Unless it brings some dramatic and unexpected changes in market conditions, 1994 looms as a year of many compromise choices for yield-conscious savers and investors.
The financial menu heading into the new year offers few conservative vehicles returning much more than 3 percent to 4 percent - unless you are willing to brave the hazards of the long-term bond markets, where yields range upward from 6 percent or so.But many analysts see a very real risk that interest rates will turn upward during the new year, depressing prices of existing bond investments.
Most forecasters on Wall Street quote long odds against anything like the drop in rates in 1993 that produced unexpected capital gains for many investors in bonds and bond mutual funds.
So analysts are advising that bond investors approach the new year with modest expectations.
"The portfolio managers in our recent surveys see little to no chance of rates declining beyond what was seen this year," reports Technical Data, a Boston research firm.
Keith Brodkin, chairman of the investment management firm of Massachusetts Financial Services Co., says anybody who purchases fixed-income investments now "should buy them for that purpose."
The ups and downs of interest rates are inherently unpredictable. If any of the "experts" could forecast these things with any certainty, they could quickly convert that knowledge into riches in the financial futures market, and would have no need to sell their services to others.
One way to deal with the uncertainty is to diversify maturities, mixing short-term with longer-term investments so that if rates rise, the increase in the yield of the short-term securities (known as "cash" on Wall Street) at least partly offsets the declining prices of the other holdings.
This insurance comes at a cost. "For the fixed-income investor who needs the regular income that bonds provide, any move to cash reduces income," acknowledges the Value Line Investment Survey in its latest appraisal of the outlook for income investments.
When you move money from Treasury bonds to short-term Treasury bills these days, for instance, the yield drops by about half.
"Even with perfect knowledge that rates would rise, many investors would be unable or unwilling to suffer so great a reduction in income, even temporarily," Value Line says.
One way to compromise on these issues is to spread your money over securities of several maturities in a "laddered" approach. Value Line says the idea is "to provide the income of a specific maturity with lower risk.
"As an example, an investor seeking a 5 percent return in the Treasury market would currently have to invest in notes maturing in January 1998, or a little more than four years."
Alternatively, Value Line suggests, "the investor could purchase equal amounts of two-, three-, four-, five- and six-year maturities.
"As the notes mature, the funds are reinvested in the six-year area. This is similar to the concept of dollar-cost averaging in the stock market.
"The tradeoff of a laddered portfolio," Value Line says, "is usually lower total return from price appreciation should interest rates decline further. Given recent trends, and our firming economic outlook, it appears this tradeoff is well worth making."
Another way to diversify is to vary the type and quality of debt issuers - for example, by considering corporate bonds or bond funds instead of sticking entirely with U.S. government securities and government-only funds.