Biting the bullet: Investment risk in these tough times

What you do depends on how close you are to retirement.

After the worst year for the stock market in decades and a financial crisis that has rocked the nation's banks, who could blame investors for wondering if there is a safe place to put their money now?

Yet, experts insist, there are secure places to protect your cash and be in a position to profit as the market recovers.

Exactly what to do depends on how close you are to retirement, how strong your risk tolerance is and how badly you need your money in a recession that has wiped out millions of jobs. But before doing anything, people need to save. There is no substitute for the systematic, automatic, bite-the-bullet socking away of money, especially for emergencies.

Despite the industry's financial problems, banks are the safest place to park savings, especially since the government temporarily bumped each bank's FDIC deposit insurance from $100,000 to $250,000 per account holder. As far as investments go, cash is still a priority for older investors and those nearing retirement, two groups of people who generally need to protect their principal.

Many people already have fled to the safest havens they could find, diverting billions of dollars to Treasury securities, savings deposits, and other conservative cash investments.

The appeal of secure money has been undeniable during tough times, even for investors many years from retirement. But those investments are not necessarily safe, either - even if you tie up your money for a long time to obtain the higher available rates of return - because inflation can easily eat away the returns.

Some have found a viable option in Treasury Inflation-Protected Securities, a government-backed bond whose principal - and subsequent interest payout - adjusts upward based on the inflation rate, so that your money at least keeps up with the cost of living.

Though that is good for your peace of mind, TIPS will not yield the healthy returns you may need to build a robust nest egg. That will require taking at least some risks. "If your time frame is between five and 10 years before retirement, these are safe investments," said Greg McBride, senior financial analyst for "But beyond that, you run the risk of investing too conservatively. I mean, for longer than 10 years, keeping your money in cash doesn't compensate you for the risk of inflation."

In general, the massive flight to cash that took place last year went against the conventional wisdom that says investors should stay the course and think long-term. A diversified portfolio of stocks, bonds, and cash carries you through even the worst downturn, the financial adviser's template says.

Last year's historic crash shook that advice to its roots, as many blue-chip financial stocks tanked amid the meltdown. "Diversity failed in 2008," said Cary Carbonaro, a financial planner with Family Financial Research in Clermont, Fla. "Every asset class fell with one exception: government bonds. Most of us have never seen anything like this."