Jules Coco is a 58-year-old software programmer who takes a conservative approach to saving and investing. He fondly remembers the not-too-distant past when he and his wife could earn in excess of 5 percent interest on their certificates of deposit.
"We were more than satisfied with our little paltry 5.5 percent," Coco said. "I don't want to defy the laws of economics. I always believe in proportionate risk, proportionate return."
Today Coco is dismayed by two-year CDs ranging between 1 percent and 2 percent, with even lower rates for shorter-term CDs - not enough to keep up with inflation.
"What the conservative, cautious American is experiencing now is trickle-up poverty," Coco said. (He readily admits, however, that his reference to poverty contains more than a little hyperbole. "Am I about to go stand on a corner and shake a cup?" he asked rhetorically. "No.")
Ultra-low interest rates have cheered borrowers and spurred economic growth with cheap loans. But those low rates, slumping real estate values and cuts in dividends by supposedly blue-chip stocks rocked by the recession - especially banks and other financial services companies - have been tough on many investors. That includes seniors who have twin goals: preserving their life savings and augmenting their income from pensions and/or Social Security.
"They're getting a reduced amount of income from what they used to get, and it may be affecting their living standards," said Raleigh financial planner Frank Smith.
Smith and other financial advisers say that some relatively low-risk alternatives remain.
To be sure, they're not no-risk. Unlike CDs, they're not insured by the Federal Deposit Insurance Corp. for up to $250,000.
"If a person says they can't tolerate any risk whatsoever, we are looking at a lesser return," said Doug Ebner, president of Ebner Financial Group, which recently moved from Holly Springs to Durham. "You have to take some risk to beat inflation."
As always, diversification is part of the plan. Investment professionals say that by avoiding putting all your eggs in one particular type of investment, you spread out your risk. And even in a particular investment category, the smart money is the diversified money.
Investments that financial planners recommend for conservative types include:
Stocks that pay dividends: Banks and financial services companies such as Bank of America, Citigroup and General Electric have slashed their payouts to investors. Nevertheless, there are still "companies of good quality that haven't decreased their dividends," said Janet Fox, president of ACH Investment Group in Raleigh.
Among the dividend-paying stocks that local financial advisers are calling to their clients' attention are Altria Group, formerly known as Philip Morris; AT&T; Coca-Cola; Duke Energy and Progress Energy.
"What is wrong with taking 25 percent of your portfolio and putting it in a bunch of things that you know people are not going to quit?" said Joe Gordon, managing partner of Gordon Asset Management in Durham. "They're not going to quit buying soap and razor blades and shampoo. ... They're not going to quit drinking Coke." He also puts utilities in this category.
Bonds and bond funds: Bonds out-performed the stock market in the past decade. During the first half of 2010, bonds gained 4.2 percent.
Henry Peszko, 83, a retired federal employee who lives in Greenville, said he's long been a fan of North Carolina municipal bonds because you don't have to pay any state or federal income taxes on your returns.
"The trouble with CDs is you pay state and federal taxes on any interest," he said.
Fox has been talking to her clients about bond funds such as Loomis Sayles Bond Fund, Lord Abbett Short Duration Income Fund, PIMCO Total Return Fund and Vanguard Short-Term Investment-Grade Fund. She prefers bond funds "in a good quality fund family" to individual bonds because they're more liquid and it's easy to move the money to another asset class should that become the prudent thing to do.
On the municipal bond side, be aware that some experts are cautioning about the possibility of defaults because of the damages inflicted on state and local budgets by the recession.
North Carolina municipal bonds are "very highly rated," said Steven Katzenstein of HPG Wealthcare Advisors in Raleigh. On the other hand, he added, "I wouldn't want to be holding California bonds."
Preferred stocks: Preferred stocks are less risky than common stocks and, in many ways, are more like bonds. They promise regular dividend payments for a specified time.
Like bonds, the price of preferred stock is sensitive to interest rate levels and is more stable than common stock. The price tends to decline as interest rates rise, and vice versa.
That said, investors still need to examine "the underlying quality of the company you're investing in," Katzenstein said. "Don't focus strictly on the return you're getting from a preferred stock."
Two preferred stocks worth considering, said Smith, are issued by BB&T, the Winston-Salem bank, and Highwoods Properties, the Raleigh real-estate trust.
Annuities: An annuity is purchased from an insurance company in exchange for the insurer guaranteeing to make periodic payments to the buyer.
"If you don't want to take the risk of the market, you have to look at other things," said Joe Gordon, managing partner of Gordon Asset Management in Durham. "We recommend annuities for some people. We have people [close to retirement age] who have come to us and said, 'Look, I had $600,000 in early 2000. ... I was hoping it would be worth $1 million now, but it's worth $500,000.' "
Katzenstein recommends that investors go with a well-known, "high-quality" insurance company. He also cautions that investors should be sure that they understand the terms of an annuity.
"Usually, it is irrevocable," he said.
Master Limited Partnerships: These are limited partnerships that are sold on the New York Stock Exchange and other exchanges. They provide investors with a steady stream of income by distributing quarterly payments.
Many make their money by distributing oil or natural gas through pipelines. "They charge a toll," Smith said. "It's just like a toll over a bridge."
Smith likes several energy MLPs, including Enterprise Products Partners, Kinder Morgan Energy Partners, Linn Energy and Plains All American Pipeline.
Treasury Inflation Protected Securities: TIPS are hedges against inflation because they're tied to the Consumer Price Index.
"TIPS are great when people think inflation is going to go up," said Don Lozier of Lozier Financial Solutions, a Charleston, S.C., investment advisory firm that works with Ebner Financial. "This is a great, government-protected way for getting a nice return."
Some conservative investors also have conservative spending habits - with the latter buttressing the former.
Dianne Dunlap, 58, and her husband, Larry Leis, 61, fall into this category. Yes, they paid more than $500,000 for their house, but their newest vehicle is a hybrid-powered 2001 Honda Insight that gets 50 miles per gallon.
The retired Raleigh couple - she was in tech support at Cisco Systems before taking a buyout last September; he is a former state employee who worked in computer programming - aren't eating into their nest egg of more than $1 million at all. Instead, they're living on his state pension and the interest payments they receive on their municipal bonds, which is where they've plowed the bulk of their money.
That financial freedom also has enabled them to delve into an area that many would consider risky in the current climate: residential real estate.
They've taken advantage of the slumping real estate market and what Leis calls "more affordable prices" by buying three small houses of 1,500 square feet or less over the past three years and renting them out. Their not-so-secret weapon: They can do just about any repair or renovation job themselves, which saves them a bundle.
"We like to fix things," Leis said.
One of the houses was a foreclosed property that they paid for in cash. They took out 15-year mortgages on the others. Leis said that the rental payments paid by their tenants covers all but $100 a month on each of the mortgages.
"The tenant is buying the house for me," he said.
