Making Sure Investments Beat Inflation

Here are some ways to make sure your assets are keeping up with price increases.
By Lauren LaCapra ,

With inflation on the rise and "safe" investments offering paltry returns, it's important to make sure you're not actually losing money on your CDs, money-market accounts or bonds.

As the stock market began to retreat toward the end of 2007, investors flocked to more conservative assets that generally offer lower returns with less risk. At the same time, the

Federal Reserve

started to cut its benchmark interest rate, which is now at about 2%. Other interest rates followed suit.

The current inflation rate is about 4%. Yields on money-market mutual funds are near 2%, on average, according to the most recent Money Fund Report. Savings-account rates are generally lower, and yields on Treasury bonds with a term of 10 years or less are all under 4% as well.

Certificate-of-deposit rates offer slightly better returns, and have come up from a recent downturn. The longer the term, the better the rate, and credit unions can sometimes offer better deals than banks.

For instance,

BankingMyWay.com

indicates that a 7.5% yield for a one-year CD can be found at Meriwest Credit Union in San Jose, Calif. Meriwest requires a minimum deposit of $1,000. By comparison, the highest rate BankingMyWay could find offered by a national entity in the state was 4.15% from

Countrywide Financial

(CFC)

, which requires a minimum of $10,000.

Keep in mind that locking in cash for an extended period could sting if rates improve. Many expect the Fed to halt its rate-cutting campaign to stem inflation, and if that happens, you might have to watch your CD yield stagnate as others rise.

So where should investors stash their loot?

"Go with a good bond fund or money-market fund," says Christine Benz, director of personal finance at Morningstar.

Though money-market yields are not quite as attractive as CDs, investors have the flexibility to move cash around if interest rates improve. When choosing funds, it might be wise to look at tax-sheltered investments like municipal bonds to avoid a "double whammy with inflation and tax costs," Benz says. Another important factor to consider is the expense ratio, which shows how large the fees are.

If you're looking to lock in rates for a bit longer -- say, three to five years -- municipal and agency-backed bonds might be a better strategy, according to Benz. "They have been unduly beaten down and have some of the best ... managers," she adds, citing renowned bond investor Bill Gross, now managing director of Pimco, as an example.

There are also inflation-protected investments, which guarantee positive real returns but still might not offer the best yield over the long-term. For instance, the

Vanguard Inflation-Protected Securities Fund

(VIPSX) - Get Report

has a yield of 0.9% tacked onto whatever the inflation rate is. That fund's expense ratio is 0.2%, compared with an average 1.02% for similar bond funds, according to Vanguard.

Though some investors may be peeking at junk bonds -- rates of which have skyrocketed to entice risk-averse investors -- now may not be the time.

Pimco's Gross indicated in a report this month that he's still waiting for the junk-bond market to bottom out with defaults. Pimco is instead seeking out investments in "high-quality" financial institutions that are low on capital, he said.

When shopping around, you can check the best rates available in your area for CDs, as well as money-market, checking and savings accounts at

BankingMyWay.com

.

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