SPECIAL REPORT: INVESTING IN THE ‘90s : One-Third Through : As the Decade Progresses, Investors Must Reassess Strategies

When the 1980s ended, Wall Street had an ominous warning for stock and bond investors: Lower your sights in the ‘90s; the easy money days are over.

But one-third through the new decade, buy-and-hold investors again find themselves sitting atop impressive results.

Money invested in U.S. stocks and bonds at yearend 1989 generally has grown 40% to 50%. Those returns are based on popular indexes that mimic typical mutual funds--where most small investors have their nest eggs.

To put the results in perspective, consider that U.S. stocks and bonds have far outshone other competing assets, such as gold, bank CDs, and the average single-family home. And if compounded over the balance of the decade, financial investments’ 45% average return thus far would more than triple a 1989 investment by the year 2000.

Why stop and measure returns now? Officially, the decade that began Jan. 1, 1990 was one-third over on Friday. While that milepost has no real significance to markets, it’s a useful checkpoint for investors: Have you made money so far? What’s your strategy going forward?

At the risk of mistakenly crying “Wolf!” twice, many Wall Street pros are again warning stock and bond owners to tone down their expectations.

Unforeseen at the start of the decade was the dramatic drop in interest rates that has carried short-term savings rates to 30-year lows of 2.5% to 3%. In the ensuing search for higher returns, investors have flocked to stocks and bonds--essentially making those markets’ gains self-fulfilling prophecies.

“It’s difficult to find a time when stocks and bonds haven’t done well when interest rates have declined as they have since 1990,” notes James Stack, who publishes the InvesTech market newsletter from Whitefish, Mont.

The key question at this stage, Stack says, is what happens if U.S. interest rates rise again--even slightly--due to strength in the economy, an inflation scare, or another unexpected event.

If the torrent of small-investor cash reverses course, Wall Street fears a devastating stock and bond crash--even without a new economic recession.

Still, Americans’ steady shift from saving to investing has already weathered one bear stock market in the ‘90s and the collapse--and revival--of “junk” bonds. Many experts believe that investors have come to understand that, despite ups and downs, stocks and bonds still provide better returns than short-term investments over the long haul.

But if there are wild swings in financial markets just ahead, are you prepared? And where are the best returns likely to be found during the balance of the ‘90s?

This special section outlines strategies that average investors can use in creating--or remixing--portfolios of the three major long-term investments: U.S. stocks, U.S. bonds, and foreign stocks.

Investors Scorecard

For investors, the first third of the 1990s provided returns on stocks and bonds that exceeded many analysts’ predictions--especially coming atop the stupendous gains of the ‘80s. Here’s a look at how $1,000 in each of 14 major investments has grown--or not--since Dec. 31, 1989.

Investment Value of $1,000 invested Dec. 31, 1989 Corporate junk bonds (Merrill Lynch index) $1,621 Foreign stocks: Emerging markets (Morgan Stanley Capital Intl. index)* $1,543 Long-term corporate bonds (Lehman Bros. index) $1,508 Long-term U.S. Treasury bonds (Lehman Bros. index) $1,487 Intermediate-term corporate bonds (Lehman Bros. index) $1,437 Small U.S. stocks (Russell 2000 index) $1,420 Blue-chip U.S. stocks (S&P; 500 index) $1,411 Intermediate-term U.S. Treasury bonds (Lehman Bros. index) $1,397 Long-term municipal bonds (Lehman Bros. index) $1,358 6-month bank savings CD (Bank Rate Monitor index) $1,206 Money market fund (IBC/Donoghue average index) $1,188 European stocks (Morgan Stanley Capital Intl. index) $1,122 Gold bullion $838 Japanese stocks (Morgan Stanley Capital Intl. index) $652

Note: Returns were calculated as of Apr. 15, except for Morgan Stanley international indexes, which are as of March 31. All returns include any reinvested dividends and/or interest, except for the Emerging Markets stock index. Returns are before any taxes.

* An index of 14 emerging stock markets, including Mexico, South Korea, Malaysia and Hong Kong.