Investment landscape is changing

April 26, 1995|By Andrew Leckey | Andrew Leckey,Tribune Media Services

No one said investing would be easy and predictable. Because of the complexity and intertwining nature of modern financial vehicles, anything and everything affects today's investor.

For example, many average folks don't realize that:

* The recent takeover commotion surrounding Chrysler Corp. has an impact on far more than the company's direct shareholders.

The nation's stock mutual funds also hold millions of shares of the No. 3 carmaker. Funds such as Vanguard Windsor, Fidelity Advisor Growth Opportunity, Twentieth Century Select Investor, Fidelity Destiny I, Neuberger & Berman Guardian, United Income and Invesco Industrial Income each held more than a million Chrysler shares at the time Kirk Kerkorian announced his surprising and perplexing bid.

In fact, Windsor had boosted its Chrysler holdings to nearly 15 million shares because it deemed the carmaker's stock undervalued.

However this wild ride unfolds, it will potentially affect many more individual investors than would have been the case a few years ago before mutual funds had the enormous assets they do now. So keep a close eye on Chrysler, and your portfolio manager as well.

* Coming changes in the popular U.S. Series EE savings bond represent a significant revamping of the way millions of average Americans invest. The changes require some study, but know how the new system works when making decisions involving these conservative instruments.

Under current market conditions, short-term investors should do better than before under these new rules, while long-term investors will do worse.

First the good news. For savings bonds sold beginning May 1, the current guaranteed minimum interest rate of 4 percent for the first five years of ownership will be replaced by market-based rates. Interest will be credited to all bonds twice a year, with new rates announced each May 1 and Nov. 1.

The rate for the first five years will be 85 percent of the average of six-month marketable Treasury security yields. That's good, so long as short-term interest rates don't tumble. (Those holding bonds less than six months receive no interest.)

"The new rules are positive for shorter-term investors who hold bonds less than five years, since in the current marketplace, instead of the guaranteed 4 percent fixed rate they'd receive a much better 5 percent to 5.25 percent," explained Daniel Pederson, president of the Savings Bond Informer Inc., P.O. Box 9249, Detroit, Mich. 48209, which publishes reports and books for bondholders.

From five years to 17 years, bonds will earn interest equal to 85 percent of the average yield that five-year Treasury securities earned during the period the bond was held. If they don't reach face value after 17 years, the new rules allow the Treasury, in a one-time adjustment, to raise them to that level.

Now the bad news. The new rules will be less attractive for long-term investors who hold bonds more than five years, because the rate paid for the period of the first five years will be 0.5 percent to 1 percent lower than the prevailing long-range rate, Mr. Pederson estimates.

Under current rules, after five years investors are rewarded with the interest of the first five years being recalculated at the long-term rate. Investors then earn the greater of either the 4 percent guaranteed minimum or the market-based rate. With the new rules, that 4 percent safety net is removed.

As a result, long-term investors with definite plans to buy bonds should do so quickly, since Series EE bonds purchased before May 1 aren't affected by the new rules.

"Savings bonds are becoming easier to understand, for on May 1, when we announce the rate for bonds issued May 1, everyone will now know exactly what their bonds will earn the next six months," said Treasury Department spokesman Pete Hollenbach.

They're bought through the Treasury, from banks or through company payroll deduction plans.

"We haven't had people canceling because of the changes, since they see savings bonds as a strong, guaranteed product," said Donald Bowers, a national chairman for Johnson & Johnson's savings bond campaign. "They aren't the only form of savings, but can help and are a painless way to invest."

Others disagree. "Savings bonds aren't a good deal," said James McGrath, certified financial planner and owner of Financial Planners Tax Service in Rockville. "If somebody needs to have money for six months from now, a certificate of deposit makes more sense, or, if they need liquidity, a money market fund is better."

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