Have a Question for SmartMoney?
Our editors and reporters are ready to answer as many questions as they can.
Email us at firstname.lastname@example.org or call 866-219-0687 (free) and leave a voicemail.
Podcast: Listen to the SmartMoney Hotline podcasts to hear more answers to your questions. >
January 28, 2009
QUESTION: How do I go about buying corporate bonds? Are online brokerage companies ok for this purpose?
ANSWER: You can buy individual corporate bonds safely and securely through an online brokerage account, but that s probably not the ideal way to gain exposure to this asset class, says Bill Walsh, President and CEO of Hennion & Walsh. That s because sorting and picking through individual bonds is as tricky and risky as picking winning stocks. A better option for regular folks would be to look at bond mutual funds or exchange-traded funds. ETFs are a great way to attain exposure to the sector, Walsh says. As with any investment decision, Walsh cautions that it s important to know your goals, time-frame and appetite for risk., so sit down and have an honest conversation with yourself or your adviser before investing in corporate debt.
January 26, 2009
QUESTION: My broker recently suggested we consider selling our 802 shares of Oppenheimer NJ Municipal Bond Fund (ONJCX)
We have a diversified portfolio, currently valued at about $450,000-$500,000 and won't need this money or need to draw on its dividends for at least three years -- and won't suffer if it takes longer. Do we take the broker's advice and take a $4600 hit, or do we hold on and give this bond fund a chance to re-stabilize? Is there a way to know what the fund managers are doing to reinforce this particular fund?
-- Barbara Weissman>
ANSWER: First, consider the rationale behind your broker's suggestion to sell the fund. Are they very concerned about the credit quality in the fund s portfolio? If so, that s a legit reason to consider selling -- even at a loss. As of the end of December, close to 12% of the portfolio was invested in lower-rated junk bonds, while nearly half was in medium-risk bonds. So you need to ask yourself if you're comfortable with this level of risk.
Then look at the fund's performance. This fund took a significantly bigger hit than its peers did over the past year. The average New Jersey Muni Bond Fund is down 6.8% over the past year, according to Morningstar. The Oppenheimer NJ Municipal Bond Fund is down almost 31% (year-to-date, however, the fund is up a little more than 8%). Ask your broker, or try contacting an investor-relations representative at Oppenheimer, to find out why the fund is underperforming its peers by so much. Also, read our story for more on what you need to know about investing in muni and corporate bonds.
January 20, 2009
QUESTION: What happens to the bonds of a company if that company enters Chapter 11 bankruptcy?
ANSWERThe Securities and Exchange Commission explains the process well here
When a company files for Chapter 11 it usually means that they will reorganize the company. Typically, when this occurs, the reorganized company converts its debt to equity, making shareholders out of bondholders. The bad news is that the new equity is typically worth a fraction of the bondholder s previous investments. It could be worse, though. Should the company file for Chapter 7 when a company plans to liquidates and shut down the bondholder s investment becomes worthless.
January 15, 2009
QUESTION: Is this a good time to purchase gold mutual funds, such as Fidelity Select Gold (FSAGX)
--Pete Dolan >
ANSWER: Investors largely jump into gold-focused funds as a way to hedge against inflationary pressures in the economy. That strategy worked well early in 2008 when gold topped $1,000 an ounce, but then gold prices quickly reversed course. We've heard differing opinions about whether there will be an uptick in inflation later this year or if we ll actually experience deflation> instead. Yet, even if there is some deflation, investors may still want to build a position in gold. To read about our fund picks for gold investors, click here.
January 13, 2009
QUESTION: I recently saw on television that in 2009 there was no a mandatory withdrawal for those over 70 1/2. Has there been a change to the IRA rules regarding mandatory withdrawals due to the recent economic problems?
ANSWER: Simply put: Yes. In late December, Congress suspended the minimum required distribution rules for traditional IRAs for the 2009 tax year. That means seniors who are 70 1/2 or older are not required to withdraw money from their retirement accounts this year. That s a huge relief to some seniors. Not only do they avoid paying taxes on the withdrawal, but they can also keep their retirement account intact so it's better poised to recover when the market does.
January 12, 2009
QUESTION: How safe is a seven-year fixed annuity with Met Life?
ANSWER: The place to start is with MetLife s financial-strength ratings. Compare ratings from different credit ratings agencies to get as broad a picture as possible. MetLife lists its ratings on its web site here, but it s a good idea to cross-check these data against the information provided directly by the credit agencies A.M. Best, Fitch, Moody s and Standard & Poor s -- to make sure everything is up to date. For help decoding what each agency s ratings mean, check out this chart from the Insurance Information Institute. You ll also find contact information there for all the main players if you need further help sorting through the data.
