PRODUCTION: NOTE BULLETS

We've had the fattest three-year run of profits in stock-market history. Can there be a fourth? There can, of course, although the odds are against it. For example:

What if Southeast Asia's implosion takes more than a modest nip out of U.S. growth?

What if business profits fall, because of worldwide excess production capacity in everything from computers to cars?

What if downsizing gets a second wind (several major corporations recently announced plans to cut their U.S. work forces)?

What if the impending flood of cheap imports from Southeast Asia stirs the hot blood of U.S. protectionism?

The risks on my "what if" list shouldn't drive you out of stocks especially since investors keep pouring their wealth into U.S. equities. But they should remind you that smart investors own bonds, too.

Rates on 30-year Treasury bonds fell below 6 percent in December, and when interest rates drop, bond prices rise. Last year's rate drop, from 7 percent to 6 percent, produced gains for bond investors of 18.3 percent.

That's less than the 28.6 percent gain in Standard & Poor's 500-stock average. But bonds carried less risk than the stocks you owned.

Going forward, who knows? The Baltimore mutual-fund company T. Rowe Price checked every fabulous five-year gain in stock prices since 1960. During those fat years, gains averaged 14.6 percent.

But in the subsequent five years, stocks tended to quiet down averaging a modest 8.7 percent. During those leaner periods, bonds yielded nearly as much as stocks.

Most of the bond money today is pouring into individual bonds or traditional bond mutual funds. But you'll often find higher yields both taxable and tax-exempt in closed-end funds.

A closed-end fund normally raises money only once. It sells a fixed number of shares and invests the proceeds. Then it lists itself on a stock exchange, just like any other public company.

To participate in its investment results, you buy shares through a stockbroker.

Unlike traditional mutual funds, a closed-end has two measures of value: (1) net asset value what all its investments are currently worth; and (2) market value the price that investors are willing to pay to own its shares.

The market price of a closed-end goes up and down independently of what happens to the fund's net asset value.

Typically, a closed-end sells at a discount from net asset value. If its bond investments are worth, say, $11 a share and the fund is selling for only $10, you're buying at a 9 percent discount. That increases your current yield.

As an example, take the AA-quality, tax-exempt Managed Municipal Portfolio, recently selling at a 7 percent discount and yielding 5.8 percent.

That's the same as getting a 9.7 percent taxable return in the top federal bracket not obtainable in a high-quality bond today, says George Foot of Newgate, a money-management firm in Greenwich, Conn.

Some closed-ends pump up their yields even further by leveraging your investment that is, raising extra money (say, by taking a bank loan) and using it to buy even more bonds.

But winning with closed-ends takes some work. You have to research the fund's average discount and buy only when it's deeper than that. For example, a fund that normally sells at a 7 percent discount may get interesting when the discount goes to 12 percent.

Such a price means the fund is out of favor, perhaps for good reason. But by buying cheap, you're more likely to earn a capital gain. (Occasionally, closed-ends sell for more than their net asset value, which is normally not a good price.)

What can go wrong? Several things:

The fund may own high-rate bonds that the issuer "calls in" (that is, redeems early), forcing your dividend down.

The market for your fund's investments might go sour, driving down the price of your shares. A leveraged fund will drop more than an unleveraged one.

Some closed-ends show high yields by paying out more than they've actually earned a deception that's hard for tyros to spot.

Donald Cassidy, a senior research analyst for Lipper Analytical Services, compared closed-ends with traditional funds and found the picture mixed. There's a slight tendency for closed-ends to do better in good years and worse in bad years.

Closed-ends aside, any bond investment will profit from falling inflation and slowing business activity. Maybe that's not happening now. But wise investors diversify, just in case.

New Year's Resolutions

Here are my three New Year's resolutions:

1) Lose 10 pounds (making a return appearance from last year's list).

2) Clean up my appallingly messy office (take this as a confession, to the readers who assume that someone like me aligns her pencils and keeps immaculate files).

3) Do all the money stuff I've been meaning to get to for months.

Speaking from long experience, I can't vouch for success with Nos. 1 and 2.

But I'm a shoo-in for No. 3. Early in each year, my husband and I set aside some time to discuss money matters that we haven't attended to, and ask ourselves what we ought to be doing next.

Our list will differ from yours. But here are three places you might want to look in '98:

- Your mortgage. If you haven't already refinanced, get the ball rolling now. Rates are down, and might drop even further, due to a slowing economy. Or they might not. Because you can't predict, you should refinance whenever the costs of refinancing can be recouped in lower mortgage payments over a reasonable period of time.

Talk to your own lender first. You can often recast your present loan for a low fee, without a full-scale refinancing.

My personal goal is to prepay my mortgage. The cheapest way to live in retirement is in a paid-up home, and the fastest way to get there is to accelerate payments many years ahead of time.

- Your debts. Slow holiday sales this year suggest that everyone's credit cards were already stuffed to the gills. If you pay the minimum each month, it will take 30 years to erase the debt you're carrying now, let alone any debt you add.

So pay more than the minimum. Your return on investment equals the rate on your credit card. If you prepay an 18 percent debt, you are getting an 18 percent return on your money, risk-free. There's no better yield in the market today.

- Your investments. Reassess and simplify them.

If all your investments are in a company 401(k) plan, ask yourself whether you're too exposed to company stock. Your company may contribute stock to your plan. If so, you shouldn't also buy it yourself; diversify into something else. The company's stock might be hot right now, but things could change.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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