Smart Alternatives to Stocks and Bonds

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STEPHEN KRONINGER FOR TIME

With the DOW edging above 9000 last week, stock investors are feeling a sense of relief. Whether or not we have hit bottom, the substantial rise in prices offers a chance to breathe. You can now look at your portfolio as a whole and cover your bases — not just for future growth but for future safety.

Unfortunately, the prospects for traditional safe havens — intermediate- and long-term bonds — are questionable. Higher interest rates and inflation, which may be in the offing, could erode their value. So what's a cautious investor to do?


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First, rebalance your portfolio to be sure you are comfortable with your exposure to stocks. Financial planner Harold Evensky of Coral Gables, Fla., says that, on average, his balanced investors (40% bonds, 60% stocks) are down only 2% annually over the past three years. How is that possible? Bonds, small caps and value stocks kept them afloat. Reaching your equilibrium in this market may mean selling your losers on the way up or putting all or part of your new investment capital into safe alternatives to stocks and traditional bonds. In general, you should keep in a safe haven any money you will need in the next three to five years — say, the first years of retirement or a child's college tuition. Where should you put that money? Here are some specific safe alternatives to stocks and bonds.

PREPAID TUITION PLANS
Unlike so-called 529 college-savings plans, most of which lost money last year, prepaid plans gained about 7%. That's because they are guaranteed to keep up with tuition costs, which have risen at twice the rate of inflation. Mark Kantrowitz of FinAid.org also notes that prepaid plans (often derided because they tie you to a particular school or group of schools) are becoming more flexible about school choice. Kantrowitz suggests combining a prepaid plan (which does better when the economy performs poorly) with a 529 (which does the opposite) as a way to balance a college-savings portfolio.

STABLE-VALUE FUNDS
If opening your 401(k) statements has become a gut-wrenching experience, you may want to shift some of your assets into a stable-value fund. With it, you are buying either a portfolio of guaranteed investment contracts or a portfolio of short-to intermediate-term bonds with an insurance feature that guarantees you will not lose money. Since 1999 the typical stable-value fund has returned more than 6% annually. This year the funds are not on track to perform quite that well. One large fund, Scudder Preservation Plus Income, is up just 3% year to date. Still, that's a heck of a lot better than you could have done in a money-market fund.

TREASURY INFLATION PROTECTION SECURITIES (TIPS)
These can be purchased in the form of Inflation-Protection funds from Vanguard, Fidelity and other large firms or through the government's Treasury Direct program savingsbonds.gov). TIPS pay 3 percentage points above the inflation rate. Eric Jacobson of Morningstar says that though TIPS are a stable long-term investment, their day-to-day prices can be as volatile as those of conventional intermediate bonds or bond funds.

TIAA-CREF'S PERSONAL ANNUITY SELECT
There are many annuities on the market, but this is the only one we could uncover with no surrender charge and a return double that of the average CD. tiaa-cref's tax-deferred annuity returns a fixed 4.7% annually through next March (when the return will be adjusted) for contributions made through October. The program works much like a money-market account but with a few restrictions. You make a deposit (the minimum is $250) and add to it as often as you like. Once you reach age 591/2, you are allowed but not required to make a withdrawal every six months. There is a 10% penalty for early withdrawals.

If you have more than enough money in safe havens to cover your short-term needs, how will you know when to shift some of it back into stocks? Hugh Johnson, chairman of First Albany Asset Management, says he would wait until the market showed a broad, consistent rise that lasts four to eight weeks. "I know I'll always be a little late to the party," he says. "That's O.K. with me."

Jean is a columnist for MONEY magazine. You can e-mail her at moneytalk@moneymail.com