Searching for a place to stash cash can be frustrating.
You could put the money in a savings account and earn virtually nothing, or put it in a money market fund and suffer the same fate. You could select a short-term bond fund, but you will get little more than you earn in a savings account, and your risk of losing some money will be greater when interest rates start climbing.
Short-term bond funds have typically been popular with financial advisers trying to earn a little more yield for individuals.
Yet Morningstar analyst Samuel Lee says there's nothing alluring about short-term bond funds now, and he suggests a simpler option: bank CDs.
In the current low interest environment, your best deal would be five-year bank CDs, provided you are willing to skip your local bank and head to an online source such as Bankrate.com to scout for palatable interest rates.
Last week, the site had identified a couple of banks offering 2.27 per cent on five-year CDs: Synchrony Bank and Everbank. Barclays was just about as good: 2.25 per cent.
Lee's conclusion is an unusual one for an analyst who makes a living examining exchange-traded funds.
But, as he looked at 31 short-term bond-traded funds, he concluded they would pose more risk than the CDs, and pay less in interest.
Typically, with CDs from banks you're not going to lose money, provided you pay attention to the rules. Yet short-term bond funds are not as safe, because there's no insurance. If interest rates rise, you can lose some money in short-term bond funds.
As for CDs, pay attention to the penalties. Lee found Barclays required you to give up 180 days of interest if you pulled money out of the CD before it matured. Synchrony Bank imposed a 270-day penalty.
Note: the penalties are capped. You know from the start what will happen if you get antsy about pulling money out early.
That's not the case with bond funds; including short-term bond funds. There is no cap on what you can lose, and the loss will happen if interest rates are climbing when you need to withdraw your money.
"If interest rates spike 10 per cent overnight, you'd be hit with double-digit losses on all but the shortest-duration bonds, but your CDs will lose almost nothing, and you'll have the option to re-invest at these higher rates," Lee said.
Lee makes a point of suggesting bank CDs, not brokered CDs like those you get from a brokerage firm or adviser.
The brokered CDs don't provide the leeway that bank CDs do with modest penalties. And there are also fees on the brokered version.
Corporate bonds are no competition for the safe CDs either, Lee said. Corporate bonds can become losers when the economy or the corporation weakens.
High-yield bonds and bank loans are even more vulnerable in weakening economies.
"I suspect most investors could improve their portfolios by dumping their bond funds for CDs and using their freed-up risk capacity to buy foreign equities, which I believe offer a better risk-reward trade-off than most bonds," Lee said in a report.
Of course, stocks are not the right choice for people who are saving cash for a purchase or living expenses that must be paid in the next five years.
But if you are saving for many years ahead and have been hoarding cash simply because you are nervous, putting some money in stocks makes sense.
Ultimately, they should provide better returns than the 2.25 per cent on CDs.