Types of Investment

Types of Investment

Do you have free cash and want to invest it without worrying about losing the money?  Unfortunately, this is where you get into the realm of risk and return. Getting high return sometimes requires risk. However, while prices of corporate stock and bonds can experience significant upsides and downsides, many government securities are risk free and guaranteed by the Federal Government. There a few  types of investment to keep in mind, which we will overview below.

Savings Accounts

Savings accounts are the most liquid type of investment. Money is always available for withdrawal from the account. You should only check that the saving account is FDIC insured (Federal Deposit Insurance Corporation). Maximum amount coverage at one bank is 250,000$, so ensure that you do not put more than that in one bank.

Certificate of Deposit

Certificate of deposit is a great tool to use when saving money for a big purchase, such as saving money for the down payment of a house or a car. CD’s pay a higher interest rate than a savings account, but are less liquid. You can get a CD with a term starting from 3 months to 10 years. You can also build a CD ladder and strategically manage your money. This involves buying multiple CDs at one time, but with different maturity periods: 1 year, 2 years, 3 years, 4 years, and 5 years. Your CDs will mature every year giving you two options; to cash out the funds, or roll them over into a new CD with a 5 year maturity term.

I” Saving bond

Buying “I” saving bonds is a great way to invest if you want to be protected from inflation. “I” bond is the only investment tool that the Government of the United States guarantees. If inflation picks up, you will earn more interest through the inflation adjustment. If the prices go down and there is deflation in the economy, the interest on “I” bonds will be adjusted with deflation. However the interest rate on “I” bonds has floor cap of 0% and will never go negative, meaning your purchasing power would continue to increase with decreased prices even if you are earning zero interest on your money.

Treasury Bills

Treasury bills are short term securities having maturities up to one year. They are sold through auctions and mainly at discount. This means that you are eligible to buy a treasury bill with a face value of 1,000$ at discount price (i.e. 975$) and you would receive your 1,000$ at a time when you redeem the bill (after one year). In this case  you would have earned an effective yield of 2.6%.

Treasury Bonds

Treasury bonds have long-term maturities of up to 30 years. These bonds make interest payments semiannually. These government bonds offer a yield of up to 3%. These are safe investments with zero risk. You can combine this type of investments with other ones and use them as a shelter for your  other investments.

Appendix 1

 Interest yields as of Oct 2015

Type of investment Yield Type of investment Yield
Treasury bill 1m

0.01%

US Municipal Bonds 1y

0.28%

Treasury bill 6m

0.13%

US Municipal Bonds 2y

0.52%

Treasury bill 1y

0.24%

US Municipal Bonds 5y

1.25%

Treasury bill 2y

0.66%

US Municipal Bonds 10y

2.10%

Treasury bond 3y

0.94%

US Municipal Bonds 30y

3.16%

Treasury bond 5y

1.43%

CD 3m

0.55%

Treasury bond 7y

1.81%

CD 6m

0.90%

Treasury bond 10y

2.09%

CD 1y

1.30%

Treasury bond 20y

2.54%

CD 2y

1.52%

Treasury bond 30y

2.90%

CD 3y

1.85%

Inflation Protected Securities 5y

0.18%

CD 5y

2.45%

Inflation Protected Securities 10y

0.56%

Saving Accounts

0.05%

Inflation Protected Securities 20y

0.84%

   
Inflation Protected Securities 30y

1.19%

   

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