Risks of stocks, bonds no longer predictable

ON MONEY

October 15, 1995|By Susan Bondy | Susan Bondy,Creator's Syndicate

Risk-taking is inherently failure-prone. Otherwise, it would be called sure-thing-taking. But risk has taken on a whole new meaning in the '90s.

Conventional wisdom used to say: Diversify your assets between stocks and bonds. Stocks were considered risky because of their historically high volatility, and bonds were considered safe because of their relative price stability.

On top of that, stocks and bonds have often moved in counter-cyclic ways -- meaning that when stocks went down, bonds went up, and vice-versa. This characteristic helped the overall performance of most portfolios.

No more! These two traditional truisms don't seem to hold water any longer.

Bonds have become as volatile as stocks and, in some cases, even surpass stocks. The stock market's violent reaction to changes in interest rates have allowed the bond tail to wag the stock dog.

At this time, I would say that bonds are every bit as risky as stocks and then some. Both bonds and stocks are highly risky. Any significant upward move in interest rates will cause both bonds and stocks to fall.

So, if both bonds and stocks are risky, what are the safe investment alternatives? Safe investments today include "short-term parking vehicles," such as money-market mutual funds or money-market accounts at banking institutions. Although not exactly sexy with current yields of 5 to 5.5 percent, these instruments are convenient, liquid and stable alternatives in falling markets.

Long-term certificates of deposit (five to 10 years maturity) from healthy financial institutions are safe but sometime illiquid. However, there are two ways to increase the efficiency of these investments:

1. Buy "bump-up" CDs. These CDs promise a fixed rate but allow you to bump up your interest payments if rates go up before

your CD matures.

2. Buy CDs that have small penalties for early withdrawal. I consider small penalties to be: one month, three-month or even six-month interest penalties. That way, if interest rates go down, you've locked in the higher rate. If interest rates rise, you can cash in the old CD, pay the small penalty and reinvest in a higher-rate CD.

Single premium fixed annuities from financially sound insurance companies also provide safe havens from volatility and worry but should be viewed as long-term investments. Income taxes on interest earned on fixed annuities are deferred until withdrawal, giving these accounts a hefty plus. On the other hand, any moneys taken before age 59 1/2 are subject to a 10 percent IRS penalty. Most annuity issuers also impose their own back-end penalties, which can range from four to 15 years.

Short-term bond funds, short-term investment-grade corporate bonds and Treasury notes also fall into the safe alternatives category. By short-term, I mean one to three years' maturity or average weighted maturity in the case of a bond fund.

Although at this time I personally see long-term bonds as very risky, it won't stay that way forever. There will come a time in the next five to 10 years when bonds will again offer attractive rates and a potential for price appreciation.

I recently retired and have become interested in investments. Do you know of an investment club for senior citizens that I could join?

I like your way of thinking because I am very much in favor of investment clubs; unfortunately, I cannot refer you to one. Most limit their membership to a maximum of 15 investors and take in new members only when one leaves. The rule is to admit no more people than can fit into the smallest living room of the members.

Still, I suggest you ask around. You might luck out. Ask friends, fellow church-goers, members of community senior-citizen centers and senior housing residents.

If you don't find a club with an opening, why not start your own? The National Association of Investors Corp. will provide all the details and procedures and provide monthly follow-up articles and research reports.

For more information, write to: NAIC, 1515 E. Eleven Mile Road, Royal Oak, Mich., 48067, or call (313) 543-0612.

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