In the midst of volatile markets & inflation worries, protecting your investment dollars has become the number one priority for a lot of Americans. Sure, investments that aim for long-term growth get a lot of attention, but for most people, a crucial part of financial planning is actually setting aside a chunk of their portfolio for vehicles that're primarily focused on preserving the capital you put in. Take US Treasury Bills (T-Bills), Certificates of Deposit (CDs) & US Savings Bonds for example - they're all pretty low-risk options that can help keep your original investment safe.
Figuring out how big a chunk of your portfolio is earmarked for these low-risk investments isn't about pinning down some specific percentage - since everyone's financial situation is different, & so are their age, risk-tolerance & goals. Rather, it's about getting a sense of the role these investments play in a wider portfolio, especially when interest rates have gone up - making their returns look pretty good compared with recent times.
Treasury Bills (T-Bills) : The Short-Term Promise from the US Government
T-Bills are short-term debt securities that the US Department of the Treasury puts out. They usually have a maturity date of one year or less - 4, 8, 13, 17, 26 or 52 weeks. You buy a T-Bill at a price that's less than its face value, and when it matures, you get the full face amount back. The main thing that's attractive about T-Bills is that they're super safe because they're backed by the full faith and credit of the US Government which makes them almost risk-free in terms of default. So for someone in the US, T-Bills are a pretty good place to stash cash that you might need soon, or as a temporary holding spot while you wait for other investment options to come through. With interest rates higher than they've been in a few years, T-Bills can also give you a pretty decent return on your investment - a genuine return that'll help you beat inflation over a short period of time without risking your capital in volatile markets. Some people might choose to put 5-15% of their total assets into T-Bills or similar cash-like instruments if they think they'll need access to that cash in the next 1-2 years.
Certificates of Deposit (CDs): Picking a Rate that Holds Steady
Certificates of Deposit - or CDs for short - are essentially savings accounts where you put a lump sum of money in for a fixed time - like 6 months, a year or 5 years. In exchange, the bank gives you a higher interest rate than they would with a regular savings account. The thing that really sets CDs apart is that the interest rate is locked in for the whole term - whether interest rates are high or low - so you know exactly what you're getting. Plus, most CDs are backed by the FDIC for up to $250,000 - so your cash is protected and you can sleep easy. For Americans, CDs are a pretty popular choice for medium-term savings goals like buying a car, a down payment on a house or just squirreling away for retirement. When interest rates are on the rise, they get even more appealing - lots of banks are offering pretty competitive rates for different term lengths. Depending on your investment strategy, you might even consider putting 10 to 25% of your portfolio into CDs especially if you have a clear idea of what you're working towards over the next 1 to 5 years where keeping your principal safe and earning a steady income is the priority.
US Savings Bonds: Long Term Protection with a Twist
US Savings Bonds, like the Series I and Series EE, offer some pretty unique benefits when it comes to keeping your money safe long term. Series I Bonds are especially good in times of inflation because their interest rate is made up of a fixed rate plus a rate that changes with inflation - that way you've got built in protection against losing buying power. They're really popular in times of high inflation when other investments might lose value. In contrast, Series EE Bonds offer a pretty cool guarantee - the value of the bond will double in 20 years no matter what interest rates are doing. Both types of bond are backed by the US Government so you know they're secure. They're often used for long-term goals like saving for college or retirement, as a sort of less exciting but secure part of a portfolio. Although you can only put a certain amount of money into each type of bond (each individual is capped at $10,000) many Americans will put 2 to 10% of their long-term investments into these bonds - especially I-Bonds - to take advantage of their inflation fighting powers.
The Strategic Allocations to Preserve Principal
The amount of an American's portfolio that gets invested in these key preservation assets isn't a one-size-fits-all number . Generally speaking it increases as people get closer to retirement age and start prioritizing making sure their capital is safe over chasing higher growth. In their early years younger investors tend to hold a small chunk (anywhere from 5-15%) mostly as a safety net in case something unexpected comes up. Then as they get closer to or are actually in retirement they often earmark a pretty big chunk (20-40% or more) for these super secure options to keep their nest egg from getting rocked by market swings and to keep the income coming in steadily. With market conditions right now - and the higher interest rates on T-Bills and CDs - younger folks are looking at these alternatives for short-term savings as a pretty attractive option because they can offer better returns than your run-of-the-mill savings account with a lot less risk. These tools serve as the bedrock of a portfolio providing a sense of stability and liquidity so that the other areas can take on a bit more risk in pursuit of higher rewards. It's not just about avoiding taking a hit - it's about creating a solid foundation on which to build the rest of your financial plan so you can rest easy knowing your essential funds are safe, and not at the mercy of the market.
Post a Comment