OROTHY O. MULVI has developed something of a following at Golden West Manor, a high-rise retirement home overlooking the Rocky Mountains in Boulder, Colo. When other residents are thinking about how to stretch their savings to pay for retirement, they often come to Ms. Mulvi, an 82-year-old former bond trader, for investment tips. These days, however, she tends to have only one piece of advice, and it is not very comforting.
Sit tight, she told one friend recently. Don't tie up your money quite yet in long-range interest-bearing investments. Just because long-term interest rates have ticked up over the last month or so, she pointed out, they are still near the 40-year lows.
This may well be the most confusing time for investors in more than 20 years, and not only for those like Ms. Mulvi who are more dependent on the returns from their investments to live day to day. Short-term interest rates are below inflation for the first time since 1980. Many investment advisers consider long-term bonds a poor choice despite the recent climb in their return, with the rate on a 10-year Treasury note now at 4.27 percent, up from 3.1 percent in June.
Stocks remain more expensive than they have been for much of the last century, relative to corporate earnings. Real estate values in some regions are considered excessive, making housing in some cases a potentially risky investment.
"There is just no easy answer," said Jeremy J. Siegel, a finance professor at the Wharton School of the University of Pennsylvania.
Ms. Mulvi has even taken to advising some friends to do as she has done and dip into their investment principal.
"That pains me," she said, tightening the grip on her cane as she sat in Golden West's lobby. "I'm a conservative person."
Amid all the uncertainty, however, there is also room for many people to fare better than they are now. Doing so requires thinking about investing as something that encompasses more than cash flows and tax implications and extends to far more basic concepts, financial experts say. In a strange way, that might offer a little relief from all the uncertainty.
With short-term interest rates near zero, economizing has become more lucrative than it was in the 1990's. People who cut $50 from their monthly expenses — by switching to a less expensive Internet service, say, or quitting a gym they never use — are adding the same amount to their after-tax income as the interest on a $100,000 money market fund might.
Index funds, which generally have the lowest expenses among mutual funds, have become attractive for the same reason. So are investments that do not force people to tie up their money for years at the current level of returns. Many households could more than double the return they are getting on a C.D. or money market fund by moving the cash to inflation-indexed government bonds, which are paying 4.66 percent a year and must be held for just 12 months.
Of course, investing never looks free of peril at the time when the decisions are made. Many of the clairvoyant people who pulled their money out of technology stocks in early 2000, for example, worried at the time that the bubble was still inflating. The home buyers who brilliantly bought real estate amid the 2001 recession received no assurances then that housing prices were still on the rise.
But the current situation is nonetheless unusual. It has created vexing questions for retirees, baby boomers preparing to follow them soon and even Generations X, Y and Z, who should care almost exclusively about the long term and will usually do best by diversifying their investments.
There is no low-hanging fruit, said Martin Barnes, managing editor of the Bank Credit Analyst, an investment publication based in Montreal. It was easier in the 90's, even before the run-up in stocks, he said.
After the recent jump in interest rates, as investors have become more confident about economic growth but more concerned about the federal budget deficit, long-term bonds offer the latest temptation. But buying these bonds could ultimately feel like buying the best apple in a barrel full of rotten ones.
A few years from now, the 4 percent return now available on a 10-year note could look far less attractive than it does today, particularly if the economy picks up and takes inflation with it.
"You've got to be patient in the expectation that rates will rise," said Marshall B. Front, chairman of Front Barnett Associates, an investment counseling firm in Chicago. "Then you can tie your money up."
People who buy long-term bonds now are likely to suffer the same fate as those who bought long-term Treasuries a month ago, Mr. Front added. As interest rates have risen, those investors have seen the principal value of their bonds fall about 8 percent.
Ms. Mulvi agrees: "We've got a $450 billion deficit now, and it's going to be financed through the issuance of additional Treasury securities," she said. "That's going to bring interest rates up."
In fact, economists can make a credible argument, grounded in history, that bonds or stocks or houses are so far ahead of themselves that they will be to the coming decade what Japanese real estate and General Motors shares were to the previous one. Based on earnings over the last 12 months, the Standard & Poor's 500-stock index is more expensive than it has been at any time since 1950, outside of the late 90's.
Money market deposit accounts, meanwhile, are paying an average annual return of about 0.5 percent, down from about 2 percent during most of 2001, according to the research company BankRate.com. Against that background, some investors find that they have more financial decisions to make, because some municipal bonds and mortgage-backed securities have recently been called in before their due dates, unable to continue paying 5 or 6 percent a year.
Ms. Mulvi and other people trying to live on investment income face the hardest choices. Many already live on tight budgets, offering little chance at easy savings, and they cannot simply abandon low-risk, low-return investments to put their faith in the stock market's unmatched long-term record.
