Alternative buys for the stock-shy
Wary investors eye bonds, money markets, and CDs
With US stock indexes riding out a tough stretch, and concerns about market volatility growing, many investors are looking to put their money elsewhere.
Take Stephen Smith. A top officer with Brandywine Asset Management in Wilmington, Del., he favors international investing as a long-term alternative to US stocks.
International bonds offer potential down the road, he says, because of the possibility of falling interest rates abroad and foreign currencies' growing parity with the dollar.
Falling rates push up bond prices. Mr. Smith particularly likes the prospects for European bonds in the months ahead.
Global bonds aren't Smith's only alternative to the US stock market. He also buys carefully selected early-American antiques. Well-chosen antiques, he believes, offer the possibility of decent-to-substantial price appreciation. Besides, "you can look at them and admire them" while their value grows, Smith chuckles, something far harder to do with a stock or bond certificate. (Many analysts caution, however, that collectibles are best left to experts.)
Welcome to the world of alternative investing! Amid all the upheaval, the good news is that those spooked by the market have a broad array of options. Among them:
Global stocks: Some longtime market watchers, such as Russ Kinnel, who heads up equity analysis for information firm Morningstar Inc., in Chicago, believe every investor should have at least a small portion of his or her assets in non-US stocks.
Bonds: Numerous opportunities for gains lie here. In particular, US municipal bonds have been considered attractive given their solid yields and tax advantages. Many high-yield (junk-bond) funds have been in positive territory.
James Lowell, editor of the Fidelity Investor newsletter, recently urged his clients to shift some stock assets to the Fidelity Capital & Income Fund, a high-yield fund. Mr. Lowell has also beaten the drum for a broad-based, intermediate-term bond fund, such as the Fidelity Target 2003 fund. Most fund families offer "general" or all-purpose bond funds that invest in a wide array of bond products. Look for expense ratios well below 1 percent, and, when possible, in the 0.35 percent to 0.85 percent range, experts stress.
US savings bonds, often derided by investment advisers, are in fact quite competitive now, yielding about 5.5 percent for Series EE bonds. I Bonds, designed to offset inflation, currently yield 6.49 percent. But remember, there is a penalty for cashing out savings bonds before five years.
Money-market accounts: They currently yield around 5 percent, with fees that run from 0.15 percent to about 0.50 percent. Fees can add up over time. A 0.50 percent fee on a $10,000 account, for example, costs $50 a year. Fortunately, some money funds waive fees and still offer very high yields. But if they do, make sure their portfolio is not packed with junk-bond issues of B grade or less.
Very few money funds have had financial trouble over the past decades. And even when they have, investors have not lost much money. An alternative: bank money-market accounts which are federally insured. But they currently only yield between 3 percent and 4 percent.
Bank CDs: CDs have been appealing in the past year, as interest rates began to drop and investors locked in higher rates. The best time to get into a CD was probably several months back. But their rates remain competitive with mutual-fund money-market accounts, and are federally insured up to $100,000 per account.
Home equity: You may be living in your best investment. Home sales have soared in recent years, in part because of demographic changes (rising immigration, boomers buying "up," and their children starting families). Now may be time to ensure future gains by doing some repair work around the house.
(c) Copyright 2001. The Christian Science Monitor