twice the return than a CD would over time, but is riskier.  Bond funds usually are fairly stable, but it is possible for them to lose money.  However, if you are in a bond fund for a long time, you are really looking for the income (dividends) that the fund pays out, and should not be as concerned with the overall price per share of the bond.   Bonds are definitely more complicated that the first two options I mention above, so if you are interested in this I suggest doing some reading. There are many introductory books to bonds available on Amazon.com   I suggest picking up a copy of "Investing for Dummies", available at amazon and most major book stores. There is a section on bonds, but also introductions to most other forms of investing. This is a big decision, and while you should not let your self be paralyzed at what to do and fall into the trap of doing nothing, you also should be well informed about your options. You may find something else in this book that appeals to you.

Whatever you do, I wish you the best. Please do not hesitate to follow up with me if you have any additional questions either on what I provide here, or on anything else as you look into your options to invest.  Investing takes time: the longer your investments have to work, the more they grow. So don't delay, but do it right!

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com