When he retired from TRW Inc. this month, Dan Ayala thought he'd be able to live off the interest of several hundred thousand dollars he had accumulated in company investment and retirement plans.
"But when I looked at rates today and what has been happening in the market, I came to the realization that I need to look elsewhere," said the former aerospace engineer.
Among other things, the Westminster, Calif., resident figures his principal would last only about 10 years in a high-cost area such as Southern California.
So, after consulting a stockbroker, Mr. Ayala, 62, plans to roll his life savings -- the bulk of which was invested in cash -- into a portfolio dominated by higher-yielding growth stocks and bond funds.
Mr. Ayala is one of millions of conservative investors grappling with the new realities of the 1990s, namely, the lowest interest rates in 20 years. Having been spoiled by the booming 1980s, they now are struggling with the seemingly conflicting goals of finding above-market returns with a minimum of risk.
Although not impossible, today's investor must adhere to a new set of rules, analysts and advisers say.
Rule No. 1: Get real.
Investing in the 1980s was a snap. The stock market was on one big bull ride for most of the decade. The Standard & Poor's index rose an average of 17.6 percent annually from 1981 to 1991, compared with an annualized return of 12.5 percent since 1950, according to the Leuthold Group, an investment strategy firm.
Fixed-income investors also had it easy. Treasury bonds returned 15.6 percent during the 1980s, three times their historical average, while Treasury bills provided an annual average gain of 7.7 percent, almost double the rate of inflation.
"People have to reduce their expectations," said Leon Colafrancesco of Seamount Advisers, a Newport Beach, Calif., money manager. "People have a tendency to gear in on a number as to what the rate of return should be, without comparing it to the rate of inflation."
With inflation running at 2.9 percent the past six months, returns of 5 percent to 8 percent today are comparable to the double-digit gains of the 1980s, which saw much higher rates of inflation.
Rule No. 2: Higher returns mean assuming more risk.
"If you're somebody who's afraid to lose money by investing in the [stock and bond] markets, you're going to have to live with 3 percent yields," said Ron Laut, who manages three bond funds for Denver-based Investco Trust Co.
For those who find 3 percent unbearable, money managers suggest:
International bonds: Interest rates are stubbornly higher in many industrialized foreign countries, making government-backed bonds especially attractive. Many are paying in the 8 percent and 9 percent range and don't appear headed lower any time soon.
Mutual funds investing in international bonds have been among the best performers the past year, gaining 17 percent in the fiscal year ended June 30, according to Morningstar Inc. of Chicago.
One drawback: Fluctuating currency rates could reduce returns.
Mr. Colafrancesco favors bonds issued by the governments of Germany, Canada and the United Kingdom.
Tax-free municipal bonds: Besides decent yields, the interest paid on these bonds is tax-free.
As with any stock or bond, examine the issuer's financial health. Many muni bonds, most notably the general-obligation bonds issued by the state of California, have been downgraded in recent weeks as local governments struggle to finance a narrowing array of services.
In both international and municipal bonds, analysts urge investors to stick to short- and intermediate-term maturities. "Otherwise you're taking more interest risk than you have to," Mr. Laut said.
Utility stocks: Shares of the some of the nation's biggest utilities -- telephone companies and providers of electricity and natural gas -- haven't enjoyed as big a run as the Dow Jones industrial average this year and may have some upside left.
The stocks of these companies were once known as "widows and orphans" because of a reputation for investment safety. Regulated utilities often provide steady earnings growth and pay big dividends.
Save more: One trick suggested by experts for conservative investors who can't bear to say "risk" is to improve their returns simply by increasing their rate of savings, even in small amounts.