On Jan. 2, the Smiths invested $5,000 in each of two companies that had been showing strong, consistent growth between 1993 and 1995 _ Motorola Inc. and Rockwell International Corp.
It was a no-brainer for the Smiths. They bought 85 shares of Motorola at $59, and 93 shares of Rockwell at $53.93. Each transaction cost them $35 through a discount broker, or a total cost of $70.
On the other hand, the Joneses _ innocent conservatives that they are _ locked 10 grand into a six-month bank CD that yielded 4.93 percent. But when Harry Jones told Mac Smith what he did, Mac said Harry needed his head examined.
Here's how the two families' investments stacked up as of July 3:
In the first two quarters of '96, the Smiths collected $18 in dividends from Motorola and $54 from Rockwell. After transaction costs, the residual value of the Motorola stock had soared by 11.11 percent to $5,556, and that of Rockwell gained by 3.87 percent to $5,193.
Then came the big stock market drops beginning July 5. By Wednesday, Motorola's share price had fallen to $54.63, Rockwell's to $51. Mac immediately unloaded all his shares in both outfits, incurring another $70 in transaction fees.
The Joneses, meanwhile, kept plodding along with their CD, which they rolled over into another six-month account on July 3. The new CD yielded 5 percent.
You'd think that with all the racy excitement attending stock investments, the Smiths would still clobber what the Jones family earned, right? Well, let's see:
The Joneses' original $10,000 CD investment was worth $10,266 through July 15, a gain of 2.66 percent. By contrast, the Smiths' Motorola stock value had plunged by 7.74 percent to $4,613, while their Rockwell shares were down by 5.03 percent to $4,749.
In other words, the Joneses were $266 ahead, while the Smiths were in the hole by a total of $639.
Does that mean you should bail out of stocks? No, especially if you are a young investor with time to ride out Wall Street's ups and downs. Stock prices have risen by an average of more than 12 percent a year the past 50 years. In the last 10 years, they've increased by more than 14 percent annually.
By comparison, bank CD yields such as the six-month have gained by an average of 5.9 percent a year.
It's that old risk-vs.-reward decision. If you're like the super-careful Joneses, stick with safe, federally insured instruments such as CDs and Treasuries. You may not earn as much over the long haul, but you won't be risking a dime.
What you should do is shop a bunch of different banks.
But if it's heart-stopping action you want, where the rewards are greater, take your cue from the Smiths. They'll eventually wind up with more money. If you go their route, be prepared to become a willing traveler at the end of a long bungee cord.
LATEST RATE TREND: Mortgage rates fell again, to 8.18 percent on the average 30-year fixed rate. CD yields are still moving up at a snail's pace.
Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from North Palm Beach.