As your devoted scribe
noted last week, the stock market has been rising on bad news and falling
on good news. So the shocking statement by Federal Reserve Board Chairman
Bernanke that “the economic outlook remains unusually uncertain” was just
what the markets needed. The large company stock indexes rose between 3
and 4% for the week, with small company stocks rebounding over 6%. After
a very disappointing first half of the year, an unexpected recovery in
stocks has almost offset those losses. If we can add another good week,
stocks will be in positive territory for the year so far. This is a very
confounding market, to say the least, but investors still luxuriate in
strong gains, which is just what happened last week.
Low interest rates have been plaguing investors particularly retirees who
need income to pay their bills. There are opportunities to earn high
interest (and dividends), but you need to realize that the higher the
interest, the higher the risk. You can earn interest or dividends of over
5% on Build America Bonds (these are taxable municipal bonds), high yield
bonds, preferred stocks, and some master limited partnerships. But the
danger of these securities is that you could end up losing a lot more
principal on these investments than the interest or dividends they pay. In
other words, there’s no free lunch. But you can reduce the risk of
principal loss somewhat by investing in mutual funds or exchange-traded
funds that invest in the aforementioned Build America Bonds, high yield
bonds, preferred stocks. Funds spread your money around among a large
number of securities, so if any one or a few of them go sour, you’re
investment value shouldn’t be badly impaired.
Before you jump whole
hog into higher interest investments, bear in mind that a lot of experienced
investment professionals currently prefer to let their money languish in
low-yield Treasury bills rather than reach for more yield. They worry that
when interest rates rise, the value of higher-interest securities will fall,
perhaps significantly. Also, if the economy does come unglued, many higher
interest bonds could default. If you are attracted to the siren song of
high interest, my advice is to put only a portion of your money into these
funds.