Ask Carrie by Carrie Schwab Pomerantz

Dear Carrie: Considering the state of the economy at this time, what is the best place — for safety and growth — to invest available cash? — A Reader

Dear Reader: You're really asking two questions: What's the best place to invest for safety? And what's the best place to invest for growth? Unfortunately, there is no single answer to both these questions. In fact, it's one of the most fundamental facts of life for investors: Growth entails risk; safety means avoiding risk. Growth and safety are fundamentally different investment objectives, and they demand different investment strategies. So instead of looking for one "best place" to invest now, I suggest you identify your investment objectives and your attitude about risk to help you build and manage your portfolio.

Start with the key question for every investor: What are your investment goals and their associated time horizons? Are you investing for long-term goals like retirement or college expenses for your children? Or do you have more near-term objectives like saving up for the down payment on your first home or maybe just putting aside cash for a rainy day? (Regardless of your long-term goals, an emergency fund can represent an important safety net for anyone. I suggest setting aside enough money to cover three to six months' worth of living expense — perhaps even more if you're nearing retirement or worried that you could lose your job.)

Second, what is your tolerance for risk? Most investors know the connection between risk and reward, and know they need to embrace a certain amount of risk to generate growth over the long term, especially taking inflation into account. Still, it's important to know how much volatility you can handle.

When you've answered these questions, you can begin to think about your overall portfolio and make some intelligent decisions about the kind of investments that are most appropriate. You'll probably have several goals with different horizons, and your challenge will be to invest accordingly.

For example, most investors keep their "rainy day" money in something relatively safe; for example, a money market account or an interest-bearing savings or checking account.

Another possibility are certificates of deposit, which are also FDIC-insured and can offer better yields — but at the cost of tying up your funds for the fixed term.

If you have mid-term goals — say you're planning to buy a home in three to five years and are saving for the down payment — then you might consider taking a little more risk in pursuit of a little more reward. Municipal bonds and high-grade corporate bonds might be appropriate (you'll want to make sure the credit quality is high). Obviously, Treasury securities have less default risk, but they currently offer so little return that they are less attractive.

For longer-term goals, I would suggest you consider investing in the stock market. Why? Because historically, stocks have delivered the highest long-term returns (from 1970 to 2008, large-cap stocks generated an average compound annual growth rate of 9.5 percent). Looking ahead, while most experts agree that we likely won't be seeing this level of return, we can reasonably expect stocks to outperform bonds and cash investments over the next 20 years.

There are multiple ways to invest in stocks — index funds, actively managed mutual funds, exchange-traded funds and individual stocks — but keep in mind the basic requirements of any portfolio: a high degree of diversification and low costs. Building your own portfolio is something you can do yourself or with the help of an objective advisor who understands your goals, time horizon and risk tolerance (and is committed to keeping costs down). And I should reiterate here the idea of taking the long-term view. The inevitable short-term ups and downs of the markets become much less important over a period of several years or a few decades. Successful investors don't let today's market environment affect their long-term investment decisions.

There generally isn't a single answer to the question "Where should I put my money now?" But if you start from a position of knowledge — understanding your financial goals and your tolerance for risk — you'll have a head start on making sound decisions. Finally, remember that your situation is dynamic, as are the markets, so be sure to monitor your performance at least annually, and adjust your portfolio accordingly.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2009 CHARLES SCHWAB & CO.