New Interest-Rate Puzzle for Savers
NEW YORK (AP) _ Even for savers and investors who don’t own any stocks, 1986 is off to a tumultuous financial start.
The headlines and lead stories on television and radio broadcasts have focused on the record 39.10-point drop of the Dow Jones industrial average on Jan. 8.
But the apparent cause of that decline in the stock market - a sudden change in expectations about the outlook for interest rates - had ripple effects for many other investments and savings vehicles as well.
The market value of most interest-bearing securities fell as interest rates rose. The net asset value of one conservative ″income″ mutual fund, checked at random for purposes of illustration, dropped in a four-day period from $8.74 a share to $8.62.
That kind of development surely came as a jolt to investors who had grown accustomed to a steady rise in the prices of their fund shares during the second half of last year.
Beyond that, it posed new questions for just about everyone with money to manage in planning strategy for the months ahead.
If interest rates have stopped falling and are heading back up, it would be sensible now to avoid any new commitments to interest-bearing investments with relatively long lives.
The logical tactic would be to keep your assets in a short-term haven such as a money market mutual fund, bank money market account or Treasury bills, awaiting better opportunities later in long-term investments.
In this set of circumstances, money market accounts at banks and savings institutions would bear particularly close attention. Yields on money funds and Treasury bills would rise with open-market interest rates, but institutions such as banks might drag their feet on raising the rates they pay on those accounts.
It is by no means a certainty that interest rates have begun a significant rise. Rates, by their very nature, defy all efforts at consistently accurate forecasting.
Analysts at New York’s Citibank are predicting a further rise in rates, partly because ″they almost always rise as the economy moves toward full employment.″
The economists S. Jay Levy and David A. Levy, on the other hand, argue that interest rates are headed much lower this year.
That puts risk-wary savers and investors in a troublesome spot. The confidence almost everyone seemed to share about the 1986 investing outlook has abruptly diminished.
Experts in personal finance say there is no wishing away the volatility of interest rates in the modern, deregulated world of money. It has become a financial fact of life.
However, they add, that does not mean you are powerless to do anything about it. Conservative investors have always sought to protect themselves against risk by diversifying, and that principle can be applied to interest- rate risk as well as other hazards.
An individual trying to decide what to do with a $2,000 individual retirement account contribution, for instance, might start by splitting the money in half, putting $1,000 into a relatively long-term investment with a fixed return, and the other $1,000 in an investment whose yield fluctuates with money market conditions.
That amounts to a compromise - and like most compromises, it means settling for less than the best possible results. Whatever happens to interest rates, half the money invested probably won’t produce results as good as the other half.
But it also provides some assurance that your efforts to achieve financial security won’t be highly vulnerable to the ever-changing outlook for interest rates.
End Adv PMs Thurs Jan 16