How to buy 'chicken money' investments
Q:I hear people talking about capital preservation and moving their money out of stocks during major market downturns. What type of investments are considered to preserve capital during those times?
A: The answer to your question is what I call "chicken money" investments! They include short-term bank CDs, money market deposit accounts, and money market mutual funds. These investments are all "liquid" -- which means you can get at your money very quickly if you need it, or want to make another investment. They are not subject to the short-term swings of the stock market. They are FDIC insured, or in the case of money market funds, they buy only very short term, high-quality investments. And the words "short-term" are very important. If you think you're getting safety though long-term bonds, for example, think again. When interest rates rise, bond prices fall. You may have a promise to get your money back when a bond matures in 10 or 15 years -- but if you have to sell in the meantime, you could lose money because no one wants to pay full price for a bond when rates on other bonds of similar maturities are higher.
So stick with "chicken money" investments -- for the money that you don't want to risk. Having some money set aside in this way allows you to sleep through the ups and downs of the stock market, where you're investing for long -term growth.
How to buy "chicken money" investments: You can buy IOUS from the government -- Treasury Bills -- at www.TreasuryDirect.gov. It's easy. Or try a mutual fund such as Capital Preservation Fund -- 800-345-2021. Or just a money market account at your bank.
Q: I am 78 years old and recently received a $100,000 for the sale of my home. That is all the money I have and currently do not need to live on it. Where should I invest the $100,000. I would like to make more than two percent, but would like to sleep at night and not have to worry that I will be wiped out. Where is the safest place for me to put my money?
A: Here are a couple of choices -- the places where I have my "chicken money."
If you want to do a little "work" to get set up -- the very safest place is in Treasury Bills right from the U.S. Govt. To get started go to www.TreasuryDirect.gov, then click on "Individuals" and then "buy Treasury securities" and they'll show you how to open an account. There's a "guided tour" that shows you how to do it.
So, assuming the money is in your bank right now, probably in a money market deposit account (which is another good choice, but pays so little these days) you'll open your Treasury Direct account, "link" it to your bank account, and buy $25,000 of 13 week T-bills. They'll wire it right from your bank to your T-bill account. Then two weeks later, do the same thing with another $25,000. Then again, a few weeks later. That way they'll keep maturing every 3 months, and rolling over. You'll elect to have each roll over at maturity for another 13 weeks. Each time you buy t-bills they'll direct deposit the interest into your checking account, so you'll have money coming in to spend.
Or you could buy a money market fund that invests only in Treasury bills, for example Capital Preservation Fund -- 800-345-2021. They do all the "rolling" for you, and you can withdraw money by check at any time. They're not FDIC insured, but since they only buy Treasury bills, they're just as safe.
Terry Savage is a registered investment advisor and the author of the newly published The Savage Number: How Much Money Do You Need To Retire? (256 pages, Wiley, $24.95).
