WSJ's Zweig: With Fed on the Cusp, Beware 'Safe' Investments

Monday, 27 May 2013 10:23 AM

By Dan Weil

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Many investors have loaded up on "safe" investments, such as dividend stocks and real estate investment trusts (REITs) during the past few years. But these investments may provide little security when the Federal Reserve finally raises interest rates, says Wall Street Journal columnist Jason Zweig.

He turns back to history to divine what the implications of a Fed rate hike might be.

The central bank raised rates five times in 1994. And, "the damage was widespread, hitting supposedly safe and risky assets alike," Zweig wrote.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

For that year as a whole, utility stocks dropped 15.3 percent; municipal bonds lost 5.2 percent; intermediate-term Treasurys slid 5.7 percent; and gold shed 2.2 percent.

To be sure, REITs squeaked out a gain of 0.8 percent, but that was only because they yielded about 7 percent Zweig says. Now they yield about 3 percent.

"REITs, dividend-paying companies, utilities and low-volatility stocks all have a place in a portfolio," he wrote.

"But they aren't worth paying a premium price for — and, as safe as they have seemed until recently, they won't offer blanket protection once the fear of rising rates becomes reality."

Zweig raises a valid point. If it's pure safety you want, you'll pretty much have to stick with insured bank deposits, CDs and money market funds.

And while you have to be careful about the price you pay for them, blue-chip dividend stocks, REITs and municipal bonds can offer a nice combination of safety and return for the long term.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

 

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