Published: Monday, Nov. 09, 2009

Updated: Monday, Nov. 09, 2009

Making a big splash with investments means higher risks

Where can you put your money today to get a higher return?

That's the question many investors are asking as yields on cash investments sit at rock-bottom lows.

Unfortunately, there's no easy answer, no silver bullet.

The issue is not just about chasing a fatter return. It's about understanding the trade-offs in doing so.

The cardinal rule, and there's no way around this one: If you want a higher return, you must take on more risk.

And that can be dangerous.

"There's a tendency in low-rate environments for investors to chase yield and, in the process, take on more risk than they've bargained for," said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site. "I don't think that's the territory you want to go to, especially today."

You can't blame consumers for wanting more bang for their buck. Consider these dismal average annual percentage yields for various savings vehicles in Dallas as of Wednesday, according to Bankrate.com:

Savings accounts: 0.17 percent.

Money market deposit accounts: 0.26 percent.

Six-month certificate of deposit: 0.59 percent.

One-year CD: 0.85 percent.

What's more, the average seven-day simple yield for taxable money market funds sank to a record-low 0.04 percent for the week that ended Tuesday, according to the Money Fund Report.

It'll take a long time for anyone to get rich with investment yields like that.

When deciding where to put your money, a key question to ask yourself is when will you be needing it?

If you anticipate needing the money in a year or so, you shouldn't be risking it in the stock market, experts say.

"Unfortunately, for the person who needs cash, or it's just a short-term investment, there just isn't any alternative but money markets," said Thomas Murphy, a certified financial planner at TEMAA Financial in Dallas.

The starting point for savers, McBride said, is a high-yield online savings account, where top returns range from 1.5 percent to 1.75 percent.

"Those numbers won't knock anyone's socks off, but the money is FDIC-insured, you can access it whenever needed, and it preserves your buying power by staying ahead of inflation," he said.

And there's another advantage to having your money readily accessible, Murphy said: "Liquid accounts, such as savings and money markets accounts, as well as short-term CDs, give investors the flexibility to take advantage of higher returns once interest rates and inflation begin to pick up."

Murphy is having his clients divvy up their money in incremental periods:

-For money they need in six months to a year, he recommends putting "that emergency money in a money market account or checking or savings account. The key point is that it's not tied up."

-For money that may be needed within one to three years, he suggests things such as CDs and short-term bonds.

"Any dollars that you think you're going to need in three years that is too short a time horizon to be risking it in the (stock) market," Murphy said.