"Ask The Expert": With the Market in Turmoil, Where's the Best Place to Park Cash Now?

In this rate environment, cash investors get short-changed. So what's a cash-flush investor to do? CDs are safe, sure, but returns are paltry. If you can stomach slightly more risk, consider these alternatives.

Q: With the market in such turmoil, where do you recommend parking cash now?

A: In this rate environment, cash investors get short-changed.

With Europe’s debt problems roiling the global financial markets, the U.S. Federal Reserve continues to hold off on raising the federal-funds rate -- the rate it charges banks to borrow money overnight. Until the Fed starts raising short-term rates, it will remain cheaper for banks to borrow from the government rather than boost savings account yields to lure cash depositors.

So what’s a cash-flush investor to do?

Yields on traditional cash savings accounts are starting to creep higher, but they’re still paltry. Cash savings accounts such as certificates of deposit (CDs) currently offer an average yield of about 1.5% on a one-year CD. Rates on money market accounts are averaging a return of about 1%. (You can shop for the highest-yielding accounts both nationally and in your own backyard at comparison rate websites such as Bankrate.com or MoneyRates.com.

You can find returns of 2% or slightly more if you “go long” and park your cash in a 3- or 5-year CD, but that would be a mistake. Most economists predict the Fed will move to raise rates late this year, and the last thing you want is to have your cash locked up in a rising rate environment.

If you’re looking for better returns, and can stomach a bit more risk, consider short-term bonds. Vanguard Short-Term Bond Fund Index (VBISX) is yielding 2.38% year-to-date, and unlike most bond funds it’s never had a down year. Vanguard’s GNMA fund (VFIIX) is another relatively safe short-term play: Yes, it invests in mortgage bonds -- and we all know how well that turned out for investors over the last few years -- but the fund invests only in mortgage securities backed by the U.S. government, so it’s safer than most. Its YTD return is just over 4%.

On the riskiest end of the low-risk spectrum, you might consider real-estate investment trusts (REITs). Despite the uncertainty in the overall housing market, many REITs have been performing well. Among the most stable players in the sector are medical-property REITs (think hospitals, nursing homes, office buildings, and the like). Medical REITs tend to be more immune to economic fluctuations than, say, commercial REITs that own malls, hotels or parking garages. Among the top-performing medical REITs: Medical Properties Trust Inc. (MPW) with a dividend yield of 9.10%; Universal Health Realty Income Trust (UHT), with a 7.70% yield; and Health Care REIT Inc. (HCN), yielding 6.60%.