Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 2, 1995 TAG: 9510020099
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
So for many people, this is the hour of decision. Should you buy another CD, or are there better paying and relatively safe alternatives out there?
In the Roanoke Valley, one-year CDs earned a yield ranging from 5.20 percent to 5.76 percent last week. That's not much better than a year ago when yields extended from 3.60 percent to 5.30 percent.
Three reasons usually are given for October's dominance in maturing CDs.
First, it is the anniversary month of the short-lived stock market crash in 1987. Although Wall Street recovered quickly, some investors bailed out and moved into insured savings at banks.
October also is the anniversary month of the maturity of All-Saver certificates back in 1981. The tax-free certificates were a one-time event, but they were offered just at the time when interest rates peaked before starting down. They attracted a great deal of money.
Finally, for people who invest in six-month certificates, October is the calendar opposite of April when income taxes are due and tax refunds are being paid. People shove around a great deal of money at that time.
These days, of course, even the banks offer alternatives to their traditional certificates.
Rob Norvelle, manager of the Salem branch of First Union National Bank, said his suggestions depend on the customer's age.
For young people willing to take a risk, Norvelle may propose a mutual fund, specifically one of the bank's own Evergreen funds. He said the customer may choose funds aimed at growth or at income or at a combination of both. But those funds are not federally insured.
Neither are the annuities, which he said might be suitable for older people.
Older people often like the bank's so-called cap account if they have the $15,000 minimum investment.
He described the cap account as a cross between a money market account and a certificate. Cash in the account is insured by the FDIC up to $100,000, but any stocks or bonds placed in the account are uninsured.
The account pays in the mid-4 percent range, which is less than a certificate but more than interest checking, which it also resembles.
Norvelle said customers can write an unlimited number of checks against the account and they can access all the cash at any time. Unlike certificates, he said, the cash in a cap account is always ready for an emergency.
Ryland H. Hubbard Jr., manager of the Roanoke office of Merrill Lynch, declined to suggest alternatives to bank certificates because the choice varies so much with the individual.
But he said people who are going to keep CDs or Treasuries should ladder. That means they should vary the maturity dates by buying one-year, two-year and three-year certificates. They might even extend that range by buying some four- and five-year certificates as well.
Hubbard said this staggers the maturities over a long period of time. If interest rates should rise, some money will come due soon to take advantage of it. If, on the other hand, rates should fall, some money remains locked in at the former higher yield.
Forrest T. Miles, manager of the Roanoke branch of Davenport & Co., said there's no easy answer because people present so many variables. The proper choice depends, he said, on every person's tax situation, whether the goal is income or growth, and the length of time the money can be left in the investment.
He likes tax-free municipal bonds for people who want income without paying taxes. A large number of the bonds of Virginia localities are available, he said, and these are free of Virginia income taxes as well.
Mutual funds of municipal bonds also pay income and are safe and secure, according to Miles.
Miles also suggested Treasuries and government agencies such as Ginnie Maes. He called them "ultra safe" as long as you hold them to maturity. To this end, he said, buy short maturities such as two years.
Banks sell CDs, Miles said, and then invest the customer's money in Treasuries and agencies. They earn money on the difference between the two. So he advises buying the instruments directly and pocketing the higher rates.
Paul Higgins of Interstate/Johnson Lane in Roanoke also likes short-term Treasuries. He would stick with those that have maturities of only a few months.
Last week, he said, the three-month Treasury paid 5.3 percent, the six-month 5.49 percent and the 12-month 5.57 percent. Higgins said that income is free of state tax, which gives it an added boost, and the securities are backed by the full faith and credit of the government.
His only other suggestion is a conservative money market mutual fund, which last week paid in the range of 4.5 percent to 5 percent. The money in such a fund is completely accessible without penalty.
People who want to replace CDs, Higgins said, "are looking for something nice and warm and fuzzy. Anything else is too volatile for their portfolios."
Christopher Whisnant of the Roanoke office of J.C. Bradford & Co. recommends government bonds and Ginnie Maes to his older clients because they are safe if held to maturity.
He said a 30-year government bond was paying 6.58 percent last week with a minimum investment of $1,000.
Ginnie Maes, which are pools of mortgages, are a very conservative investment because the government backs the underlying mortgages. The downside is that you never know when the bond will be called.
Last week, Whisnant said, Ginnie Maes were paying an average rate of 7.5 percent. "You'll never get rich," he said, "but you'll never lose if you hold to maturity."
He likes mutual funds for their average performance over a 10-year period, even though they're hard to sell to the CD buyer.
John Parrott, a certified financial planner with Wheat First Butcher Singer likes Ginnie Maes if you buy an older bond that has a short time to maturity, perhaps a year or two. He said the yield to maturity is 8 percent on those bonds, although you would pay a premium to get that rate.
The typical rate, he said, is 6.25 percent to 6.75 percent for the shorter maturities without paying a premium.
Treasuries are paying 5.4 percent to 5.5 percent, he said, but it requires $10,000 to buy a short-term bill and $5,000 to get a bond.
Right now, he said, he believes that income mutual funds are very expensive. And a bond fund right now carries more risk that he would care to take.
Anyone willing to accept a longer maturity and a higher risk might try corporate bonds. He said a 15-year bond with an AAA rating might pay 7 percent.
by CNB