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Don't shy away from stocks; they didn't do badly in 2011

DEAR BRUCE: I have been a longtime listener of your show and have tremendous respect for your opinion.

I am in my early 40s. My wife lost her job more than a year ago, which has put an added strain on our finances. She was making more than $120,000 a year. We both worked for the same engineering company for more than 20 years.

I have decided to leave this company and pursue another opportunity. Benefits are excellent, with an ESOP (employee stock ownership plan), matching 401(k) and annual bonuses. I also will be making $20,000 more than mycurrent salary. I have a current 401(k) account with about $100,000 that I have built up over the years, and I have a similar amount in my current company ESOP that will be paid out to me when I leave.

I want to maximize my retirement as much as possible through another 401(k) account, but with the instability in the market over the last few years and speculation that 2012 may be even worse than 2011, I was curious if you had recommendations forother ways to maximize my retirement investment. Also, is it wise to continue to defer 10 percent to 15 percent annually into my 401(k)? — D.D., via email

DEAR D.D.: You take the position that 2012 may be worse than 2011. I don't know where your funds have been invested, but if you stayed with well-known companies in a mixed portfolio, 2011 wasn't such a bad year.

The Dow gained 5.5 percent last year. Modestly conservative investments in companies that pay decent dividends have not hit the returns that were available some years ago in an inflated market, but they haven't been all that bad.

You have a current 401(k) account, the name of which you shared with me. It hasn't had princely returns, but it hasn't done badly. Since I don't know the company you are leaving, I don't know how the ESOP has done. There are a lot of unknown items.

In general, you hear people complaining bitterly about the performance of the market in the last couple of years. Those who have hung in there and invested in some large companies that have a good track record, as well as in stocks that have appreciated marginally well, have recorded decent combined returns.

I wouldn't shy away from the marketplace were I in your position. In my view, a young person investing on a regular basis over a period of time is going to come out ahead.

DEAR BRUCE: I read and appreciate your column. When I retired a few years ago, my Social Security and some interest on savings were enough for a comfortable modest living for us. Now, with interest at a disgraceful level, we are in a difficult situation. We cannot risk losing what we have, so we must remain in risk-free investments.

An ad in our local newspaper says that at a local bank we can get a five-year insured and guaranteed CD ($10,000 deposit or $5,000 minimum IRA deposit) for a 3.2 percent annual percentage rate. It is a member of the Better Business Bureau and local Chamber of Commerce. Is this considered risk-free, and is it a safe way for us to go?— H.E., Citrus Springs, Fla.

DEAR H.E.: In your note you enclosed an advertisement from a company with a name that at first blush appears to be a bank or some other such institution. But the extraordinarily fine print at the bottom of the advertisement reveals that this company is a brokerage that seeks out FDIC-insured institutions for your consideration.

For reasons that I'm not completely sure of, many federal agencies (I believe this includes the FDIC) discourage banks and patrons such as yourself from using brokers. But as long as you are extremely careful that the institution you are dealing with, not the broker, is FDIC-insured, I don't see any particular risk. Three-and-a-fraction percent is such a small return, yet it is attractive when contrasted with what is normally available — currently under 1 percent.

One of the very unattractive aspects of an investment like this is that you are required to invest for at least five years, and it's entirely possible interest rates will rise within that period. You and other folks like you are the victims of our government's current terror of inflation. The Federal Reserve has announced it is going to continue to keep pressure on interest rates. While borrowers — in large part younger people buying their first homes or somewhat older folks moving up — will be rewarded, the reality is that you are paying the bill.

I have commented many times in this column that the people who have lived the good life — those who have saved, who have not gone into huge debt and who have met their obligations — are literally being screwed by their own government. Unhappily, there doesn't seem to be any recourse, although more and more people are becoming aware of what amounts to a transfer of wealth from one class of people to another. I have yet to get a response from anybody representing any governmental authority on the issue of low interest rates.

Send your questions to Smart Money, P.O. Box 2095, Elfers, FL 34680. Send email to bruce@brucewilliams.com. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.