As the Federal Reserve has eased credit conditions in recent months, it has provided a vivid demonstration of one of the risks of "conservative" investing.
And the results of its handiwork are showing up clearly on the bottom line for legions of savers who keep their assets in money-market mutual funds, Treasury bills and certificates of deposit.These short-term interest-bearing vehicles are widely, and accurately, described as some of the safest choices available in the world of finance.
Relatively safe, that is, from the risk of loss of your principal, either through default by the security's issuer or through the kind of market fluctuations that affect the value of stocks, bonds and even - gasp! - residential real estate.
But falling interest rates since last year have pinched the pocketbooks of money-market savers in a different way, by eroding the regular returns they receive.
A year ago, for example, yields on three-month Treasury bills stood at just under 8 percent. As of early this month, they were down to about 6 percent.
Owners of money-market fund shares have felt the impact of this change gradually, as their yields have eroded week by week and month by month.
Investors in T-bills or CDs, by contrast, have generally been hit in stair-step fashion as their investments matured, and they sought to roll over the proceeds into new bills or certificates.
Yet either way the eventual result is the same. If you had, say, $25,000 invested a year ago at 8 percent interest, it was producing income of $2,000 a year, or $166.67 a month. Now, at 6 percent, the same amount of capital earns $1,500 a year, or $125 a month.
"Money-market yields have dropped like a lead balloon," says Soula Stefanopoulos, executive editor of the newsletter Personal Finance, in the current edition of that biweekly publication.
If your savings goal is long-term growth, this kind of development may come as something less than a crushing blow.
But for people who need the income from their nest eggs to pay living expenses, the decline in yields is tantamount to a 25 percent pay cut, however temporary.
How should anyone react to such a setback? An income-minded saver can reclaim a yield of 8 percent-plus by moving the money into a long-term Treasury bond, which yielded about 8.3 percent at mid-March.
Of course, that involves sacrificing some of the flexibility and maneuverability that money-market investing offers.
Another choice, for which many savers have opted in past interest-rate declines, is simply to sit tight.
If the economy begins to recover from the recession, short-term interest rates would presumably turn upward. So, in short order, would savers' yields on money funds or CDs or T-bills.
The most obvious risk in this approach is that rates won't rebound significantly, for one reason or another. It is possible, some economists have suggested, that interest rates have entered a period of lasting decline after spending most of the past 15 years at relatively high levels.
Whatever decision a saver reaches involves making some assumptions about where the economy is heading, which is always a chancy endeavor.
A saver who needs maximum current income now might find the temptation strong to lock in a known dollar return by switching to an investment with a longer maturity, such as a Treasury bond.
If the main mission is accumulation of savings for the future, another saver might elect to "stay loose" in the money markets, or to diversify between short- and long-term ma-tur-ities.