Newspaper article St Louis Post-Dispatch (MO)

Woe to the Timid Investor Who Struggles to Find Both Yield and Safety

Newspaper article St Louis Post-Dispatch (MO)

Woe to the Timid Investor Who Struggles to Find Both Yield and Safety

Article excerpt

If you're a timid investor, woe is you. You have no place to turn.

Investors long of tooth, or short of courage, like income from interest and dividends. They fear risk either because they're living off their savings, or because their nerves can't take the shock.

But there is no place to go these days if you want both safety and income that beats inflation.

"If a client needs income, he's going to have to take risk," says Brian Rehling, who heads global fixed-income strategy at Wells Fargo Advisors.

So, let's crawl slowly out on the limb of risk to gather what income fruit we may.

BANKS

You can find a federally insured money-market savings account paying 1 percent at Goldman Sachs Bank with no minimum if you're willing to open an account online. With $10,000, you can get 1.11 at Silverbank, according to Bankrate.com. CIT Bank offers a 1-year CD at 1.22 percent.

That's the high end. Most St. Louis banks pay a lot less.

But inflation rose 1 percent in the year ending in May, and its been rising a little faster for the past few months. Today's best bank account rates probably won't keep you even with prices - especially because bank interest is taxable.

Goldman Sachs Bank is offering a five-year CD at 2 percent. That might, or might not, preserve your buying power.

Government bonds won't do it either. The rate on a two-year Treasury note is a mere 0.6 percent, and the five-year Treasury is 0.95 percent.

Banks and short-term government securities are safe. The government insures bank accounts to $250,000, and Uncle Sam will certainly pay his debts. Anything else requires taking a risk that you won't get all your money back.

BONDS

A problem with all higher-yielding investments is that investors have already bid up the prices. "On any type of historical basis, they are incredibly expensive," Rehling says.

That goes for corporate bonds, real estate funds and high- dividend stocks. Even risky junk bonds are up 10 percent this year after last year's drubbing.

The first step on the limb of risk involves longer-term bonds. Forget Treasury bonds. The rate on 10-year U.S. Treasury bonds hit a record low on Friday and ended the day at a measly 1.36 percent. You can do better at a bank.

But rates on investment-grade corporate bonds look more interesting. Five-year A-rated bonds were yielding 2.55 on Friday. Five-year bonds rated BBB - the bottom of investment grade - were yielding 4.8 percent. Those stand a better chance of beating inflation.

But corporate bonds come with two kinds of risk: credit risk and interest rate risk.

Hold a five-year corporate bond to maturity and you'll get the face value of the bond back - if the company survives. But sell the bond in the meantime and you get more or less than you paid.

Bond prices fall when interest rates rise and vice versa. …

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