For small investors, getting a reasonable return from their
savings can be frustrating. Today, many money-market funds pay about
1.2 percent. A one-year bank certificate of deposit averages less
than 1.6 percent. Tying money up for two years in a CD boosts the
return to about 2.1 percent, according to Bankrate.com.
But with inflation running at about 2.3 percent, even that rate
means that real returns are negative.
Is there any possible relief? Yes, experts say, but only if
investors move away from such supersafe investments.
"People should get used to being in a protracted period of low
interest rates," says Ronald Kaiser, director of Bailard, Biehl &
Kaiser, Inc., an investment-counseling firm in Foster City, Calif.
"Those happy days [of high interest rates] are gone."
Nonetheless, there are investments that do offer higher yields,
though at a higher risk. One is REITs (real estate investment
trusts). Another possibility is junk (high-yield) bonds. In both
cases, consider investing through mutual funds, since that's safer
than purchasing them individually.
Mutual funds provide exposure to various types of REITs or a
batch of high-yield bonds. Such diversity helps protect against
losses sustained when a single REIT performs poorly or a company
behind a junk bond goes bankrupt.
Right now, REITs are paying an average cash dividend of about 6
percent. Coupon payments on junk bonds run about 8 percent - better
"The risk of default is very real in junk bonds," says Annette
Thau, the author of McGraw-Hill's guide on fixed-income investments,
"The Bond Book." "If investors want to invest in that sector of the
market, you want to invest in a mutual fund."
Mr. Kaiser advocates putting a quarter to a third of an
investor's portfolio into real estate. In fact, right now with
interest rates so low, he sees REITs as a surrogate for investment-
To most investment planners, Kaiser's views are extraordinary if
not revolutionary. But with today's low yields on better quality
bonds, "there are serious questions as to whether bonds should play
any role at all in any but the most risk-averse portfolio mixes,"
Bonds are a poor choice for investors right now because REITs
offer a higher cash yield, Kaiser continues. That yield is
relatively steady, he says, and the potential return over the next
several years is double that of bonds.
His evidence: the yield for 10-year Treasury bonds for the past
eight decades. (See chart.) When the interest rate at the start of
the decade starts out low, the annual average yield for the next
five years or for the entire decade is similarly low if not lower.
In the 1980s and 1990s, interest rates started out high and
annual bond yields were rich. "But now we are back to the days when
you get only 4 percent a year," Kaiser says. …