January 7, 2009
QUESTION: What is the best way to find out which banks don't make or hold subprime mortgages?
ANSWER: There's really no way for an ordinary investor to find out for sure which banks hold or make subprime mortgage loans. It's possible to glean some information about publicly traded banks via SEC filings, annual reports, press releases and transcripts of company conference calls, but it's a painstaking process with no guarantee of success. The good news is subprime lending is significantly out of favor, so there's far less risk that banks will be making gobs of these kinds of loans any time soon.
The federal agency that does have all of that information handy is the Office of Thrift Supervision, the nation's major bank regulator.
"Our examiners are intimately familiar with the institutions we regulate, with what their business models are, what types of mortgages they hold," says William Ruberry, a spokesman for the agency, which does have considerable clout. It shut down a failing Washington Mutual on Sept. 25 to facilitate its takeover by JP Morgan Chase (JPM)
Unfortunately, the Office of Thrift Supervision doesn't share its data with the public.
"Our examiners' reports are proprietary -- they show everything that's on a bank's books," he says. "I don't know how a consumer would know what banks deal with subprime mortgages. Any disclosures would come from the companies themselves."
Ruberry suggests that investors use the SEC's EDGAR system -- short for Electronic Data Gathering, Analysis, and Retrieval -- to research particular banks, which may disclose tidbits about their loan portfolios in public filings.
December 30, 2008
QUESTION: I purchased common shares of Washington Mutual before JPMorgan "bought" them out. Since then, the ticker symbol has changed to WAMUQ. My question is this: What happens to these shares? Are they completely worthless now?
ANSWER: Washington Mutual (WAMUQ)
As a poster child of the subprime mortgage boom, Washington Mutual Bank reaped huge rewards for its corporate parent company, Washington Mutual Inc., the sole shareholder of the bank business and other subsidiaries. Common shares, which traded under the ticker WM, were shares in Washington Mutual Inc., and before the waves of loan defaults sent everything crashing down, investors reaped fat and happy dividends. Those shares traded above $42 as recently as June 2007.
The stock price plummeted as the size and scope of the subprime crisis widened and investors realized that WaMu's fortunes were substantially built on a shaky foundation of risky adjustable-rate mortgages. The bank's business went into a death spiral as its loan losses mounted, and on Sept. 25 the Office of Thrift Supervision of the FDIC, the nation's main bank regulator, seized Washington Mutual Bank> and put it into receivership. Shares of Washington Mutual Inc. had a final closing price of 16 cents.
On Sept. 25, the FDIC sold Washington Mutual Bank and all of the stock in the bank unit the shares owned by the corporation, not investors to JPMorgan. On Sept. 26, Washington Mutual Inc.>, the parent holding company, filed for Chapter 11 bankruptcy reorganization, canceling its common stock until the company is restructured. The problem for shareholders is that there's not much left to reorganize, and the value of the stock of a bankrupt holding company whose liabilities exceed its assets is minimal.
"Washington Mutual, Inc. is informing investors that, at this stage of its Chapter 11 case, it is too early to determine what recoveries will be available for investors," the company said in a prepared statement. At last check the shares went for a little over two cents apiece.
December 29, 2008
QUESTION: I moved much of my investments into "good" bond funds like DWS Short Duration (DBPIX)
ANSWER: Bond funds are suffering the same forced selling pressure and aversion to risk that's causing prices of pretty much every security except U.S. Treasurys to decline. Both these funds have good long-term track records (though LSBRX has underperformed over the past year), and given enough time they should recover. The question you must ask yourself is how long are you willing to wait? A 25% decline requires a 33% gain just to get back to break-even.
Selling now and locking in losses might make sense if you need access to that cash in the next, say, five years. If that's not the case, pulling out of these bond funds for a couple of other comparable ones isn't likely to make you whole again anytime soon. You'd just be buying high and selling low.
December 24, 2008
QUESTION. I have money invested in six American Funds. They have all lost approximately 40%. Should I take out the remaining monies and put it in a CD, or keep the money in the mutual funds in hopes they recover some day? Obviously it is only a paper loss at this time, but the way things are going I'm afraid I am going to lose it all.
ANSWER. The answer depends on several factors. Are these funds down much more than other mutual funds in the same category? If not, the problem might not be the funds per se but the lousy market. If that's the case, how many years do you have before you want to tap this money? If you have a long time horizon (five to 10 years), wait for the market to rebound rather than locking in those losses. The most common mistake investors make is to sell low and then buy again when prices are high.