In Boulder, 20 percent of the apartments are now vacant at Villas at the Atrium, a retirement home that costs $2,400 a month for a one-bedroom apartment, meals, housekeeping and other services. That is more than twice the rent across town at Golden West. Three years ago, Villas at the Atrium was full.
"People are moving out of here because they can't afford it anymore," said Elizabeth Pahlke, who moved to the Atrium four years ago with her husband and has continued to live there since he died six months ago. "I'm having to dig into the principal of my investments," she added, "to pay for it."
To conserve principal, she has made small spending cuts. She no longer eats out, as she did with her husband, and avoids buying souvenirs on trips, like a vacation last month in Minnesota with grandchildren. As is the case for many of her peers, however, one big cost is going in the other direction: health care.
Although Medicare covered most of a recent ambulance ride to the hospital, her share of the $800 bill was more than twice as much as it was the last time she needed an ambulance, four years ago. "And it's not like it's something I could have done without," Mrs. Pahlke said.
Overall medical costs having risen 10 percent since the start of 2001, according to the Labor Department, while the Federal Reserve has lowered its benchmark federal funds interest rate to 1 percent, from 6.5 percent. That divergence has become a frequent subject of complaints to AARP, the lobbying group.
"We get calls from seniors asking us to lobby Alan Greenspan to raise interest rates," said David M. Certner, AARP's director of federal affairs. "But the truth is, there's not an easy solution to the problem right now."
When Mr. Greenspan, the Fed's chairman, testified before Congress last month, Representative Ron Paul, a Texas Republican, questioned him sharply about the problems that low interest rates create for retirees. Mr. Greenspan replied that the Fed had no choice but to keep its benchmark rate low and to encourage business investment, home buying and other activity that would help the still-weak economy.
"We can't have it both ways," Mr. Greenspan said. In other words, we cannot have both high interest rates, which give significant incomes to those who hold interest-paying investments, and low interest rates, which will stabilize the economy and expand it.
INVESTORS can do better than a 1 percent annual return by handing over their money for longer stretches of time. Five-year C.D.'s still yield about 2.7 percent, on average, compared with 0.85 percent for a three-month C.D. and 0.26 percent for an interest-bearing checking account, according to BankRate.com.
But these present some of the same problems as long-term bonds. At today's low interest rates, tying up money for long periods rarely makes sense, financial planners say. Despite their puny yields, money market accounts and C.D.'s remain better options for many people who need income because of the flexibility the investments offer. If rates rise, as many economists expect, better opportunities will become available.
For investors who are just looking for a safe, decent return without immediate income, meanwhile, the inflation-indexed bonds remain attractive. They are still paying a better return than a 10-year note, even though they require just a small time commitment and do not put the investment's principal at risk.
The bonds — which are known as I-bonds and should not be confused with Treasury Inflation-Protected Securities, or TIPS, whose underlying value varies — will now pay about 1.1 percentage points a year over the inflation rate for up to 30 years, and they can be redeemed anytime after one year. For the first five years, investors who redeem them must forfeit their last three months of interest.
The stocks in the S.& P. 500 are also paying more income than money market funds, and their current dividend yield of about 1.7 percent could increase soon. The yield is now far below its 50-year average, and the most recent tax cut included a reduction in dividend taxes for investors, potentially increasing the incentives for companies to pay them.
Citigroup has increased its dividend to 35 cents a share, from 20 cents. Viacom has said it will pay its first dividend in 16 years.
BUT the more basic — and perhaps creative — solutions to the challenge of investing in a low interest-rate world present much less risk than stocks.
Coletta and Bill Davis of Carlsbad, Calif., did not come to the strategy by choice, but they have been converted. They entered retirement with a bulging stock portfolio, then watched as their life savings deflated in the last three years. "We lost so much principal when the stock market went down," said Mrs. Davis, 66, who had been a vice president at a large bank, "that the thought of spending even a penny more of it just panicked me."
But they decided that they had no alternative — and have set aside some of the money for living expenses while putting most of it in long-term investments. By going to fewer movies and restaurants and canceling some trips they had imagined, the Davises estimate that they spend about $300 less each month than they had expected. A money market fund with a typical yield would need to have a balance of $350,000 before it could produce that much income a month — and that income would be taxed.
Investors can also create their own returns by moving money out of high-cost mutual funds. The average annual expense for a domestic stock fund is 1.49 percent, while the average cost of an index fund is 0.78 percent, according to Morningstar Inc. In other words, the difference between the two is a good bit larger than the yield on a typical money market fund.
For people with outstanding credit card debt, the opportunity is even better. "If somebody is making 1 percent on a money market fund and paying 18 percent on a credit card, there's a spectacular investment to be made by paying off the credit card," said Andrew Tobias, author of "The Only Investment Guide You'll Ever Need" (Harcourt, 2002).
Where else are spectacular investments available these days?
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