SURE & STEADY SECURITIES.FOR IRIS ATKINSON-KIRKLAND, MUNICIPAL bonds not only represent a security blanket security blanket n. 1. A blanket carried by a child to reduce anxiety. 2. Informal Something that dispels anxiety. Noun 1. but also a great way to earn a considerable return. A conservative investor by nature, the 48-year-old accountant has always sought a safe haven--especially during unpredictable times. That's the primary reason she's put roughly 45% of her $150,000 portfolio in municipal, or muni muni See municipal bond. , bond funds. "I've worked at banks for over 15 years and for me, the name of the game is preserving capital and keeping risk to a minimum," says Kirkland, who lives in Hempstead, New York Hempstead is the name of some places in the State of New York, in the United States of America:
Her strategy has paid off: thanks to the recent decline in interest rates, Kirkland's main muni fund, Putnam New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Investment Grade (800-634-1587), gained almost 18% in 1997 and has produced an 11% total return as of mid-December 1998. You'd be hard-pressed to find glamour or excitement in Kirkland's sane investments. That's because over the years, munis, along with Treasury bonds and utility stocks, have won the well-deserved reputation of being mild-mannered, milquetoast milque·toast n. One who has a meek, timid, unassertive nature. [After Caspar Milquetoast, a comic-strip character created by Harold Tucker Webster (1885-1952). investments that a broker would probably recommend to your grandmother. That's for a good reason. Through thick and thin, they all provide holders with a regular stream of income and tend not to fluctuate much in value. While you're not likely to lose a thread off your shirt or blouse investing in any of the three, you'll probably not see the kind of beefy beefy, beefyness 1. in dog conformation, used to describe overdevelopment of musculature in the hindquarters. 2. in cattle, used to designate the desirable physical conformation of a beef animal, but an undesirable character in dairy cattle. gains the stock market has racked up over the past few years. Then, why bother when you can put your money in a hot technology stock that's ready to zoom to the stratosphere stratosphere (străt`əsfēr), second lowest layer of the earth's atmosphere. The level from which it extends outward varies with latitude; it begins c.5 1-2 mi (9 km) above the poles, c.6 or 7 mi (c. ? Well, for one, investment pros will tell you that any good portfolio has an anchor in investments that won't lose their value and will produce income no matter what happens. Treasury bonds and munis pass muster, thanks to yields of 5% or so. What's more, they promise to pay back your original investment upon maturity. We have included utility stocks in the mix because they act as bond surrogates. As a whole, they operate in a steady sector and offer an average yield of 4.5% in the form of a dividend. "Depending on your risk tolerance Risk Tolerance The degree of uncertainty that an investor can handle in regards to a negative change in the value of their portfolio. Notes: An investor's risk tolerance varies according to age, income requirements, financial goals, etc. level, at least 30% of your portfolio should be invested in bonds," says Craig Simmons, chief investment strategist strat·e·gist n. One who is skilled in strategy. Noun 1. strategist - an expert in strategy (especially in warfare) strategian market strategist - someone skilled in planning marketing campaigns and head of fixed income for Ashland Global Securities, a New York institutional investment firm. "Certainly, the older you get, the greater the percentage of the allocation of those assets. But anyone in his or her late 30s should be investing in Treasuries and munis." This year, there could be an added reward in socking away a portion of your money in these investments. For one, experts are looking for Looking for In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. interest rates to fall. By some accounts, the interest on the 30-year Treasury bond, widely used as the yardstick for fixed income investments, is predicted to tumble as low as 4.5%, down from 5.24% as of press time. That should translate into a nice bonus for investors in treasury bonds, munis and utility stocks. Not only will holders receive a reliable income flow but they could witness a healthy gain as the prices of these vehicles tend to rally when rates drop. Case in point: In early January 1998, the yield of the 30-year Treasury stood at 5.92%. By November, it dipped to 5.07%--before the world economy and the stock market sustained a number of jolts. To review the results, look at mutual funds that follow the three groups. As of October 31, utility funds, for instance, posted a 22% total return during the preceding 12-month period, compared with an average annual of 11% over the last five years, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Morning-star Inc., the Chicago-based investment research firm that tracks mutual funds. Treasury and muni bond funds didn't fare as well but still outperformed their historic averages. Government bond funds, which invest in Treasuries and muni bond funds, returned investors almost 9% and 7%, respectively, compared with 6% and 5% over the previous