Experts' advice to small savers: don't tie up money long term

For the small saver or investor in the United States, the heady days of earning "big" interest rates are rapidly coming to an end. Financial planners who cater to individuals offer varying advice for staying ahead in the current environment of falling savings and investment interest rates. But most agree it is a good time for individuals to "take stock" of their finances since lower yields are likely to prevail for the forseeable future.

Until recently, savers with as little as $100 to invest could earn double-digit interest rates on savings certificates. High and accelerating rates of inflation last year and early this year boosted the yields on a number of savings and investment vehicles.

But the recession has changed that. The six-month money-market certificates offered by thrift institutions and banks yielded more than 15 percent in March. But the rate offered on them now is just over 8 percent. And the popular 2 1/2 -year savings certificate that paid 10.75 percent last month will fetch a maximum rate of 9.5 percent this month.

Even money-market mutual funds -- one of the first investment vehicles available to those with small amounts to risk and also promising interest rates that would rise rapidly with inflation -- are yielding significantly less now than they were a matter of weeks ago.

In a recession, when unemployment is rising and wages may be depressed, financial counselors say small investors should be extra careful with their money.

"We're advising our clients to keep a fair amount of liquidity. We don't advise investing in things that are highly speculative," said Dan Carter, a financial planner with Financial Designs Inc., of Houston. Mr. Carter recommends keeping some savings where it can be withdrawn immediately in case of an emergency, even if the money earns less interest than it might elsewhere. The temptation for individuals to "lock up" all their savings, or the bulk of it , in long-term investments is particularly strong when interest rates are falling, he notes.

Those seeking maximum safety may choose to keep their money in savings accounts or certificates of deposit at banks or thrift institutions. The rate of interest may be less than on other investments, but it is guaranteed and deposits at federally chartered institutions are insured up to $100,000 by the US government.

Few other investments are this safe. Stocks, for example, are insured against the brokerage firm going bankrupt, but there is no protection against price fluctuation.

Still, stocks in general have gained popularity among individual investors this year. Analysts say it is a result of both falling interest rates and greater recognition that stocks are among the few commodities that have not risen in price on par with inflation in recent years. Those who advocate stocks say they are undervalued and represent a bargain for investors.

Stock mutual funds with "aggressive growth" strategies had an 80 percent increase in sales in April, according to the Investment Company Institute, a trade group for the mutual fund industry.

"Stocks appear to be reasonably cheap compared to the alternatives," maintains Alfred Johnson, chief economist with the Investment Company Institute.

Money-market mutual funds, which pool the money of a lot of individual investors and businesses to buy high-yielding money-market instruments, remain very popular.

Financial planners point out that in a deteriorating economy the small saver or investor would be wise to evaluate investments in terms of safety and security as well as rate of return.