LOS ANGELES -- For investors already hammered by low returns, last week's interest rate cut could hardly have come at a worse time.
While there are no easy answers to the interest income dilemma, financial advisers point to several ways of earning higher yields, especially in fixed-income mutual funds and the bond market.
These investments have their down sides and might require a leap of faith for the cautious investor.
But for those investors whose returns barely keep pace with inflation, a little risk may be a reasonable alternative.
"People are really angry about where the rates are now," says Jeffrey Lavin, a financial planner at IDS Financial Services Inc. in suburban Glendale near Los Angeles. "A few years ago people could park their money but now they've got to take a few more chances."
Though rates on T-bills have sunk, other short-term and intermediate-term Treasury bonds continue to offer reasonable yields at minimal risk, says Steve Jesson, a vice president of Fidelity Investments in Century City near Los Angeles.
For example, a one-year T-bill yields only 3.69 percent but a five-year note has a 6.03 percent yield, according to Bloomfield Financial Markets.
But investors have to be wary of longer-term bonds if they plan to unload them before their maturity. As interest rates go up, the value of these bonds drops, Mr. Jesson says.
"If you need to liquidate, you'd be at the mercy of the interest rate market. If interest rates move up, the [loss in] principal could eat away at whatever advantage you had" by higher yields, Mr. Jesson says.
Morrie Reiff, a financial planner in Encino, says mutual funds that include Ginnie Mae (Government National Mortgage Association) bonds are a reasonable investment because they still pay good yields and are government-backed.
In terms of yield, it wouldn't take much to better the interest rates on savings accounts, certificates of deposits and money ,, market funds, which have fallen to 20-year lows.
The latest cut came Thursday when the Federal Reserve cut the discount rate, the interest that it charges banks for short-term loans, to a 29-year low of 3 percent.
Major banks, in turn, chopped the prime rate, which they charge their best business customers, to 6 percent from 6.5 percent.
The average yield on a one-year CD paid by 100 large banks and thrifts has fallen from 8.83 percent three years ago to 4.03 percent, according to the Bank Rate Monitor in North Palm Beach, Fla.
The interest rate on a passbook savings account at BankAmerica Corp. of San Francisco has tumbled to 2.75 percent from 5 percent a year ago.
"The decrease in the interest rates has hurt me quite a bit," says Manny Silverman, a resident of Van Nuys in suburban Los Angeles. Like many people on fixed incomes, he relies on certificates of deposit to help pay his bills.
"I used to take my daughter out to dinner at least once a week but I've had to tell her I can't afford it anymore," he says.
For investors who do not require immediately high yields, certain mutual funds might be right, says Gloria Andreae, owner of the Andreae & Associates in Tarzana, in suburban Los Angeles.
These funds, which contain both stocks and bonds, pay a regular yield and also have a longer-term growth component.
David Weymouth, BankAmerica director of consumer financial services, says the interest rate drop might help some people by nudging them out of conservative investments and into stocks and bonds where they stand to make more over time.
"Just because there's risk doesn't mean it's inappropriate," he says. "For a large number of people, accepting a higher degree of risk in return for a higher amount of return can be a very good decision to make."
But investors have to be cautious about their entry into the
equity market and make sure they are involved with strong companies, Andreae says.
"I think a lot of times people don't know the right questions to ask because they're unfamiliar with investing," she says.
"Anyone who says, 'Your yield will be 6 percent and sign on the dotted line and don't worry,' you should walk right out the door."