If Wall St. Sun Dims, Stars Shine Bonds, Other Securities Advantageous If Stocks Fall

There’s a reason astronomers pack up their telescopes at dawn. The stars are still there, to be sure. But none will outshine the sun.

Luckily, investors don’t face the same problem. Even as the stock market reaches its zenith, investors can - and should - scope out other investments.

Nearly every financial planner tells clients to put at least part of their money into something besides stocks. They may disagree on the particulars, but they will agree that a mix of investments serves the investor best.

The reason ought to be clear. If the stock market’s heyday is near an end, as some believe, other stars will start to shine brighter.

This isn’t a plea to abandon the stock market. The idea is that these other investments might gain while stocks sag, offsetting short-term losses.

It also means giving up some gains when stocks soar, as they have in the last three years. But for most investors, the steadier outcome of a mixed portfolio of investments is easier to live with than the ups and downs of owning nothing but stocks.

There are almost innumerable ways of putting money to work.

Take cask, for example. Advisers who say to put some money in cash don’t mean cash exactly. They mean cash equivalents.

These are riskless or nearly riskless investments that pay some interest to the investor and usually can be converted quickly into other investments. Examples include bank certificates of deposit, money-market bank accounts and money market mutual funds.

Money market funds, which are paying about 5 percent interest currently, buy securities that pay modest interest rates without risking the money customers invest in the fund.

Investors who want a bit extra for their cash might consider 4-year Treasury notes, paying 6.1 percent. Despite the higher rates, these are certain to pay off in full after four years.

If you need the money unexpectedly, you can sell early. The buyer, however, won’t pay you the full amount if interest rates have risen since you bought the note.

Investors can reach for extra return by investing in bonds.

Stodgy old bonds don’t promise the same long-term gains as stocks. But they shouldn’t be dismissed lightly.

For 10 years, 1965 through 1974, corporate bonds paid better average returns than stocks, according to a recent comparison by the Investment Company Institute. In two more recent five-year periods, corporate bond yields kept up with stocks’ average returns without exposing investors to as much risk, the comparison showed.

Bonds haven’t matched stocks recently, but their interest payments aren’t a bad deal. Treasury bonds maturing in 30 years are earning 6.57 percent, compared with inflation at about 3 percent.

And Treasury bonds are as secure as dollar bills in your pocket. But that doesn’t mean T-bond owners face no risks.

Sell a 30-year Treasury early and the price might not be anywhere near the amount you paid for it.

If interest rates have risen, buyers of secondhand bonds want to make up for the lower interest rate paid by the bond you’re selling. So they cut the bond’s price.

And because the buyer is looking at many years of below-market interest rates, the price cut will be steep with even a relatively small change in interest rates.

The opposite is true if rates have fallen. Buyers bid up your bond’s price because it pays greater interest for the remaining years than any new T-bonds they could buy.

Prices of five- and 10-year Treasury bonds vary with interest rates too, but less dramatically than prices of 30-year bonds. They also pay lower interest rates, with 10-year Treasury bonds currently yielding 6.30 percent and five-year bonds 6.24 percent.

Corporate bonds are riskier than government bonds because a company is more likely to go broke than the federal government. Even Coca-Cola Co. pays higher rates to borrow than the U.S. Treasury.

But not much more.

But some companies are riskier than others, and their bonds offer still higher interest rates for that extra risk. These companies fail to get investment-grade ratings from independent agencies such as Moody’s Investors Service.

Bonds that pay these higher rates are called high-yield bonds, or junk bonds.

Cities, counties and other local governments sell bonds, too. These - called municipal bonds - pay much lower interest rates than federal or corporate bonds. That’s because neither the federal government nor local government taxes the investor’s interest income.

The question for investors is to figure out whether the lower interest from a local municipal bond is still higher than the after-tax income from a similar taxable bond.

Don’t buy municipals from outside your home state. You’ll have to pay your state’s taxes on the out-of-state bond’s interest.

Planners often include foreign bonds in a portfolio, just as they usually mix U.S. and foreign company stocks. This adds another risk from changes in currency-exchange rates.

Many financial planners urge investors to buy bonds directly rather than through mutual funds. Investors can hold the bonds to maturity and get their original investment back even if interest rates rise sharply. Bond funds never mature, and their prices change with changes in interest rates.

International funds and junk-bond funds are two notable exceptions. Both require expertise in tricky markets, in which case a fund manager likely earns his keep.

Real estate has been a boom-time investment in recent years. And investors don’t have to buy apartments, offices or malls to participate.

Real estate investment trusts, or REITs, buy properties and sell investment units to individuals. There also are mutual funds that pick and choose among REITs.

Generally, REITs trailed the stock market in 1995, beat stocks last year and have fallen flat this year. But that’s good diversification for an investor looking for something other than stocks to own.