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How you view this recent economic fallout has more to do with age than people suspect. My younger clients, even those dealing with job losses and high mortgage and tuition payments, have confidence in a market rebound. Though they are distressed about the big dent in their portfolios, time is on their side. It is my older, retired clients, who are struggling, not just because they may live on fixed incomes or fear outliving their money. This generation has ridden one of the longest financial waves in our country’s history, enjoying a twenty year high rate of return on all of their investments from real estate to precious metals to bank instruments and of course, the stock market. They can’t accept a 2.5% return on a CD or a 3% return on a treasury bond. It’s like putting the money under the mattress.

But are they right? As with any economic climate, the key is implementing a financial strategy that works with the tide, not against it. Here are some examples:

CDs  Right now, their low interest rates don’t dazzle, but they do protect your principal with minimal risk and allow you to optimize flexibility by staggering their maturity dates. This is calling laddering. As the shorter term CDs mature, reinvest in longer- term CDs with higher rates. Because you will invest every one to two years, you take advantage of hopefully higher rates. It’s not a quick road to prosperity, but the steady growth and the flexible timing adds up.

Muni- Bonds  Consider moving some of your portfolio out of Treasuries and into muni-bonds. Yes, there is the risk of default, but with so much stimulus money going into municipal projects, this is unlikely, and the net return is greater because of federal income tax exemptions. Right now, muni bond yields are significantly higher than short term Treasuries because of investor sentiment and the tremendous sell off at the end of 2008, which temporarily drove prices below par value.

Inflation Protected Bonds and Bond Funds (TIPS)  TIPS are US Treasury notes and bonds that have a fixed rate of return and are date-specific in terms of maturity. The potential upside is that the fund rate is tied to the consumer price index, the so-called inflation rate. This means if interest rates and living costs rise during the bonds life, the value of the fund is enhanced. They are also government-backed, so investors are assured of getting their face value at maturity.

Remember, aside from safety, the most important consideration with any investment is not only the rate of return, it’s all of the variables factored in: return of principle; rate of earned interest on that principle; your tax bracket and whether or not you’ll pay taxes on the interest; and whether or not this total return adjusted for any tax due out earns the annual inflation rate.

The bottom line is that interest is only one measure of your real rate of return. The true test is overall benefits, and the best strategy for riding the wave, asset allocation. Diversity is still king.

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Tags: cd, interest rates, lee rosenberg, low interest, muni-bonds, outliving money, portfolios, treasuries

About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.

This entry was posted on Friday, May 22nd, 2009 at 9:30 am and is filed under investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.