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Still Worried About the Market?

Consider these 12 investments to beat money market and passbook savings rates.

By James P. Ruth, CFP

Every couple of decades, it seems as if one of our cherished institutions gets shaken to its very foundation with a hurricane-like force that scorches the earth as it pounds across a community, with devastating results. Recently, we’ve seen our religious and political institutions battered as they were peeled back like the skin of an onion revealing a seamy core.

Diversification and asset rebalancing are as important today as when the market was rocketing into outer space.

Then just when we thought the economy and the stock market were awakening from a two-year slumber, business and accounting scandals rocked our world again. The 401(k) and personal investment plans of many Americans plunged like a barrel over a waterfall.

The recovery
Like the aftermath of a hurricane, however, communities rebuild and recover. Institutions rebuild and recover, too—sometimes they become even stronger than they were before. I believe stocks and stock mutual funds, in the long run, will continue to outperform fixed-income investments, as they have done in the past. In previous columns, I’ve discussed the importance of investment diversification and annual asset rebalancing in your clients’ portfolios. These two strategies are as important today—when many investment portfolios are below sea level—as they were in the latter half of the 1990s when the stock market was rocketing into outer space.

But what can investors, scorched by recent market losses, do if they want to lighten their stock portfolios, yet still have a chance to beat money market and passbook savings rates? Here are 12 investments to consider. Most of them can be purchased individually or through mutual funds and all offer some form of risk, e.g., market, inflation, liquidity and credit risk. They are not listed in any particular order.

Certificates of Deposit (CDs): CDs guarantee interest rates for various holding periods, such as six months or one, three or five years. They are also FDIC insured up to certain limits.

Treasury Bills: These short-term loans from investors to the U.S. Treasury are backed by “the full faith and credit of the U.S. government.”

U.S. Government Bonds: These instruments have longer maturities than Treasury bills and are also guaranteed by the U.S. government.

TIPS: Treasury inflation-protected securities offer U.S. government bonds a rate of return indexed to the U.S. Consumer Price Index.

Municipal Bonds: Often called munis, these tax-exempt bonds are loans from investors to a state or a municipality. These IOUs have a fixed maturity date and are backed by the state or municipality that is offering the bonds.

Corporate Bonds: Similar to municipal bonds, corporate bonds are IOUs issued by public corporations. The safety of these bonds varies, depending on the creditworthiness of the issuing corporation.

REITs: Real-estate investment trusts offer investors the opportunity to own a piece of shopping centers, apartment complexes and office buildings. These investments trade like stocks and currently produce a steady yield. While bond interest rates have declined recently, REIT yields have remained high. However, they are not backed by the U.S. government.

Preferred Stocks: These stocks look like bonds because they pay high, fixed and regular dividends. But like stocks, the investment is only as safe as the company issuing it.

Annuities (single premium deferred): Because they can produce a fixed rate of return, annuities are sometimes referred to as CDs that are offered by insurance companies. They also offer tax-deferred accumulation until distribution. However, there is no FDIC insurance or government backing for annuities.

Annuities (immediate): During the last several years, the idea of earning a steady stream of predictable income has sounded pretty good to some investors. Offered and backed by insurance companies, annuities can guarantee income for various periods, including for one’s lifetime.

Exchange Traded Bond Funds: Exchange traded stock funds have been around for sometime. But their fixed-income counterparts have only been around a couple of months. They offer a wide spectrum of maturities in U.S. Treasury securities and domestic investment-grade bonds that are tied to several bond indices.

Ginnie Maes: These bond-like investments represent pools of mortgages made to homeowners. The underlying mortgage payments are guaranteed against default by the U.S. government. But like bonds, as interest rates rise, the value of the Ginnie Maes (net asset value) could fall, even though the income may remain steady.

James P. Ruth, CFP, is a registered representative and president of Potomac Financial Group in Gaithersburg, Md. You can reach him at 301-948-3900 or by email at jruth@pfgroup.org.

 


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