In other words, one bad year for these funds amidst a very tough market isn't reason enough to sell. Before selling, also consider the funds' historical track records, their expense ratios relative to other funds and the overall record of American Funds as an asset manager. Also check out SmartMoney.com's mutual fund coverage for more background.
December 17, 2008
QUESTION: I would like to introduce my 10-year-old grandson to the stock market, but I don't have a lot to spend. I thought about buying some penny stocks so that he could watch a number of different stocks instead of just one expensive one. Would this be a good idea?
ANSWER: Giving your grandson an early education in investing and financial matters is a laudable goal, but we would urge you not to do it through penny stocks because they don t really represent how responsible markets work. A lack of listing requirements, liquidity and regulatory oversight make these stocks a poor fit for almost all retail investors.
A better idea would be to build a diversified portfolio of brand-name companies that happen to be trading at affordable per-share levels. The market s collapse has left no shortage of these stocks. Indeed, we recently highlighted 11 stocks in the S&P 500, including Starbucks (SBUX)
December 16, 2008
QUESTION: I have 1,000 shares of Dime Bancorp warrants held by Washington Mutual and have not been able to find out what has happened to them after WaMu was shut down. Can anyone tell me the status of these warrants?
-- Richard F. Wrobbel>
ANSWER: Even though Dime Bancorp was purchased by Washington Mutual back in 2001, the holders of Dime Bancorp warrants still own them. That's about the only good news. The bad news: The warrants, which are derivative securities that give investors the right to purchase shares at a specific price within a certain time frame, aren't worth much, if anything at all. While JPMorgan Chase (JPM)
December 12, 2008
QUESTION: The value of my Roth 401(k) is less than my contributions. If I take a nonqualified withdrawal, can I deduct the loss on my tax return? Is it a capital loss or ordinary loss? What form would it be reported on?
ANSWER: You can take a loss on a nonqualified withdrawal from your tax-exempted Roth 401(k), but there are limits on its utility, says Maureen McGetrick, a partner at tax consultant BDO Seidman. The loss would be recorded as a miscellaneous itemized deduction on Schedule A. In order to take the loss, the tax code requires a complete withdrawal of the account, and the amount of the loss would be the amount you put into the Roth, less the amount distributed. For example, if your contribution totals $100,000, and the value now stands at $80,000, you'd have a net loss of $20,000. The catch, says McGetrick, is that you can only deduct the loss to the extent it exceeds 2% of your adjusted gross income, so that total would be further reduced, and you may need more miscellaneous itemized deductions to get any benefit. Also, if you are subject to the alternative minimum tax, none of the above is valid, since the loss is an add-back for purposes of the AMT. "I think the best bet is to wait for [those 401(k) assets] to recover," she says.
December 10, 2008
QUESTION: I was lucky enough to transfer my 401(k) funds into the lowest-risk option offered: a short-term fixed income that provides 5% growth. It consists of 56% SSGA Govt STIF, 7% each of JP Morgan Chase Global Wrap, Monumental Life Global Wrap, Royal Bk of Canada Global Wrap, as well as several other bank and life insurance company funds. My question is just how safe is this 401(k) option and what would need to happen to the economy for these to be affected? Are these nearly as safe as FDIC-insured CD accounts?
ANSWER: Defining safe is no easy proposition these days, says Pam Hess, director of retirement research at Hewitt Associates, a human resources consulting and outsourcing company. First, nothing in the mix of investments in this 401(k) plan is insured by the Federal Deposit Insurance Corp., which protects bank account holders from old-fashioned bank runs in which everybody demands their money at the same time.
The bulk of this 401(k) is in a short-term investment fund, or STIF, which operates very much like a money-market fund, with low costs and a high level of stability, Hess says. The wrap products, known as stable value funds, are also pretty conservative investments, and are usually bond portfolios guaranteed by the insurance companies.
"Generally, the insurance company will guarantee that participants can access their money on a daily basis," Hess says. But in these uncertain times, when September saw the rare instance of a money market fund "breaking the buck," Hess says nothing is certain. "It's not an easy equation what's safe and what's not," she says. "What we've seen in last few months is that the area of the market that has had the most problems is cash."
These funds aren't in imminent danger, but investors should be concerned if insurance companies start to fail. Given the government response to massive problems at AIG, a widespread collapse is unlikely, though not impossible. "Things could go wrong if participants all wanted their money out tomorrow that could be tough," she says.
While a plan like the one outlined above was usually the most conservative 401(k) option, Hess says some employers are now offering Treasury-bond-based money-market funds, which won't pay out much, but which offer the most safety available.