Low rates dictate need for portfolio that's diversified

Andrew Leckey

March 26, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Signs of the times: Corporate layoffs and low interest rates are changing the 1993 retirement account business.

This is the period when investment in individual retirement accounts and Keogh plans for the self-employed typically heats up due to the approaching tax deadline.

However, our nation's endless corporate layoffs and early retirements have transformed the retirement account rollovers that pour in from employer-sponsored plans into a year-round event.

Investment firms say this constitutes the bulk of growth in their retirement accounts. Also accelerating this rollover activity is a recent law change requiring direct transfer of such funds from one trustee firm to another -- without the plan's owner touching the money -- to avoid a 20 percent withholding penalty.

Whatever may prompt a retirement account contribution, low interest rates make a difference. Investors are turning away from bank certificates of deposit and money-market funds and moving toward stocks, bonds and funds that invest in them.

The sooner you start and the more organized and diversified your portfolio, the better the results.

"Any investment good on its own merit is also potentially attractive as an IRA or Keogh investment, though there's obviously no reason to put tax-free investments in a tax-deferred account," said Norman Fosback, editor of the Fort Lauderdale-based Mutual Fund Forecaster and several other newsletters. "If you consider a CD appropriate for your risk tolerance, there's no reason not to include it, though I consider the yields too low."

Younger individuals should be daring, Fosback believes, through high-yield bond funds and small-company stock funds.

In high-yield bond funds, he recommends T. Rowe Price High-Yield Fund, Baltimore; GIT Income Trust Maximum Income Portfolio, Arlington, Va.; Northeast Investors Trust, Boston; and Vanguard Fixed-Income Securities High-Yield Corporate, Valley Forge, Pa.

Suggested small-company stock funds are Shadow Stock Fund, Jones & Babson, Kansas City, Mo.; Colonial Small Stock Index Trust, Boston; and Vanguard Small Capitalization Stock Fund, Valley Forge, Pa.

For older individuals seeking more conservative stocks, Fosback recommends Janus Fund, Denver, and Fidelity Equity-Income II, Boston.

"My clients are concerned about whether stock market levels can be sustained, so I'm using Fidelity Asset Manager [Boston] and Vanguard Asset Allocation Fund [Valley Forge, Pa.] in retirement accounts," said Elaine Bedel, president of Bedel Financial Consulting in Indianapolis.

"These funds move money into bonds, stocks or money-market instruments whenever managers feel timing is appropriate."

During an investor's younger years, the account should be diversified in small-company, large-company and international stocks, Bedel believes. At 50 or 60 years of age, switch to less volatile fixed-income investments.

A suggested retirement mix is currently 50 percent stocks, 35 percent bonds and 15 percent money-market funds, advised Don Underwood, vice president of retirement plans for Merrill Lynch & Co.

"International funds are worth considering, especially those of the Far East and Latin America," said Underwood, co-author with Paul Brown of "Grow Rich Slowly: The Merrill Lynch Guide to Retirement Planning."

Seventy percent of retirement money at Fidelity Investments is going into stock funds, said Kathryn Hopkins, senior vice president at Fidelity.

"Our retirement account business has increased since we instituted some attractive pricing," said Hopkins. "That includes

removing the 'load' [initial sales charge] from funds that normally carry loads, such as Fidelity Growth & Income Fund."

Low interest rates have turned bank CD investors toward government bond funds, observed Richard Davies, president of

First Chicago Investment Services Inc. Still conservative with relatively stable principal, these funds acquaint individuals with the market.

"Their next step typically is the balanced fund that combines blue-chip stocks with fixed-income investments," Davies explained.

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