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Tracking down safe investments

- Alan Lavine and Gail Liberman

Considering moving your money from mutual funds to lower-risk investments?

Unfortunately, there is no perfect investment. Even if you brought all your family's money home, you still could be robbed.

But it can pay to examine the quality of the guarantee with any investment you're considering.

U.S. Treasury bills, notes and bonds, which are directly backed by the U.S. government, are considered to have the lowest risk. You typically can earn more today on a bank CD, which also carries a direct U.S. government guarantee through the FDIC--provided that you follow the FDIC's very specific rules.

The FDIC covers you to $100,000 per depositor only if your bank fails. If you have more than $100,000 to invest, you might consider investing in CDs at other banks.

Or, you can boost FDIC coverage further by very carefully titling deposits in different account categories. Certain retirement account deposits, like IRAs, for example, are insured separately to $250,000.

Other categories that let you boost your FDIC coverage include: Joint accounts, which are separately insured. Each person's shares of all joint accounts would be added together and protected to $100,000. Beneficiaries of trusts also may be insured to $100,000 apiece--but only under very specific conditions.

Don't get confused. Even though mutual funds and annuities may be offered by your local bank lobby, these investments are securities--not deposits. Therefore they not covered by FDIC insurance if your bank fails.

Don't like the interest rates on deposits at your local bank? Credit unions, which require membership, have the same U.S. government guarantee if backed by the National Credit Union Share Insurance Fund.

You also may be able to insure more than $100,000 at a bank by going through a broker, who can distribute excess funds to different banks so that all funds are FDIC-insured. But keep good records. The FDIC may need them if the bank fails. Also, stay with brokerages you know and trust.

There are other types of low-risk investments to consider.

The Government National Mortgage Association, which issues mortgage-backed securities, is backed by a direct U.S. government guarantee.

U.S. Savings Bonds, like Treasury securities, are backed directly by Uncle Sam. For as little as $25, you can invest through your bank, the nearest Federal Reserve Bank, or from the Bureau of Public Debt. You can cash in your savings bond to pay for your child's college education and you needn't pay income tax on the earnings either.

Some government agencies that issue bonds fall a notch lower on the safety ladder. Those include the Small Business Administration, Federal National Mortgage Association (Fannie Mae) and Freddie Mac.

How much the government would stand behind them was put to the test recently, when the Federal Reserve and the U.S. Treasury stepped in to financially strengthen Fannie Mae and Freddie Mac.

Beware, though, that a direct government guarantee doesn't necessarily make your investment risk-free. While it may protect your principal against default, it does not protect you from price fluctuations if you need to sell. Even bank CDs have withdrawal penalties if you cash out early.

Bond prices move in opposite directions to interest rates. So for example, if interest rates rise 1 percent, and you needed to sell, the value of a long-term Treasury bond could drop about 12 percent. Of course, the opposite also could happen.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

To read more columns, please visit the column archive.

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