What are the safest places to invest now?

By Elliot Raphaelson
Posted on June 02, 2022

Many who have invested in various forms of bond funds have been disappointed to see that, despite receiving regular interest payments, the value of their investment has decreased significantly in 2022.

I have received quite a bit of mail from readers asking whether they should bail out of bond funds and instead make new investments in money-market funds, CDs or I bonds.

Here are some considerations you should take into account:

Bond funds

The Federal Reserve has indicated that for the rest of the year it will raise interest rates several times in order to curb inflation.

As a result, if you have investments in bond mutual funds or exchange-traded funds with long maturities, it’s likely in the short run that the net asset value (NAV) of your investments will decrease and that, even with regular interest reinvested, the total value of your holdings may decrease in value.

For that reason, I don’t recommend additional new investments in bond funds/ETFs with long maturities at this time.

Investments in short-term bond alternatives will have lower risk, but also lower yields.

Certificates of deposit

Many readers have asked whether this is a good time to be reinvesting proceeds from maturing CDs and funds from savings accounts with low yields into new CDs.

As the Fed increases interest rates, banks and credit unions will likely offer higher rates on CDs. I expect interest rates on CDs to increase gradually, so it would be prudent to invest in shorter-term CDs now. As interest rates increase, you can invest in longer-term CDs.

One of the advantages of investing in CDs as opposed to bond funds now is that, as you redeem your CD at maturity, your principal is safe. In contrast, there is no guarantee that new investments in bond funds, even in Treasury instruments, will not decrease in value in the short term.

Money market funds

If your main objective is to stay liquid while protecting your capital, you can invest in money market instruments. However, with inflation likely to stay at high levels in the short run, the returns you receive will not keep pace with inflation.

I bonds (inflation-protected bonds)

As I have written in many recent columns, investing in Series I bonds has a significant advantage now, as well as one disadvantage that I don’t think is significant.

The major advantage is the high rate of return with no capital risk. For the six months starting May 2022, I bonds will be paying 9.62% in interest.

After October, there will be a new rate, based on the updated consumer price index. Although the next new six-month rate may be lower than 9.62%, you can be sure that the rate of return will be higher than the return from CDs or money-market instruments.

Individuals can purchase up to $10,000 each calendar year and they must be bought through the U.S. Treasury at TreasuryDirect.gov. Married couples can invest $20,000 per year. In addition, you can invest an additional $5,000 per year using a tax refund.

The main disadvantage of investing in I bonds is liquidity. Once you purchase an I bond, you can’t sell it for 12 months; if you do sell it in less than five years, you lose three months of interest.

You cannot lose money on your investment in I bonds. When you compare investing in I bonds to investing in CDs, savings accounts and money-market instruments, I bonds stand out as a superior choice for conservative investors (as long as you can accommodate the one-year holding period).

Treasury bills and notes

For short-term investments, you can purchase Treasury bills directly from TreasuryDirect.gov without a brokerage account.

You can invest in bills that mature in six or 12 months. The recent rate for six-month bills was almost 1.5%, and the 12-month rate was 2.07%. Another option is the two-year Treasury note yielding 2.71% as of the time of publication.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.