Published: Sunday, July 25, 2010
Four low-risk ways to earn more interest
RALEIGH, N.C. -- Jules Coco is a 58-year-old software programmer who takes a conservative approach to saving and investing. He fondly remembers the not-too-distant past when he and his wife could earn in excess of 5 percent interest on their certificates of deposit.
"We were more than satisfied with our little paltry 5.5 percent," Coco said. "I don't want to defy the laws of economics. I always believe in proportionate risk, proportionate return."
Today Coco is dismayed by two-year CDs ranging between 1 percent and 2 percent, with even lower rates for shorter-term CDs -- not enough to keep up with inflation.
"What the conservative, cautious American is experiencing now is trickle-up poverty," Coco said. (He readily admits, however, that his reference to poverty contains more than a little hyperbole.)
Ultra-low interest rates have cheered borrowers and spurred economic growth with cheap loans. But those low rates, slumping real estate values and cuts in dividends by supposedly blue-chip stocks rocked by the recession -- especially banks and other financial services companies -- have been tough on many investors. That includes seniors who have twin goals: preserving their life savings and augmenting their income from pensions and/or Social Security.
"They're getting a reduced amount of income from what they used to get, and it may be affecting their living standards," said Raleigh financial planner Frank Smith.
Smith and other financial advisers say that some relatively low-risk alternatives remain.
To be sure, they're not no-risk. Unlike CDs, they're not insured by the Federal Deposit Insurance Corp. for up to $250,000.
"If a person says they can't tolerate any risk whatsoever, we are looking at a lesser return," said Doug Ebner of Ebner Financial Group. "You have to take some risk to beat inflation."
As always, diversification is part of the plan. Investment professionals say that by avoiding putting all your eggs in one particular type of investment, you spread out your risk. And even in a particular investment category, the smart money is the diversified money.
Investments that financial planners recommend for conservative types include:
Stocks that pay dividends: Banks and financial services companies have slashed their payouts to investors. Nevertheless, there are still "companies of good quality that haven't decreased their dividends," said Janet Fox of ACH Investment Group.
Among the dividend-paying stocks that local financial advisers are calling to their clients' attention are Altria Group, formerly known as Philip Morris; AT&T; Coca-Cola; Duke Energy and Progress Energy.
"What is wrong with taking 25 percent of your portfolio and putting it in a bunch of things that you know people are not going to quit?" said Joe Gordon, of Gordon Asset Management. "They're not going to quit buying soap and razor blades and shampoo. ... They're not going to quit drinking Coke." He also puts utilities in this category.
Bonds and bond funds: Bonds out-performed the stock market in the past decade. During the first half of 2010, bonds gained 4.2 percent.
Preferred stocks: Preferred stocks are less risky than common stocks and, in many ways, are more like bonds. They promise regular dividend payments for a specified time.
Like bonds, the price of preferred stock is sensitive to interest rate levels and is more stable than common stock. The price tends to decline as interest rates rise, and vice versa.
Annuities: An annuity is purchased from an insurance company in exchange for the insurer guaranteeing to make periodic payments to the buyer.
"If you don't want to take the risk of the market, you have to look at other things," said Joe Gordon of Gordon Asset Management. "We recommend annuities for some people. We have people (close to retirement age) who have come to us and said, 'Look, I had $600,000 in early 2000. ... I was hoping it would be worth $1 million now, but it's worth $500,000.' "
Katzenstein recommends that investors go with a well-known, "high-quality" insurance company. He also cautions that investors should be sure that they understand the terms of an annuity.
"Usually, it is irrevocable," he said.
"We were more than satisfied with our little paltry 5.5 percent," Coco said. "I don't want to defy the laws of economics. I always believe in proportionate risk, proportionate return."
Today Coco is dismayed by two-year CDs ranging between 1 percent and 2 percent, with even lower rates for shorter-term CDs -- not enough to keep up with inflation.
"What the conservative, cautious American is experiencing now is trickle-up poverty," Coco said. (He readily admits, however, that his reference to poverty contains more than a little hyperbole.)
Ultra-low interest rates have cheered borrowers and spurred economic growth with cheap loans. But those low rates, slumping real estate values and cuts in dividends by supposedly blue-chip stocks rocked by the recession -- especially banks and other financial services companies -- have been tough on many investors. That includes seniors who have twin goals: preserving their life savings and augmenting their income from pensions and/or Social Security.
"They're getting a reduced amount of income from what they used to get, and it may be affecting their living standards," said Raleigh financial planner Frank Smith.
Smith and other financial advisers say that some relatively low-risk alternatives remain.
To be sure, they're not no-risk. Unlike CDs, they're not insured by the Federal Deposit Insurance Corp. for up to $250,000.
"If a person says they can't tolerate any risk whatsoever, we are looking at a lesser return," said Doug Ebner of Ebner Financial Group. "You have to take some risk to beat inflation."
As always, diversification is part of the plan. Investment professionals say that by avoiding putting all your eggs in one particular type of investment, you spread out your risk. And even in a particular investment category, the smart money is the diversified money.
Investments that financial planners recommend for conservative types include:
Stocks that pay dividends: Banks and financial services companies have slashed their payouts to investors. Nevertheless, there are still "companies of good quality that haven't decreased their dividends," said Janet Fox of ACH Investment Group.
Among the dividend-paying stocks that local financial advisers are calling to their clients' attention are Altria Group, formerly known as Philip Morris; AT&T; Coca-Cola; Duke Energy and Progress Energy.
"What is wrong with taking 25 percent of your portfolio and putting it in a bunch of things that you know people are not going to quit?" said Joe Gordon, of Gordon Asset Management. "They're not going to quit buying soap and razor blades and shampoo. ... They're not going to quit drinking Coke." He also puts utilities in this category.
Bonds and bond funds: Bonds out-performed the stock market in the past decade. During the first half of 2010, bonds gained 4.2 percent.
Preferred stocks: Preferred stocks are less risky than common stocks and, in many ways, are more like bonds. They promise regular dividend payments for a specified time.
Like bonds, the price of preferred stock is sensitive to interest rate levels and is more stable than common stock. The price tends to decline as interest rates rise, and vice versa.
Annuities: An annuity is purchased from an insurance company in exchange for the insurer guaranteeing to make periodic payments to the buyer.
"If you don't want to take the risk of the market, you have to look at other things," said Joe Gordon of Gordon Asset Management. "We recommend annuities for some people. We have people (close to retirement age) who have come to us and said, 'Look, I had $600,000 in early 2000. ... I was hoping it would be worth $1 million now, but it's worth $500,000.' "
Katzenstein recommends that investors go with a well-known, "high-quality" insurance company. He also cautions that investors should be sure that they understand the terms of an annuity.
"Usually, it is irrevocable," he said.
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