HOW SAFE ARE SUPPOSEDLY 'SAFE' INVESTMENTS? (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

The recent volatility in the stock market brought out a fact many people had almost forgotten: stocks can go down as well as up.

For most of the 1990s, we had an almost continuous bull market, which has led to record amounts being invested in stocks. Many of these investors have had little experience with a bear market. Consequently, if they suspect one is coming, they may be tempted to look for "safer" alternatives, such as savings accounts, certificates of deposit (CDs), money market funds and Treasury securities.

Are these types of investments completely safe? It's true they will generally protect your principal, and they do pay a fixed rate of return, but they might not keep pace with inflation, which, although low in recent years, has not disappeared. Over time, you could lose significant purchasing power through these so-called "safe" vehicles.

You can clearly see this risk by reviewing the historical "real" rates of return -- the rate of return after inflation -- for various investments. From 1926 through 1998, the annual average inflation rate was 3.1 percent. Here's how different investments fared during this same period:

* "Cash" instruments, such as short-term U.S. Treasury bills, averaged a 3.9 percent return, producing a "real" rate of return of just 0.8 percent.

* Long-term corporate bonds returned 5.7 percent, for a real rate of return of 2.6 percent.

* Stocks, as measured by the Standard & Poor's 500 Composite Stock Price Index, returned 11.2 percent, resulting in a real rate of return of 8.1 percent.

As you can see, only stocks significantly outpaced inflation, but that gets us back to where we started -- the price fluctuations associated with investing in stocks. The fact is you simply cannot get the high returns of stocks without taking on some risk. Stock prices will unquestionably jump up and down on a daily, monthly and yearly basis. They always have and they always will.

But keep this in mind: The longer you hold your stocks, the more this volatility will even out. It has been proven that time significantly lessens the effects of the extreme price swings that transpire over the short term, and, over the long term, the stock market has always trended up.

Apart from time, you have one other effective weapon against volatility: diversification. By spreading your investment dollars among many types of stocks, you will lower the risk of being caught in a downturn that affects just one group. And by adding bonds, you can help reduce the volatility of your portfolio. The greater your asset mix, the better off you're likely to be.

Ultimately, when it comes to investing, safety is in the eye of the beholder. In other words, your idea of safety depends somewhat on whether you seek long-term growth or the guaranteed return of your principal. Perhaps the most secure strategy is to build a well-diversified portfolio that contains all types of investments -- from the volatile to the predictable, and everything in between.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.