On the edge--tentatively.

Conservative investors take on a smidgen of risk to boost their returns

Playing it safe characterizes most investors like Robert Williams, 41, and his wife, Therrie, 40. But the couple, who have been investing in the stock market for more than 13 years, have taken their first hesitant steps toward assuming more risk to boost their returns.

For example, the Chicago couple recently plunked down $1,500 in a private placement done back in October 1997 by an inventor who is looking to mass produce a fiber-optic Christmas tree, due to hit the market by year-end. After attending a few formal meetings and reviewing a prospectus, the Williamses decided it was a viable business opportunity.

Although the Williamses realize they may not be "jingling" all the way to the bank with newfound riches from this highly speculative venture, the investment is an attempt to maximize their capital, they say.

Seeking to take advantage of more aggressive growth vehicles, Robert is also reorganizing the portfolio he holds in his company's 401(k) plan, currently valued at more than $50,000. A distribution coordinator for Fujisawa Healthcare, a pharmaceutical company in Bensenville, Illinois, Robert is fully vested. He contributes 15% of his salary, with the company matching 6%. About 70% of his portfolio is invested in stock funds and 30% in bond funds. Up until a year ago, Robert had his money only in the safest vehicles--money market and fixed-income funds--which were offering him lower returns.

Besides the 401(k) plan and shares in the fiber-optics company, the Williams family doesn't have any other investments and $1,500 in savings. Another financial challenge for the couple is a small business that absorbs a great deal of their leftover capital.

Therrie quit working five years ago after giving birth to daughter Angelica. Looking for a way to be a stay-at-home mom yet generate some income, she decided to launch a business, borrowing about $3,000 from Robert's 401(k) plan. The former manager with the Catholic Office of the Deaf, part of the Archdiocese in Chicago, Therrie started out with a day-care service that generated very little capital. To offset the business' expenses, Therrie started selling school supplies.

This eventually led to Therrie founding Y's Choice. Today, the company provides basic educational supplies such as pencils, crayons, construction paper, writing tablets, furniture and hard-to-find items to Chicago's public schools. The business is generating annual sales of about $60,000, but Robert and Therrie have yet to see a profit. Every dime they make is put back into the business.

This presents a problem for the couple, who are now seeking to build an education fund for their daughter The Williamses sent their older children, sons Frederick, 22, and Robert Jr., 19, to private high schools, and had planned to spend the same amount of money they contributed to their sons' secondary education on their college expenses.

Fortunately, "both of our boys received merit scholarships, which offset the majority of the costs," says Williams. When they were growing up, "we didn't know about investing in the market like we do now. As we got older, we realized that if our kids hadn't gotten scholarships, then those funds would not have been available. You have to set that kind of money aside," he adds. "When our daughter gets of college age, we want to be prepared. We want to be able to finance her education."

RELATED ARTICLE: Financial Snapshot: Robert & Therrie Williams

Household income (before taxes)   $50,000
Household income (after taxes)    $25,000
Household expenses                $15,600

Business income (before taxes)    $60,000
Business income (after taxes)     $26,000
Business expenses                 $34,000

Investment portfolio: 401(k),     $51,500
 savings (bank accounts)
Debt/liabilities                  $82,000
 (including mortgage)
Credit cards                      $25,000
 (business/personal)

RELATED ARTICLE: Expert Advice

FINANCIAL ADVICE: Baunita Greer, President and CEO, Cromwell, Miller & Greer Inc., New York

Greer's recommendations:

* Open an Individual Retirement Account (IRA). The couple needs to contribute $2,000 a year to an IRA to further build their nest egg. Given their limited resources, they should start by investing the money in a blue-chip mutual fund. Once their pool of resources grows, they need to diversify--allocating 70% of their assets to stock funds and 30% to bond funds. Of the equity portfolio, 50% should be in blue chip/large caps, 20% in growth and income, 20% in small caps and 10% in international funds. As for fixed-income investments, Greer recommends a mix of corporate and U.S. Treasury bond funds. Greer notes that the business isn't generating enough revenue for Therrie to look into self-employed retirement vehicles such as a Keogh plan, which also would be too cumbersome at this point in terms of administrative paperwork and cost.

* Establish an education fund. The Williams family still has another 13 years to save for their five-year-old daughter's college education. Again, they should contribute to a good core equity fund that has a solid large-cap or blue-chip portfolio. Worth considering are the college plans offered by Fidelity Investments and T. Rowe Price. Since the Williamses have to take most of their money and put it back into their business for now, they should start with at least $50 a month, taking advantage of an automatic reinvestment plan. Greer says the couple also needs to eliminate their credit card debt over the next five years.

* Prepare for a loss on the speculative investment. Greer believes that the Williamses' stake in a private placement is highly speculative and risky. Such investments can sometimes generate high returns, so it is possible that the Williams family could see a 100% return on their investment. But the reality, says Greer, is that "nine out of 10 times, investors never see their money again. If a person is comfortable with that possible loss, then fine. But I've seen too many investors fall prey to get-rich-quick schemes, thinking that they are going to take $2,000 and turn it into $20,000 overnight."

Greer adds that while the Williamses' investment in the inventor's venture was small--equivalent to what they would have spent on a vacation--they would be better off putting any extra cash into their own investment program.3