Newspaper article THE JOURNAL RECORD

Some Savers Making Classic Error in Timing

Newspaper article THE JOURNAL RECORD

Some Savers Making Classic Error in Timing

Article excerpt

NEW YORK _ It takes nerve to recommend an interest-bearing investment paying out less than 5 percent over one that yields 7.5 percent or 8 percent.

But that's just what some financial advisers are doing right now, in defiance of the prevailing wisdom.

Many savers of late have been fleeing the depressed returns of the short-term money markets for the greater yields of long-term alternatives such as bonds and bond mutual funds.

A few analysts argue that those people may be making a classic error in timing.

"The puny yield on money-market investments is encouraging many investors to lengthen their maturities in quest of higher returns," says Norman Fosback, editor of the advisory service Income & Safety in Fort Lauderdale, Fla. "That is the wrong step."

Or as James Grant, editor of the New York-based Grant's Interest Rate Observer, puts the argument: "People are in full flight from cash. They want zippy common stocks, high-yield bonds, defaulted Peruvian bank loans, collateralized mortgage obligations and intermediate-term bond funds.

"On form, they should suffer low (Treasury) bill rates rather than reach for the overpriced, longer-dated alternatives."

The theory they propound isn't very complicated at heart. In fact, it is little more than a variation on the old precept "buy low, sell high."

But it can be difficult to put into practice, if only because it requires time and patience before it has a chance to pay off. Though it has historical precedent on its side, it comes with no guarantee.

How could a money fund yielding 4.9 percent wind up eventually paying more than a bond fund yielding 7.9 percent?

Suppose interest rates, at some unknown time in the near future, begin to rise. Since money-fund yields tend to follow market trends with a lag of just a few days, weeks or months, their yields would soon climb on a parallel path. …

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