A SAFE PLACE IN A TIGHT CORNERA SAFE PLACE IN A TIGHT CORNERWarren Buffett's mentor, legendary investor Benjamin Graham Benjamin Graham A scholar and financial analyst who is widely recognized as the father of value investing. His famous book, "The Intelligent Investor", has gained recognition as one of the best and most important investment pieces written illustrating the fundamentals of a , wrote that when challenged "to distill dis·till v. 1. To subject a substance to distillation. 2. To separate a distillate by distillation. 3. To increase the concentration of, separate, or purify a substance by distillation. the secret of sound investment into three words, we venture the motto, Margin of Safety." Those are wise words for all seasons, but especially at a time like this. Even after the Wall Street crisis dies down, households will remain under pressure to create their own margins of safety by saving more and borrowing less. Places to stash stash Drug slang noun A place where illicit drugs are hidden cash and hedge against risks like inflation and a weak dollar range from plain-vanilla Treasuries to certificates of deposit denominated in euros. All of the options below rely on the backing of the U.S. government rather than private-sector promises. SHORT-TERM TREASURY SECURITIES The allure of safety was so strong late in the week of Sept. 15 that the yield on the three-month T-bill went negative at one point. That's right, below 0%. The yield is up, but investors are being paid less than 1% on their investment. That said, anyone tempted to go for a higher yield by buying the 10-year Treasury bond at 3.79%, or the 30-year at 4.37%, should think twice, with consumer inflation up 5.1% so far this year. "Treasury yields are stupidly low," says Robert Auwaerter, head of the fixed-income group at Vanguard Group. TREASURY INFLATION-PROTECTED SECURITIES The fear over rising prices is why more investors are flocking to U.S. Treasury U.S. Treasury Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. Inflation-Protected Securities (TIPS). "The yield on long-term inflation-indexed bonds is around 2%," says Laurence Kotlikoff, head of the financial planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against firm ESPlanner. "That's surely the place for those who must seek shelter from this storm." The bonds are available in 5-, 10-, and 20-year maturities. TIPS offer a fixed interest rate above inflation, as measured by the consumer price index. The bond's principal adjusts semiannually as the CPI changes. TIPS tend not to move in sync with other fixed-income securities Fixed-income securities Investments that have specific interest rates, such as bonds. , so they're a good diversifier. An additional advantage is that they protect against deflation, or a decline in the overall price level of goods and services In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility (unless the "good" is a "bad"). It is often used when referring to a Goods and Services Tax. . After all, Japan became known as Deflation Nation when its finance mania crashed in the late 1980s. Deflation also gripped the world economy during the Great Depression. TIPS offer a "deflation floor" that protects principal value if the fear of falling Fear Of Falling is the Season 2 final episode of the Nickelodeon show All Grown Up. Episode Notes
TIPS have one drawback: taxes. In essence, Uncle Sam requires owners in taxable accounts to pay income taxes on inflation-adjusted gains before getting any of the inflation-adjusted money at maturity. The trick to avoiding the tax hit is to own the bonds in a tax-deferred retirement savings account Noun 1. retirement savings account - a plan for setting aside money to be spent after retirement pension account, pension plan, retirement account, retirement plan, retirement program, retirement savings plan . Most major fund companies and financial firms offer a TIPS fund, such as the PIMCO PIMCO Pacific Investment Management Company Real Return Bond Fund and the iShares Lehman TIPS Bond. I BONDS Taxes aren't an issue with I Savings Bonds, the federal government's other inflation-protected security. These 30-year bonds allow money to compound tax-deferred until they are cashed in. There are no commission costs. I bonds redeemed before five years forfeit the three most recent months' interest, but after that there is no penalty at redemption. At first glance, the rate on I bonds seems to be a joke. The fixed rate on I bonds bought before November of this year is 0% (the rate is announced every May and November). Any gain will come from adjustments in the CPI. Earlier this year the Treasury Dept. cut deeply into how much you can put away in I bonds. Savers can now buy $10,000 worth--$5,000 at treasurydirect.gov and $5,000 in paper bonds at a bank. MONEY MARKET MUTUAL FUNDS Early in the week of Sept. 15, investors started a money fund version of a run on the bank. Nearly $200 billion cascaded out of money funds before stopping on Sept. 18 when the Treasury Dept. put the full faith and credit of the U.S. taxpayer behind the implicit "don't-break-the-buck" pledge at money funds. The principal value of money-market funds--including tax-exempt ones--is now guaranteed. BANK SAVINGS ACCOUNTS Investors can earn a good yield and enjoy FDIC FDIC See: Federal Deposit Insurance Corporation FDIC See Federal Deposit Insurance Corporation (FDIC). safety at online banks. At ING Direct, for instance, a savings account pays 3% and a 12-month CD, 4%. No one with an account of $100,000 or less has lost a penny from a bank failure since the government's insurance fund was created in 1933. (Federal credit unions have their own backstop, the National Credit Union Shares Insurance Fund.) The $100,000 limit is something of a misnomer misnomer n. the wrong name. MISNOMER. The act of using a wrong name. 2. Misnomers, may be considered with regard to contracts, to devises and bequests, and to suits or actions. 3.-1. . It's relatively easy to park a multiple of that sum at the same bank and get it insured. For instance, a husband and wife can each have an account with $100,000 and an IRA Ira, in the Bible Ira (ī`rə), in the Bible. 1 Chief officer of David. 2, 3 Two of David's guard. IRA, abbreviation IRA. holding a certificate of deposit worth $250,000, plus a joint account with $100,000 per spouse. That covers $900,000. The family could up the insured amount through revocable trust Revocable Trust A trust whereby provisions can be altered or cancelled dependent on the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. accounts, such as a payable-on-death (POD) trust that allows $100,000 per beneficiary. If the couple has three kids, the husband can have a $100,000 POD account with his wife as beneficiary; she can do the same with him. The couple can also have a $600,000 POD account with their kids as equal beneficiaries. According to the FDIC, an additional $800,000 is covered, for $1.7 million at one bank. One can open up accounts at different banks, but it may be easier to track multiple CDs by buying so-called brokered CDs. A broker will take, say, $1 million and buy 10 $100,000 CDs, each at a different bank. This keeps paperwork in one place. CURRENCY HEDGES Most of us are focused on safety now, but there's also concern about the falling value of the dollar. Anyone worried about a weak dollar in the wake of the government's bailout might consider a currency-denominated CD. EverBank in Jacksonville, Fla., offers a euro CD Euro CD A certificate of deposit issued primarily in London by a foreign bank or a foreign branch of a U.S. bank. that's FDIC-insured. The minimum is $10,000. As of Sept.24, a three-month euro CD yields 2.38% and a one-year euro CD, 2.75%. 
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