With CD rates plunging, investors consider higher-yield and higher-risk options

November 03, 1991|By Gregg Fields | Gregg Fields,Knight-Ridder News Service

With billions of dollars in certificates of deposit maturing this month and rates at their lowest levels in years, millions of Americans are scrambling for alternatives.

But investment advisers suggest you use caution. To be sure, there are investments that offer greater returns. But almost every alternative has a greater risk, because bank CDs offer federal deposit insurance of up to $100,000.

For some people, particularly risk-averse ones, it may be best to renew your CD, even at today's lower rate. Buy a short-term CD, however, and keep renewing it until rates improve on long-term ones.

"There are a whole lot of people I advise to stick with a CD so they can sleep at night," said Meg Green, a Miami financial planner.

Some investors, of course, will want to explore other options. With one-year CD rates averaging about 5 1/2 percent, many people, particularly retirees, won't earn money needed for expenses.

One option might be utility stocks. Utilities generally are safe investments and have a reputation for hefty dividends. To cut risk further, buy a mutual fund that specializes in utilities. A mutual fund will have shares in many utilities, so the problems of one or two won't jeopardize your investment. "Nobody's going to get hurt in a utility income portfolio," Ms. Green said.

Risk, however, is only one factor to consider. Another is reward -- how much you earn. For CD holders, particularly retirees, it's crucial.

First, however, determine how much income you need from your investment, said Linda Lubitz, a Miami financial adviser. "When we work with our clients, we set very clear parameters for income needs," she said.

For safety, Treasury securities sold by the U.S. government are one option. They have no credit risk. And mortgage-backed securities, such as those sold by the Government National Mortgage Association, or Ginnie Mae, will pay much higher interest than CDs. Ginnie Maes are offering about 8 percent interest.

But they're not without risk, Ms. Lubitz warns. The rates look good now. But if other interest rates rise, your Ginnie Mae yield won't be attractive to investors. The market value of your original investment will drop. "You have to look at total return, not just the current yield," Ms. Lubitz said.

The stock and bond markets are two other options. Stocks, particularly, are good inflation fighters; price tends to rise with the cost of living.

Margaret Starner, vice president of financial planning for Raymond James & Associates in Coral Gables, Fla., says conservative investors with long-term horizons should keep about 30 percent of their portfolio in stocks.

Most people will want to buy mutual funds. Mutual funds are investment companies that sell shares backed by their portfolios. Usually, a mutual fund will specialize in a particular type of investment -- industrial stocks, municipal bonds, etc.

Over time, Ms. Starner said, a good mutual fund will produce a total return of about 10 percent annually. (Total return is dividends plus appreciation in the portfolio.)

A good strategy for investors is to drain off 6 percent annually and keep the other 4 percent in the fund to build up principal.

A couple of final reminders:

* Consider the time it may take your investment to reach maturity. In general, longer-term investments pay higher rates. But you may be tying your money up so long that you'll miss opportunities once the economy recovers.

C7 * Beware of some slick marketing efforts out there.

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