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Text File | 1992-09-10 | 5.1 KB | 120 lines

                                                                                BUSINESS, Pag 43

MONEY MATTERS

Honey, They Shrunk the Interest Rates


By Andrew Tobias


    You have money in the bank earning 3.5%, and it's killing
you.

    It's not even that the interest rate is so low, it's that
it's so . . . embarrassing! You feel -- well, let's face it --
you feel a little like an idiot. After all, 3.5% isn't even 3%
after taxes. And with inflation running at whatever it's running
at, say 4%, you're actually losing money!

    Of course, it was no better a decade ago, in 1982, when
banks were paying 12% but tax rates and inflation were higher.
You could have been losing money back then too, but at least
12% seemed like a lot. And with the Dow groveling around 800,
what was your alternative? Certainly not stocks -- everybody
knew stocks were no place for smart money.

    Now, 10 years later, with the stock market nicely
recovered -- quadrupled, actually -- it's safe, finally, to take
your money out of the bank and put it into the market or buy
bonds.


    Or that's what everyone seems to be doing, anyway, and who
am I to quarrel with multibillion-dollar monthly capital flows?


    Yet quarrel I do. When friends call to ask which mutual
fund to plunge into, I make the following speech: "It's great
that you're thinking about stocks," I say, "because, over the
long run, stocks will outperform safer investments. And it's
great that you've decided to go the mutual-fund route, because
that's almost always wiser than picking the stocks yourself. (Do
yourself a favor, though," I remind them, "and choose a fund
with low annual expenses and no sales fee.) But are you sure now
is the time to jump in? Now, when stocks are more expensive than
they have ever been in the history of the world?" (I allow
myself a certain cosmic license here, for effect.) "Isn't the
concept to buy low?" I ask. "And to sell high?"

    They get my drift, they thank me, they take one more look
at that 3.5%, and they call their brokers to buy mutual funds.

    And they could be right! Just because something's
overpriced doesn't mean it won't become more overpriced. Look
what happened in Japan. But as often as not, things ultimately
right themselves. (Look what's happening in Japan.)

    -- If you already have money in the market, either through
a long-standing program of periodic investments in mutual funds
or through your retirement plan at work, bully for you. Keep it
up. The habit is such a good one, I wouldn't recommend breaking
it, even though the market is overpriced. (If you're anywhere
near needing some of those funds, though, lighten up.)

    -- If you don't have a long-term periodic-investment
program and want to start one with a small nibble now, that's
fine too. It's more important that you start than that you start
at exactly the best time.

    Otherwise, steer clear. My guess is that a lot of people,
fleeing a safe 4% return, will find ways to lose 40%. (In the
'70s it wasn't low interest rates but high tax rates that drove
sensible people to do silly things. Desperate to avoid forking
over 70% in taxes, they lost 100% in limited-partnership
tax-shelter deals instead.)

    This is not to say the economy is headed for trouble. The
recession ended on Feb. 25 (the day I bought a brand-new
Chrysler LeBaron convertible), and there's reason to think
business may boom in the year ahead (I have my eye on a new
computer). But while that's good news for Main Street, it's
almost surely already been discounted by the market. Could
stocks have climbed so high without expectations the recession
would end? And it also means interest rates may one day edge
back up. Uh-oh.

    So if things go nicely, stocks and bonds might well just
sit here, or fall. And maybe things won't go so nicely, in
which case it's hard to see stocks doing well.

    And then there's the matter of the election. Someone is
going to win in November (you heard it here first), and that's
a problem. If it's the Democrats, it could make Wall Street
nervous. If it's the Republicans, well, how much euphoria can
there be, once the dust settles, over four more such years?

    Personally, I'm bullish on America. For all our problems
-- which are considerable, to put it mildly -- we've become
leaner and meaner, and our quality has improved. Exports are up.
Technology races along. And the flip side of the real estate
collapse is the prospect of low rents -- bad for landlords and
lenders, good for business and consumers. Hopeful signs.

    But don't feel guilty or stupid leaving your money
someplace safe and liquid for a while. You could have the last
laugh.


    P.S.: Pay down any high-interest debt you may have; not
having to pay 11% on an auto loan is as good as earning 11%. And
check into U.S. Savings Bonds. They have tax advantages and
promise at least 6% if held five years. There are loads of
decent, riskier possibilities; but remember: we're talking about
money you've had someplace totally safe. Be certain before
moving it that you fully understand the risks.