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Avoiding high-risk investments can be prudent

- Alan Lavine and Gail Liberman



Market volatility can be scary to a family needing to save so much for the future.

It's especially tough now, since forecasts call for a one-in-three chance of a recession.

Nevertheless, promoters still keep trying to get you to boost your yields with exotic investments. Here are a few it could make sense to avoid.

  • Distressed municipal bonds. These bonds pay super high yield because the bond issuers are financially weak or nearly bankrupt. Who need to invest in financially weak municipal bond issues if the economy is weakening?

  • "Long/short funds," which claim they'll profit from some stocks, yet protect your investment by simultaneously shorting others. "Shorting" means that you profit when a stock price declines. But according to Morningstar Inc., Chicago, mutual funds designed to protect investors when the market falls end up losing more than the S&P 500, which is an index of large company stocks.

  • Foreign currency CDs and funds. The dollar is weak against foreign currencies today, making these types of investments sound awfully attractive. But this situation easily could turn. The currency markets are volatile and driven by institutional investors. Not even the pros can trade foreign currency successfully for any length of time.

  • Funds that invest in specific countries or regions of the world. Markets like Brazil, Russia, India and China are thinly traded and volatile. You can win a lot or lose a lot.

    Your best bet is to examine your holdings. Evaluate whether you have too much in risky investments--like stocks. If so, consider making changes.

    By investing only for the long term--at least 10 years, and spreading your risk across different, well-managed investments, you should be able to weather any storm.

    If you have new money to invest, CDs and money funds are looking like an attractive place to put it. Why gamble?

    Consider laddering bonds or CDs. Divide money into different terms--say, three-year, five-year and 10-year terms. Then roll CDs or bonds over at maturity, so you have money maturing at different intervals. This way, if rates rise, you'll earn higher yields than if you put all your money into one maturity. On the other hand, if they fall, your overall investment still will be earning more.

    If you select bonds, stick with U.S. Treasury or high-grade corporate bonds. If you invest in CDs, make certain all your money, including accrued interest, is covered by FDIC insurance.

    Have a lot of extra cash and feel like taking a little risk?

    In lieu of distressed municipal bonds, you might consider investing only a small amount in a well-managed high-yield bond fund. These funds at least own a large number of issuers, so a few defaults won't hurt overall performance.

    On the stock side, you might add a riskier stock fund. Just invest regularly for the long term to take advantage of declining prices.

    If you'd like to make money overseas, consider well- diversified international stock funds that own stocks in different countries and industries. The fund manager can deal with the changes in foreign currency values. Global funds invest in the United States as well as overseas.

    Don't be greedy. Stay well-diversified.

    #

    Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.


    To read more columns, please visit the column archive.




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