five years. The average stock fund, on the other hand, posted a total return of 10.9%. Consider another factor: analysts say the stock market may be in for a bumpy bump·y adj. bump·i·er, bump·i·est 1. Covered with or full of bumps: a bumpy country road. 2. Marked by bumps and jolts; rough: a bumpy flight. year. Price-to-earnings multiples (P/Es)--a measure of how stocks are valued according to corporate profits--for the Standard & Poor's 500 have never been higher. According to Zacks Investment Research Zacks Investment Research A firm that compiles earnings estimates and brokerage firm investment recommendations for thousands of publicly traded firms. , the S&P 500 currently trade at an average 26 times 1998 earnings. Historically, the market has traded between 9 times (considered vety cheap) to 22 times (very expensive) its projected earnings. Expect stock prices, in general, to come tumbling down. "If you're concerned about the ability to get your money back for your investments, this is a good time to go into bonds or utility stocks which provide a yield," says Simmons. "That's especially true now that there are concerns about the stock market's ability to deliver high returns." JUST HOW MUCH? Money managers have an answer for just this kind of scenario. When the going gets scary, they tend to move out of risky stocks and buy more sturdy investments. The average investor, however, can't keep shifting investments back and forth--after all, there are hefty brokers' fees for each transaction. Instead, as you read on, keep in mind that many financial planners Financial Planner A qualified investment professional who assists individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve these goals. suggest that the percentage of your portfolio you choose to hold in bonds should be roughly the same as your age. The reason: as you get older, you should become a less aggressive investor. That figure isn't meant to be hard and fast. If you want to take on more risk with the possibility of greater reward, boost the percentage held in stocks by 10-20 percentage points. A word of advice, before we move on. As with stocks, it's best to take a patient, long-term approach to treasuries, munis and utility stocks. "There's no way to predict just where point yields will end up. If you spend too much time trying to pinpoint it, you'll invariably in·var·i·a·ble adj. Not changing or subject to change; constant. in·var  i·a·bil get burned," says Napoleon Rodgers, a
fixed-income portfolio manager for Alpha Capital Management, an
institutional investing firm in Detroit. "It's best to invest
for the long haul Long distance. Long haul implies traversing a state or a country. Contrast with short haul. and give up on trying to time either the capital or
stock markets."TREASURIES As Uncle Sam's IOUs, Treasuries are simply the Fort Knox Fort Knox [for Henry Knox], U.S. military reservation, 110,000 acres (44,515 hectares), Hardin and Meade counties, N Ky.; est. 1917 as a training camp in World War I. It became a permanent post in 1932. In the steel and concrete vaults of the U.S. of investing. The reason: the U.S. government has never defaulted on its debt. It's little wonder, then, that the world flocks to Treasuries at the sign of the slightest bit of unrest. Treasuries work just like any other bond. In this case, you're lending money to the federal government. In return, you get a set rate of interest and a promise from Washington that you'll receive the face amount of the bond upon maturity. To top it off, you pay no state or local tax on interest income. Treasuries come in a variety of maturities, each with its own name. There are Treasury bills--commonly known as T-bills--which are issued for a year or less; Treasury notes, which mature in two to 10 years; and, finally, Treasury bonds, which stretch out 10 years or longer. Another difference: each maturity pays a different amount of interest. Generally, though, you can expect bonds with shorter maturities to pay less interest than long-term vehicles. It takes a greater amount of interest to convince investors to tie up their money for longer periods of time. Weighing the risk and reward of different interest rates corresponds to liquidity--how quickly you need to get to your money at any point in time. At press time, the 30-year Treasury bond paid 5.29%, while the two-year Treasury note anted up 4.65%. If you have a chunk of money earmarked for a specific goal and want to safeguard it from hiccups Hiccups Definition Hiccups are the result of an involuntary, spasmodic contraction of the diaphragm followed by the closing of the throat. Description in the market, we recommend you invest in Treasuries. If you have $5,000 that you want to put toward a new home three years from now, money managers suggest that you purchase the five-year Treasury, which pays 4.56%. With investors trying to figure out the future direction of the global economy, it's a good idea to stick with notes with maturities of less than five years, advises Rodgers. By doing so, you will have money available when you're ready to cash out. Buy Treasuries directly from Uncle Sam Uncle Sam, name used to designate the U.S. government. The term arose in the War of 1812 and seems at first to have been used derisively by those opposed to the war. Possibly it was an