Experts from TX, MO and IL Caution Investors on Danger of Panicky Errors; 5 Warnings About Bonds and Real Estate in Face of Higher Interest Rates.

WASHINGTON, D.C.///June 16, 2004///Investors worried about new volatility in bonds, real estate and stocks due to rising interest rates need to keep cool heads if they are going to avoid making costly mistakes, according to a warning issued today by three fee-only investment advisors from across the United States. The trio of experts outlined five things skittish investors should keep in mind about bonds and real estate as interest rates start edging back up.

The financial advisors - BHCO Capital Management Managing Director Steve Lugar (Dallas, TX.); Plancorp President Jeff Buckner (Chesterfield, MO.) and Savant Capital Management Managing Director Brent Brodeski (Rockford, IL.) - are all members of the Zero Alpha Group (ZAG). ZAG is a nationwide network of eight fee-only investment advisory firms that manage over $3.5 billion in assets.

In a news conference today, Lugar, Buckner and Brodeski focused on the following five points:

1. Stay away from long-term bonds. Most individual investors have no real use for long-term bonds. These investments are more appropriate for certain institutional investors and those looking to speculate. In a period of rising interest rates, most individuals should work with their financial advisor to find bond-based mutual funds that include shorter-term U.S. government bonds, high quality corporate bonds, global corporate and government bonds and possibly municipal bonds. The appropriateness of these bonds are determined in large part based on and investor's tax situation.
2. Watch out for the bursting of the real-estate "bubble." Home mortgage rates may cause a challenge to investors as interest rates start moving back up. "The real estate market has done really well over the past five years," said Savant Capital Management Managing Director Brent Brodeski. "This sector may very well lose its luster as interest rates rise. Because the market has been so hot, a noticeable rise in short-term rates could cause the bubble to burst as real estate becomes less affordable and thus, less appealing. Practical investors should work with their financial advisor to determine a reasonable allocation to real estate within their overall portfolio. This way, the consequences of a 'bubble burst' will not greatly affect their long-term financial plan and financial security. Otherwise, an increasing numbers of real estate speculators might get an unpleasant wake-up call."
3. Avoid the trap of thinking bonds are always safe. Most investors assume that bonds are a safe haven from risk. In many cases, bonds can be used to diversify risk in a long-term portfolio. However, investors still need to understand that bonds are not risk free and should not be viewed as being the equivalent certificates of deposit (CDs) or cash. Their principal does indeed fluctuate, dependent on interest rates. BHCO Capital Management Managing Director Steve Lugar said: "Bonds serve an important role by complimenting equities - not replacing them. They reduce overall portfolio volatility. Secondly, bonds are instrumental in generating higher cash flow for investors than what historically has been provided by stocks. Over the long-term, the cash flow from bonds will increase as rates rise, helping to mitigate the short-term drop in bond prices when rates move upward."
4. Farewell to ARMs? Over the last several years, homebuyers have refinanced their mortgages at historically low interest rates. At this point, it may be prudent for homebuyers to evaluate fixed-rate mortgages, as opposed to seeing their payments steadily ratchet up over time under an adjustable rate mortgages (ARMs). The number of homebuyers using ARMs increased to 35 percent from 14 percent just one year ago. As short-term rates move upward, those who hold ARMs will take on the risk of steadily escalating mortgage payments. By historic standards, fixed-rate mortgages are still incredibly low - representing a real bargain for prudent investors who want to avoid getting stuck on the ARMs rate treadmill.
5. Don't assume that long- and intermediate-term rates will increase. Most people just take it for granted that intermediate- and long-term interest rates will increase-causing bond prices to drop-as the Federal Reserve increases short-term rates. This is far from certain and, as such, making investment decisions on this flawed premise is unwise. While investors assume rates have approached all-time lows, they may actually be higher than average when compared to the very long-term averages. As of May 31, 2004, the 20-year Treasury yielded 5.4 percent --higher than the 4.8 percent long-term average Treasury return from 1900-2000. With inflation now also being lower than average (2.95 percent for the rolling twelve months ending May 31, 2004 vs. the 3.2 percent long-term average between 1900-2000), the current real (inflation-adjusted) long-term interest rates of 2.45 percent are actually higher than their 1.6 percent long-term average between 1900-2000. A flattening of the yield curve is just as likely as further increases in long-term rates.

The ZAG members also advised investors to keep in mind that interest rate adjustments are good thing in the long run. The Federal Reserve's practice of controlled adjustments to interest rates has a profound effect on the economy - and is intended to preserve its health and vitality for the long haul. However, most investors overlook this and focus on possible short-term pain from higher interest rates. Plancorp President Jeff Buckner said: "It is vitally important for investors to realize that the Fed controls interest rates to keep the economy from falling out of check in either direction. Small fluctuations in interest rates keep inflation from going haywire. While that upward movement may cause a bit of short-term discomfort, it will keep the economy in much better shape over the long term."

ABOUT THE GROUPS

Founded in 1995, the Zero Alpha Group, which is not an investment advisory firm itself, was created to serve as a nationwide network for eight independent investment advisory firms that manage a total of more than $3.5 billion in assets. Members of the Group are committed to providing objective, long-term private wealth management solutions to investors, focusing on asset allocation and a structured, quantitative approach to investing. The eight firms in the Zero Alpha Group network share a common philosophy about investing and client service - a commitment to passive, tax-managed investment strategies while providing an independent financial planning solution for investors. Visit ZAG online at http://www.zeroalphagroup.com.

BHCO Capital Management focuses on maximizing after-tax returns, while serving as an independent fee-only financial planning and investment advisory firm. BHCO Capital Management is on the Web at http://www.bhcocapital.com.

Plancorp focuses on the management of wealth for high net worth individuals and has done so since 1983. The firm provides personal and business transition planning, investment management, family office services and business consulting services, using its Personal Transition ProcessT and Intelligent Investor SolutionT. Plancorp is on the Web at http://www.plancorp.com.

Savant Capital Management was founded in 1986 as an independent, fee-only financial advisory firm. Savant provides financial planning and investment advisory services to financially established individuals, trust funds, retirement plans, non-profit organizations and fiduciaries, using the firm's proprietary Wise Wealth IntegratorT and Wise Wealth Investment SolutionT processes. Savant Capital Management is found on the Web at http://www.savantcapital.com.

CONTACT: Stephanie Kendall, (703) 276-3254 or stephanie@zeroalphagroup.com.