Personal Finance newsletter's annual survey of the worst places to put your money has an enviable record. Last year, for example, it warned about broker-sponsored mutual funds, Southern California real estate, troubled insurance companies and overvalued biotechnology stocks. All went on to perform miserably.
So what are the most avoidable investments these days?At the very top of the list, says Personal Finance, is the one-year certificate of deposit.
"The Federal Reserve's efforts to jump-start the economy have pushed short-term interest rates to 20-year lows. Consequently, most banks are offering one-year CDs with yields below 4 percent, the lowest rate in decades."
After taxes, says P.F., one-year CD returns won't even keep up with inflation. What makes them an even worse deal is that short-term interest rates are likely to begin creeping up soon.
"If you've locked in your money at a fixed rate in a CD, your returns will lose even more ground to inflation over the next 12 months. And you probably won't be able to get out without paying a penalty. If you have CDs coming due, don't roll them over into more CDs. Instead, put your excess cash into money market funds. Returns on such funds will rise as interest rates rise, allowing you to keep pace with inflation."
Personal Finance's next "must-avoid" investments are the two stock groups it sees as particularly vulnerable to meltdown should the market head south.
"The first group, which is most at risk, consists of 16 stocks with price-to-sales ratios 25 times higher than the average company's: Alza, Amgen, Biogen, Bolar Pharmaceutical, Centocor, Cisco Systems, Genzyme, Healthcare Compare, Immunex, IVAX, Mylan Labs, Novell, Parametric Tech, St. Jude Medical, Synergin, XOMA."
P.F.'s second overvalued stock group consists of 16 mature companies whose prices are much too high for their slowing growth rates: Automatic Data Processing, Carter-Wallace, Coca-Cola, Imcera Group, Lawson Products, Lawter International, Mylan Labs, Thomas Nelson, Northern Telecom, Omnicare, Pfizer, Premier Industries, Rollins Environmental, Tambrands, UST, Worthington Industries.
Rising short-term interest rates will soon eliminate much of the yield advantage short-term bonds enjoy over money market funds, predicts Personal Finance, in urging its readers to avoid such "bozo bonds."
"In addition, inflation will erode the worth of short-term bonds. If you own short-term bond funds, switch into long-term bond funds and money market funds, which will keep better pace with inflation."
The Mutual Fund Hall of Shame is Personal Finance's final investment no-no.
"All nine of these funds have been left in the dust by the S&P 500 over the past three years. Yet most continue to mug shareholders with hefty sales loads and expense fees: Dean Witter Convertible Securities, Mackenzie N.A. Total Return, Merrill Lynch Special Value, Merrill Lynch Strategic Dividend, MFS Government Income Plus, Permanent Portfolio, Shearson Multiple Opportunity, Sun America Capital Appreciation, United Gold & Government."