expansion of the letters "U.S. . Under its Treasury Direct program, you can open an account with the government and build a portfolio without paying brokerage fees. For details, phone the local branch of the Federal Reserve bank or 800-943-6864. Another option: consider government bond mutual funds Bond mutual fund A mutual fund which primarily or exclusively holds bonds. . Bond funds, like stock mutual funds, offer a portfolio of issues under the supervision of a money manager. And, unlike the average individual investor, funds can tap into government agency debt, which is as safe and sure as treasuries, yet pays a bit more yield. To give you a few choices to mull over mull over Verb to study or ponder: he mulled over the arrangements [probably from muddle] Verb 1. , we had Morning-star screen funds with an average maturity of four years or less (see charts). We then ranked the funds according to three-year average annual total return. The winner: Dupree Intermediate Government Bond Fund (800-866-0614), which averaged a return of 7.58%. The three-year average annual return for government bond funds as a group was 8%. MUNIS Munis, like Treasuries, represent debt obligations. Munis, however, are issued by state, city and county governments to raise money to pave PAVE Cardiology A clinical trial–Post AV Node Ablation Evaluation roads, build schools, repair bridges, erect hospitals or break ground on football stadiums. They can also be purchased as short-term investments, from one to three years. A key difference: municipal bonds are exempt from federal income tax. And if the bond is issued in the state where you live, you won't have to pay a cent in local or state taxes, either. You'll find that most munis generally don't pay as much interest as Treasuries. Remember, though, that not a dime of the interest you earn from munis will be eaten up by federal taxes. The calculation to determine the tax-adjusted yield is relatively simple. Divide the yield by your federal tax rate subtracted from 1 (for couples filing joint returns, that's 15% for up to $42,350 in income; 28% for up to $102,300; 31% for up to $155,950; 36% for up to $278,450 and 36% for any sum above that). For example, if the muni bond pays 4% and you're in the 36% tax bracket Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. , its taxable equivalent yield Taxable equivalent yield The return from a higher-paying but taxable investment that would equal the return from a tax-free investment. This depends on the investor's tax bracket. is 6.25%, or 4 divided by 0.64 (or 1 minus 0.36). The same equation works for muni bond funds. Kirkland, who is in the 31% tax bracket, reaped an 11% gain from her Putnam New York muni bond fund. Essentially, her gain on a tax-adjusted basis would come out to 11 divided by 1 minus 0.31, or 15.94%. In general, municipalities don't go bankrupt. But there have been instances when localities have defaulted on interest payments or have had their bonds downgraded. For extra protection, seek out munis that have been insured against default by such institutions as the Muni Bond Insurance Agency. Since it can be difficult to thoroughly examine the world of munis, we recommend that you opt for muni bond funds. Many are offered in a variety of state packages that can help you achieve the greatest tax savings possible. We again in approached Morning-star for a list of the top three municipal bond funds Municipal Bond Fund A mutual fund that invests in municipal bonds, operating either as an investment trust or as an open-end fund. Notes: Because the bonds are local government issues, they usually help to maximize tax-exempt income. with an average maturity of four years or less, ranked according to their average annual three-year total return. The top performer: the Strong Short-Term Muni Bond fund, which returned investors an average of 5.86% a year. UTILITIES These have been unnerving un·nerve tr.v. un·nerved, un·nerv·ing, un·nerves 1. To deprive of fortitude, strength, or firmness of purpose. 2. To make nervous or upset. times for your local electric or gas company. Not so very long ago, they were simple to understand. The power company was allowed to collect a fixed rate, as set by state regulators. These days, though, legislatures are throwing the group into a brave new world Brave New World Aldous Huxley’s grim picture of the future, where scientific and social developments have turned life into a tragic travesty. [Br. Lit.: Magill I, 79] See : Dystopia Brave New World of competition by deregulating de·reg·u·late tr.v. de·reg·u·lat·ed, de·reg·u·lat·ing, de·reg·u·lates To free from regulation, especially to remove government regulations from: deregulate the airline industry. the industry. Soon, it seems, several power ,companies will battle one another to win your business. That kind of rivalry is likely to push prices downward and pinch the profits of even the most stalwart Stalwart A description of companies that have large capitalizations and provide investors with slow but steady and dependable growth prospects. Notes: The annual gain that would be viewed as the norm for investing in stalwarts is about 10% to 12%. companies. By and large, such sweeping changes have been slow in coming. For the most part, utilities remain regulated monopolies in most of the country. In deregulated areas, several nimble nim·ble adj. nim·bler, nim·blest 1. Quick, light, or agile in movement or action; deft: nimble fingers. See Synonyms at dexterous. 