by Archie M. Richards, Jr., CFP^®
July 23, 2001

The U.S. Labor Department has reported that, for the five months through June 2001, U.S. payroll employment fell by 45,000 jobs.

The number is underestimated. Not knowing at the time of each monthly report how many people have been hired by start-up businesses, the Labor Department makes a wild guess. For the five months ending June 2001, the guesses amounted to about 165,000 a month of new hires by start-ups, approximately the level that prevailed in 1998. With those assumptions removed, payroll employment during the five months would have fallen by 872,000, which is a lot of lost jobs.

In 1998, new businesses sprouted like weeds. During the last recession in 1990, new hires by start-ups fell to zero. Which does the current economy resemble, the 1998 boom or the 1990 recession?

The index of help-wanted advertising provides a clue. It has fallen to the level last attained during the recession of 1990. Have the new hires by start-ups fallen to the zero level of 1990? My guess is, yes, they probably have.

Two conclusions we can draw from this: First, let's get the government out of the business of gathering statistics. The job would be done more reliably by competing, private companies operating for profit.

Second, even if the U.S. economic is now in a recession, don't sell your stocks. Recessions are a time to buy, not sell. Forget about investment uncertainty in the short term. Open yourself up to the certainty of the long term. After adjusting for inflation, stocks, through thick and thin, have never failed, over ten-year periods, to outperform bonds. In the long run, stocks are the lowest risk.

Yes, I know, those short-term stock market downturns can sometimes last for many years. Maybe the current economic doldrums will last for a few more months. This doesn't mean that stock prices will do the same. The prices begin rebounding before the economy does. No one consistently predicts bear markets in advance. You can do no better than to suffer through them with a well-diversified portfolio.

If you're looking for individual securities that have relatively high income, check out preferred stocks.

Preferreds are more liquid than bonds, and they're more readily priced. But certain new-fangled varieties of preferreds are backed by bonds, enabling the corporation to get a deduction for the "dividend" paid. The bond-backing also makes you a creditor instead of a shareholder. If the company goes busted, you're closer to the front of the line for picking up some of the dregs.

Preferreds can be straight stock or bond-linked stock. Some have maturities; others not. Some are convertible into another security or into cash equivalents, at a fixed or a variable price. Some of the names - Corts, Quips, Cabsos, Decs, Spurs, Percs, and Perqs - make these securities seem like munchkins in the Wizard of Oz.

The rate of default for junk-grade preferreds is substantially below that of bonds of a comparable rating. But with your good common sense, you wouldn't buy junk-grade securities anyway, would you?

Preferreds stocks are highly specialized. Don't talk with just any old broker. Speak with a member of the firm's preferred stock department. Explore the trade-offs between income, appreciation potential, and risk. You might find something with relatively high income that fits you to a T.

Let's say you have a credit card balance on which you're paying 19%. You're paying off the debt with after-tax dollars. But you're also thinking of investing.

To equal the interest rate you're paying on the credit cards, you'd have to earn at least 19 percent a year, after tax.

Pre-tax, the investments would have to appreciate at 23.75 percent a year, since 23.75 percent less 20-percent capital gains tax equals 19 percent. But with the risk this high, you wouldn't want to just equal the credit-card interest, after tax. You'd want the investments to earn more than 23.75 percent - perhaps 30 percent, pre-tax.

Believe me, you're won't make 30 percent a year as consistently as the interest you're being charged by the credit cards. Not even close! Forget about the investments. Pay off the credit cards first. Then invest.