Taking more risk

WHAT ARE you — and
your money — doing about
today’s low interest rates?

In the 1970s, you had a hard
time earning a real return on your
investments, after inflation and
especially after income tax.

Once we got into the 1980s, it
became casier as interest rates
were pushed up to bring down in-
flation. You didn’t have to take
any risk to get a reasonable
return. And if you did take risks
in the stock market and even, in
some cases, in real esiate, you
earned no premium to compensate
for that risk.

Now in the 1990s, with interest
rates — especially short-term ones
—- on the low side, taking more
risk could once again be justified
with the potential of a higher
return than guaranteed invest-
ments.

Even buying a long-term bond
(or bond or mortgage mutual
fund) in the hopes that interest
rates will continue to fall could
pay off: as rates go down, the
value of the bond (bond/mortgage
fund) rises, producing a capital
gain (tax-free if you can apply the
capital gains exemption).

You keep hearing that because
the inflation rate has dropped,
your after-tax, real rate of return
today might well be higher than it
was in the early ‘80s.

But words don‘! pay the bills. A
year or two ago, you were earning
10-12% on your CSBs and GICs.
Today you are earning 7-9%.
And how many everyday prices
have dropped that much?

The Investment Reporter, a
weekly newsletter published in
Toronto, neatly sums up the three
ways you can cope with this situa-
tion:

@ alter your lifestyle so you can
cut back on your spending;

@ dip into capital, but that jeop-
ardizes your future investment in-
come;

@ fook at alternative investments
— and accept higher risks.

Those alternatives —- the main
choices for the average person —
include stocks, bonds, mortgages,
Tevenue property and a business
(either your own or somebody
else's).

If you want or
your investment
which choice or combination of
choices is right for you. Then
commit some time and effort to
developing the expertise you will
need to increase your chances of
success — before you actuaily
commit your money.

You can do only so much to
Maximize interest income. You
can shop around for the highest

need to increase
income, decide

GIC rates (but be careful about.

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seems justified in the ’90s

Michael
Grenby

exceeding applicable deposit in-
surance limits).

You can took at mortgage-
backed securities, although the in-
come can vary because you are
receiving principal repayments as
well as interest. You can buy gov-
ernment or corporate bonds and
plan to hold them to maturity —
but realize the guarantee of both
the interest payments and return
of your principal is only as good
as the issuer,

You can invest in) mortgages.
But if the borrower defaults, you
run into legal as well as financial
problems. As always, the higher
the return, the more risk you must
accept.

Investing in stocks (as well as
mutual funds that hold stocks)
and real estate demands a long-
term commitment. The longer you
are prepared to hold the invest-

DOLLARS AND SENSE

ment, the lower the risk. You can
then wait out the inevitable mar-

[ you have the driving ambition to succeed in the

ket drops for the long-term gains
these investments have always en-
joyed — so Car,

But in the meantime, stock div-
idends can be reduced or suspend-
ed. Tenants can move out, inter-
fupting your rental income. So
while stecks and revenue property
can produce both income and in-
crease in value, and you can enjoy
some income tax breaks, the
trade-off once again is higher
risk. .

You might invest some money
to develop a business sideline.
Pechaps $10,000 invested in
equipment, marketing and the
first year’s operating expenses
could produce a higher return
than a term deposit. Again you
can enjoy some tax breaks — but
again you also risk losing money
and must consider the value of the
time you devote to this project.

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SS ISSR ES
SORES :

You could invest in somebody
else’s business venture, with a
similarly high cisk-reward
scenario.

Today’s low interest rates
should prompt you ta look at
your investment alternatives.
Diversifying now will give you a
broader base in the future.

But focus only on the basic
choices. Avoid get-rich-quick
schemes. Expecting something for
nothing is likely to return you
nothing for something.

Mike Grenby is a North
Shore-based columnist’ and in-
dependent financial adviser who
works with individuals; he will
answer your questions as space
allows —~ write to him c/o The
North Shore News, 1139 Lonsdale
Ave., North Vancouver V7M
2H4,°