2. companies are busy acquiring power plants coast to coast to help them better compete. Regardless of changes facing the energy sector, utilities look attractive for several reasons. For one, their average yield is currently 4.5%, compared with the puny pu·ny adj. pu·ni·er, pu·ni·est 1. Of inferior size, strength, or significance; weak: a puny physique; puny excuses. 2. Chiefly Southern U.S. Sickly; ill. 1.5% average dividend yield of the S&P 500. Second, even if corporate earnings dip, Wall Street estimates the utility group will still grow 4% or so in 1999. Put the two together, and there's potential to reap a 8%-10% total return--especially if interest rates fall and investors flock to utilities. "These are safe companies in a stable economic sector," says Randall Eley, chief executive officer of the Edgar Lomax Co., an institutional money management firm in Springfield, Virginia Springfield is an unincorporated community in Fairfax County, Virginia, United States and is a suburb of Washington, DC. Within Springfield are three census-designated places (CDPs): Springfield CDP, West Springfield CDP, and North Springfield CDP (plus a substantial portion of . "They're not the most profitable companies to own in a bull market, but these stocks will prove very valuable to a portfolio in a bear market." That indeed was the case in 1998, a year when the utility average was up 13% (as of press time), nearly matching the 16% rise in the Dow Jones Industrial Average Dow Jones Industrial Average The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. . Since each utility stock has a different outlook, you might want to opt for a mutual fund that specializes in the sector. Some had average gains near 10% for the year, as of October 31. Moreover, the average rate of return for utility funds was 22% over the same period. According to our Morning-star Screen, the IDS Utilities Income A led the pack with an average annual three-year total return of almost 21%. If you're looking to invest in individual stocks, Eley suggests that you take a look at Southern Co. (NYSE NYSE See: New York Stock Exchange : SO) and American Electric Power American Electric Power (NYSE: AEP) is a major investor-owner electric utility in various parts of the United States. It is headquartered in Columbus, Ohio. It serves parts of 11 states, and is currently the largest electricity generating utility in the United States. (NYSE: AEP AEP - Application Environment Profile ). Savannah Savannah, city, United States Savannah, city (1990 pop. 137,560), seat of Chatham co., SE Ga., a port of entry on the Savannah River near its mouth; inc. 1789. , Georgia-based Southern, which provides power throughout the Southeast, has a dividend yield of 4.6% and trades at 17 times earnings, while American Electric Power has a dividend of 5.2% and trades at 15 times earnings. According to Zack Investment Research, Southern's earnings are projected to grow by 4.7%, vs. 3.2% for American Electric Power. As a whole, these investments provide sound offerings in your portfolio diversification Portfolio diversification Investing in different asset classes and in securities of many issuers in an attempt to reduce overall investment risk and to avoid damaging a portfolio's performance by the poor performance of a single security, industry, (or country). strategy. Treasuries, munis and utilities will guarantee you a worry-free night's sleep as income continues to roll in.
Top Government Bond Funds
TOTAL RETURNS(*)
12-Month 3-Yr.
Bond Name Y-T-D Average Annualized
Dupree Interim Govt. Bond 7.28 8.67 7.58
Montgomery Short-Duration Bd R 7.09 8.09 7.10
Vanguard Limited-Term Tax, Exempt 7.34 8.29 6.76
5-Yr. Average
Bond Name Annualized Maturity
Dupree Interim Govt. Bond 5.93 3.2
Montgomery Short-Duration Bd R 6.43 2.8
Vanguard Limited-Term Tax, Exempt 6.06 3.3
Telephone
Bond Name Number
Dupree Interim Govt. Bond 800-866-0614
Montgomery Short-Duration Bd R 800-572-3863
Vanguard Limited-Term Tax, Exempt 800-341-7400
(*) As of October 31, 1998 Source: Morningstar Inc., Chicago
Leading Muni Bond Funds
TOTAL RETURNS(*)
12-Month 3-Yr.
Bond Name Y-T-D Average Annualized
Strong Short-Term Muni Bond 4.68 6.16 5.86
USAA Tax-Exempt Short-Term 4.39 5.58 5.27
Vanguard Limited-Term Tax-Exempt 4.38 5.42 4.95
5-Yr. Average
Bond Name Annualized Maturity
Strong Short-Term Muni Bond 4.20 2.8
USAA Tax-Exempt Short-Term 4.87 2.8
Vanguard Limited-Term Tax-Exempt 4.61 3.3
Telephone
Bond Name Number
Strong Short-Term Muni Bond 800-368-1030
USAA Tax-Exempt Short-Term 800-382-8722
Vanguard Limited-Term Tax-Exempt 800-662-7447
(*) As of October 31, 1998 Source. Morningstar Inc., Chicago
Best Bets In Utilities Funds
TOTAL RETURNS(*)
12-Month 3-Yr.
Bond Name Y-T-D Average Annualized
IDS Utilities Income A 11.03 27.36 20.72
Fidelity Utilities Growth 12.91 26.43 20.62
American Century Utilities Growth 14.84 34.95 20.58
5-Yr. Telephone
Bond Name Annualized Number
IDS Utilities Income A -- 800-328-8300
Fidelity Utilities Growth 14.66 800-544-8888
American Century Utilities Growth 13.70 800-345-2021
(*) As of October 31, 1998 Source:. Morningstar Inc., Chicago |
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