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Getting Scrambled By Stocks?
By Diane Harris, March-April 2003
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Another draw for conservative investors: Most REIT gains come in the form of dividends, because the trusts must by law pay out at least 90 percent of their income to shareholders. The average dividend recently: a hefty 7.3 percent. Says Phil Behnen, a financial adviser with A.G. Edwards in St. Louis: "REITs give you a yield to rival bonds, with some of the growth potential of stocks thrown in for free."
Unlike the other three investment options outlined here, REITs aren't a totally low-risk proposition. A sluggish economy, for example, could put short-term pressure on the real estate market—and, in turn, REIT shares.
So, if the real estate bubble bursts, REITs will suffer in the short term (and you'll suffer along with them). Which is why you should only consider them a long-term investment option and limit the amount of your retirement savings you put into them. Behnen, for one, advises restricting REITs to no more than 5-10 percent of your total portfolio and making sure you have money in both commercial and residential property. The easiest way to achieve that mix is to buy shares of a real estate mutual fund that owns many different kinds of REITs. Funds winning high marks from analysts include Cohen & Steers Realty Shares (800-437-9912), which has gained 5.3 percent over the past year and an average of 9.6 percent annually over the last three; and Alpine Realty Income & Growth (888-785-5578), up 17.8 percent and 22.3 percent over the same periods, respectively.
Keep On Keeping Up
Inflation-protected securities, fixed-income Treasury securities that guarantee investors will beat the rate of inflation over their lifetime, have attracted a lot of interest lately. And why not? During the past year, mutual funds that invested in these securities gained nearly 10 percent, besting the stock market's return by 30 percentage points.
Inflation-protected securities probably can't keep up this stellar performance, but over time they should still earn at least 2-3 percent more than inflation. That's enough to merit a place in most retirees' portfolios. Even at today's relatively benign 2.5 percent annual rate, notes Ginita Wall, co-author of the retirement guide Your Next Fifty Years, inflation will erode the purchasing power of your savings during your retirement as much as a few years' worth of losses in the stock market. "Knowing with certainty that at least a portion of your portfolio will grow faster than the cost of living is a great boon to financial security for anyone living on a fixed income," she says.
Inflation-protected securities come in three forms: I-bonds, TIPS, and TIPS mutual funds. An I-bond is a type of savings bond that pays interest in two parts: a fixed rate set when the bonds are first issued (recently 1.6 percent) and a variable rate that changes every six months, depending on inflation (recently 2.46 percent, for a combined total rate of 4.08 percent). I-bonds come in denominations ranging from $50 to $10,000 at local banks and brokerages or can be purchased directly from the U.S. Department of the Treasury (www.publicdebt.treas.gov; 800-722-2678).
TIPS, an acronym for Treasury Inflation Protected Securities, are 10-year notes issued in $1,000 increments, sold through brokerages or available directly from the Treasury. Unlike I-bonds, TIPS pay a fixed rate of interest (recently about 3 percent) for as long as you own them. Instead of your interest rate changing along with inflation, your principal is adjusted upward as consumer prices rise. You can buy the notes individually or invest in them through mutual funds that specialize in TIPS, offered by major fund companies such as Vanguard (800-851-4999) and Fidelity Investments (800-544-8888).
One caveat: You won't get your principal back until your bond matures, yet TIPS investors must pay taxes on the gains from their inflation adjustments every year. That means it's usually best to do your TIPS investing under the shelter of a tax-deferred account such as an IRA.
You Can't Lose a Cent
Long a staple of 401(k) accounts, stable value funds have only recently been made available for direct purchase by individual investors for IRAs and other retirement accounts. These portfolios of short- and intermediate-term bonds wrapped in an insurance package guarantee that shareholders won't lose a penny of principal—a very attractive promise. And the funds pay much higher interest than such "safe" investments as money market funds and short-term certificates of deposit, yielding more than 4 percent recently, compared to just 1 percent for money funds.
In shopping for a stable value fund, consider only those with relatively low expenses, preferably charging 1 percent or less annually of your assets to manage the account. High redemption fees, typically a bruising 2 percent of the amount you withdraw, can also detract from your net gains, so be sure you plan to keep your money parked in the fund for a while. (These fees typically kick in when money market yields exceed those of the fund.)
Among the funds worth looking at: Scudder Preservation Plus Income (800-621-1048), recently yielding 5.1 percent, and Gartmore Morley Capital Accumulation (800-848-0920), 4.3 percent.
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