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George Divel Investment Tips #7

With the fixed income and equity markets showing so much volatility, many investors are taking a fresh look at an old favorite: the Certificate of Deposit (CD). Investors searching for relatively low-risk investments that can easily be converted into cash often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $100,000.

Here’s how CDs work: When you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. But if you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned.

Although most investors have traditionally purchased CDs through local banks, many brokerage firms and independent salespeople now offer CDs. These individuals and entities – known as “deposit brokers” – can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain amount of deposits to the institution. The deposit broker can then offer these “brokered CDs” to their customers. Ask your investment advisor for more information about CDs. 

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March 18, 2008 Posted by | Uncategorized | Leave a comment

George Divel Investment Tips #6

A Tip About TIPS

If the threat of inflation is making you nervous and your investment timeline is one the short side – for example, if you are retired or nearing retirement. Here’s a tip:

Consider TIPS. (Treasury Inflation Protected Securities) Tips are treasury securities that are indexed for inflation. The mere prospect of facing inflation justifies a place for TIPS in the portfolio of retirees who are concerned about maintaining the purchasing power of their nest eggs.

TIPS perform well even in periods of rising inflation coupled with stagnant economic growth (known as stagflation), a condition that we may be experiencing right now.

If you buy a conventional Treasury, you receive the same interest payment semiannually for the life of the bond. With TIPS, the Treasury adjusts the principal value of a bond each month (with a two-month lag time) to keep pace with inflation. A higher principal value also lifts interest payments.

Of course you pay a little more but it could be worth it.

When experts compare Treasuries and TIPS, they study the break-even inflation rate. In mid-January, 10-year Treasuries yielded 3.8 percent, and 10-year TIPS yielded 1.6 percent. That implies a break-even inflation rate of 2.2 percentage points. If inflation over the next 10 years tops 2.2 percent annually, you’ll do better with TIPS than with the equivalent Treasuries.

So if Inflation is on your mind, ask your investment advisor to explain TIPS to you.

March 11, 2008 Posted by | Uncategorized | Leave a comment