Investor options not all bad in today’s market

With home prices falling, interest rates on savings and short-term Certificates of Deposit in the low single digits, and the stock market down for the year, now may seem like a poor time to invest.

While local investment managers share the belief that uncertainty reigns, they are also finding some opportunities for current investment.

David Jordan of Tributary Capital in Fort Collins sees opportunity for yield-seeking investors in preferred stocks issued by financial institutions such as banks, brokers and insurance companies.

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Although these are not as secure as debentures and not FDIC-backed, he said preferred issues have higher claims on corporate assets than common stocks and some issues are yielding 7 percent to 10 percent. Jordan feels it pays to extend CD maturities out 3 to 5 years.

CD rates across local banks support Jordan’s point. Many banks are quoting rates on 6- to 12-month CDs under 3 percent annualized yield, while 5-year rates are typically 1 percent higher, depending on the bank or credit union. The risk with longer duration CDs is that investors are more susceptible to higher inflation, or if interest rates move up in the interim. Money market rates available at institutions such as Vanguard are also hovering around 2 percent.

Balanced approach

At Raymond James in Greeley, Matt Varney is advising a balanced approach, and not recommending investors put all their money in any asset class. Varney suggests “a ladder of maturities for fixed-income investments.”

A ladder is a mixture of investments held over different lengths of time that helps spread risk while achieving a higher yield than a portfolio of only 3- to 12-month CDs. Additionally, Varney pointed out that investors can look at alternatives to CDs, including bond mutual funds or dividend-paying stocks.

Kevin Dunnigan with Loveland’s Home State Bank sees opportunity in today’s uncertain environment. Dunnigan believes investors who are diversified and think long term will benefit from today’s low prices across several asset classes.

He is also optimistic that the high price of oil will “change habits” and ultimately be a positive for the economy. The alternative energy movement is gaining traction locally, with a host of Northern Colorado firms involved with wind, solar and biofuels promising new jobs for the area.

Another investment opportunity can be found in consumer staples and health-care stocks which have been marked down by investors seeking safer havens such as Treasury bills. Some stocks, such as Coca-Cola, Kraft Foods or Johnson & Johnson, offer both 3 percent to 4 percent current yields and long term growth potential, if not complete safety. Such multinational companies also allow investors to achieve diversification in more rapidly growing economies, while diversifying income streams into foreign currencies.

When it comes to risk aversion, remember that only the bank and credit union CD products offer insurance, up to $100,000, through either the FDIC or NCUA.

Other asset classes available to more enterprising investors seeking yield include oil and gas trusts, which can have much higher yields, or even private, income producing real estate investments, from apartments and office buildings, to farms, and even timber.

Review portfolio costs

Times of low interest rates and poor returns are also a good time for investors to review portfolio costs. Many investors hold mutual funds that charge 1 percent to 2 percent annual fees, and others pay investment advisers 1 percent to 2 percent per year to manage their money. Often times, these advisers invest clients’ money in expensive mutual funds.

These portfolio costs may not seem like a big deal when returns are high, such as in the go-go 1990s, but are absolute killers when returns in financial markets are low or negative. When returns are low, as they have been this decade, focusing on low-cost investing is even more important.

Investors also must keep in mind yields that are too good to be true probably are just that. Many financial institutions, including Washington Mutual, Citigroup, and Fifth Third Bank have recently cut dividends to shareholders, and many bonds offer high interest rates, but much lower probability of full repayment.

To paraphrase Will Rogers, it is much better to focus on return of investment than return on investment. This statement is especially true today, when money is scarcer. As fabled investor Warren Buffett recommends, “Rule No. 1 is to never lose money. Rule No. 2 is to never forget Rule No. 1.”

Mike Rubsam, president of Liberty Steward Capital of Fort Collins, can be reached at 970-581-4045 or mike@libertystewardcapital.com.