Inflation mocks 'safe' investing

No one deliberately throws investment funds out the window. But preoccupation with safety to the exclusion of yields, appreciation, or inflation hedge may be accomplishing the same result. The relationship between risk and return from one's investments is generally recognized. So the question -- how much risk can you afford to assume in exchange for perceived benefits?

Two forms of risk must first be understood: (1) the risk that your dollars may not be returned. This is dollar risk. You can be assured that the dollars you lend to the United States Treasury when you buy a T-bill will be returned on schedule. You may not be so sure that dollars invested in a new corporation selling some new product will return to you if and when you want it later; (2) inflation risk -- the probability that the dollars you get from an investment will buy the same goods and services they would have bought when invested.

Originally only one money-market mutual fund invested shareholder funds in T-bills and other government securities to avoid dollar risk. Now the number of "government only" funds has increased to 12 in response to investor concern for greater security. To help you gauge how much risk you can reasonably afford to assume, consider these factors:

* Your age. If you are retired or nearing retirement, conservatism and caution should prevail even at the expense of a small increment of return. Since you have no way of replacing capital, you cannot afford to risk losing it. But if you are young, with many productive years ahead, conservative investments will likely ensure that you have continuing and long-term losses because of inflation. Investing for growth and capital gains may be riskier, but there is at least a chance to beat inflation and taxes. An occasional partial loss of capital can be replaced.

* Income tax position. If you are paying high taxes, you can risk more because the government assumes part of any losses through write-offs.

* Family situation. Being single, married with a working spouse, or the single breadwinner for a family obviously affects your risk-taking philosophy.

* Fallback protection. If your employer provides substantial fringe benefits , including a pension or voluntary savings plan, you can invest more in riskier ventures with the prospect of reducing inflation risk.

* Risk orientation. Unless your personality allows you to accept risk and sleep soundly, you should avoid certain classes of investments. No added increment of return is worth lost sleep and increased worry.

* Management of investments. Unless you are willing to devote some time to your investment programs, you should settle for less return from conservative, relatively risk-free, passive investments. The riskier the investment, the greater likelihood that you will need to follow it closely and regularly.

Readers are invited to send questions to Moneywise, Box 102, Mercer Island, Wash. 98040. Only a selection of such questions covering topics of general interest can be answered here, and no question can be individually acknowledged. References to specific stocks, funds, or other investments in this column are intended for the general information of readers and not as an endorsement or recommendation by The Christian Science Monitor.m