Each of the past three years, Susan Hicks has placed her individual retirement account money in certificates of deposit or other relatively conservative investments. But this year, the 36-year-old Los Angeles merchandising manager is considering a somewhat bolder move for her IRA: investing in a stock mutual fund.
"A CD is not what I would put money into now," she said. "I want to get something relatively safe, but without the low rate of return."
Hicks is one of millions of investors who are getting more aggressive or diversified with their IRA money during the final rush toward April 15, the deadline for contributions eligible for 1985 tax deductions.
Dissatisfied by the relatively low interest rates on CDs and money-market funds, IRA investors are placing a greater share of funds in stocks, bonds, mutual funds, limited partnerships and other riskier but higher-yielding investments.
This continuing trend toward higher risk and diversification is understandable, financial experts say, given that many investors' IRA portfolios now total at least $10,000--the result of $2,000 contributions each year since 1982, when Congress broadened eligibility for the tax-deductible accounts.
The trend is good news for the stock and bond markets. Their recent booms are due in part to the surge of IRA money. As much as $45 billion is expected to be invested in IRAs this year--boosting the total IRA kitty to $250 billion--with as much as one-third of the new funds going into stocks, some analysts estimate.
The riskier trend is also good news for brokerage houses and mutual fund companies. Many report sharply higher IRA sales, while many banks report flat sales compared to a year ago. Although CDs remain the most popular IRA product--with about half of total IRA funds--mutual funds' share rose to 14.2% at the end of 1985, from 10.7% two years earlier. The share could rise even higher by April 15, experts said.
But investment experts are increasingly concerned that many investors may not fully realize the consequences of their higher risks. For example, many investors have been attracted to mutual funds investing in bonds. Some of these funds pay near or above 10%.
Could Depress Value
But many of these investors may not realize that a rise in interest rates could depress the value of their shares in these bond funds. As interest rates rise, the value of already-issued bonds decline.
Higher interest rates also could kill the stock market rally as well, depressing values of mutual funds investing in stocks.
"When interest rates go back up, a lot of people are going to be surprised and shocked," said Karen Imhoff, managing editor of the IRA Reporter, a Cleveland-based newsletter. "All of that money going into brokerage firms might start going back to banks."
Others, however, minimize this problem. "No question that investors are subjecting themselves to short-term volatility," said Alfred P. Johnson, chief economist for the Investment Company Institute, which represents mutual fund companies. "But short-term volatility isn't a concern if you're going to leave your money in there for a long period of time."
Whatever the concerns about risk, brokerages and mutual fund firms are advertising aggressively to steal customers from banks and savings and loan associations. Some brokerage firms, such as Bateman Eichler, Hill Richards and Kidder Peabody, also have lowered set-up and annual maintenance fees on self-directed accounts, which allow investors to trade in and out of stocks and other investments.
Not to be outdone, savings institutions and insurance firms are increasingly fighting back. Many are widening their range of products, offering mutual funds, self-directed accounts and even limited partnerships investing in real estate. More savings institutions and insurance firms are also offering discount brokerage services for IRA customers buying stocks.
Security Pacific National Bank is among many banks and S&Ls trying to improve training of tellers and other customer-service personnel, so that they can persuade customers withdrawing CDs to at least keep the funds in the bank, investing in its mutual funds, self-directed accounts or other non-CD products, said James R. Quandt, president and chief executive of Security Pacific's discount brokerage.
Banks also are more aggressive in marketing loans for IRAs so that cash-short investors can still contribute this year, Quandt said.
Savings institutions also are offering their share of marketing gimmicks. Security Pacific, for example, has been offering discounts on American Airlines for IRA customers. Los Angeles-based Great Western Savings teamed up with H&R Block to offer certificates good toward Block's tax-preparation service.