Seek out protections for your investments

You cannot afford to make bad decisions with money now, especially with the money you intend to keep completely safe.

People generally know they are taking some risks when they buy stocks, corporate bonds and mutual funds. But during the financial stresses of the last few weeks, they have discovered that seemingly safe havens became quite unpredictable.

Even bank accounts offer limited protection - $100,000 per depositor in most cases; and the government has stepped in to insure money market funds - for a year.

Now that it is clear that money market funds are less safe than once thought, Steve Weinstein, president of Altair Advisers L.L.C., of Chicago, is using funds that invest only in Treasuries.

In addition, rather than relying on only one money market fund, some clients are dividing their money into several to lessen the risk, Weinstein said.

Those using bank savings accounts and CDs are also making sure they do not rely on a single institution.

Through a program called the Certificate of Deposit Account Registry Service, or CDARS, a person can have accounts larger than $100,000 and still receive FDIC protection. The person can deposit a large sum into a CDARS program at a bank, and then the program divides the money up into CDs at multiple institutions. For example, a person with $500,000 would have five CDs at five banks, but have paperwork from a single source and full FDIC protection.

"It's all about diversification," Weinstein said.

Besides his cautious approach with cash, Weinstein is being careful with bonds.

Typically, investors have considered many municipal bonds as almost as safe as U.S. Treasury bonds. That has been especially true of general-obligation bonds, or the bonds that states, cities and other governments pledge to pay with tax money, regardless of any stresses that might arise.

Currently, however, financial advisers are growing leery of municipal bonds, too. With unemployment climbing and real estate values falling, cities and states are expected to have declining tax revenue. The National Conference of State Legislators says many states will face financial pressures in 2009. The group estimates a $40.3 billion shortage in revenue to cover costs. Governments will make cuts in expenses, and some already have been tapping rainy-day funds.

To protect investors, some advisers are selecting only general-obligation bonds from states rather than cities.

Bruce Heyman, managing director of Goldman Sachs Private Wealth Management, has been using high-quality escrowed to maturity pre-refunded municipal bonds. With such bonds, the investor is protected because U.S. Treasuries are put aside to cover the payments.

For investors who want safety, "make sure they are escrowed," Heyman said.

Of course, relatively safe municipal bonds - like U.S. Treasuries - are providing little yield now. The municipal bonds Heyman likes may be yielding about 2.1 percent.

But Marilyn Cohen, president of Envision Capital Management Inc., of Los Angeles, warns investors to beware of seeking higher yields with money that must be safe.

"We are in the midst of a crisis, not the end," Cohen said. "It's ludicrous to seek more yield in the middle of a crisis."