Rethinking Stocks, Home Equity Credit, Annuities

QUESTION: My husband and I are at least eight years away from retirement. All our money goes into an aggressive portfolio that fell 33 percent in 2008 and 20 percent this year. We’re worried. Should future contributions go into more stable investments?
—Susan Docherty, West Orange, N.J.

Asset allocation is a squishy science at best, but yes, it sounds like yours needs an adjustment. Boosting your fixed-income investments might ease anxiety and could temper your growth potential—though not by much. A portfolio that was 100 percent invested in the S&P 500 over the past 40 years (1969–2008) delivered average annual returns of 8.98 percent, according to Ibbotson Associates, whereas one that was 60 percent invested in the S&P 500 and 40 percent in intermediate government bonds delivered returns of 8.95 percent.

Avoid extreme, panicky moves in your portfolio, says financial planner Mari Adam of Boca Raton, Fla. You’ll still want a big chunk of your investments in stocks. “Your time horizon is not the day you retire—it’s the day you die,” notes Adam. “That could easily be 30 years away.” For more specific advice, find a fee-only planner or, at the very least, a Web asset-allocation tool.

QUESTION: How will it affect my credit score if I increase my home equity line of credit?
—Audrey Pederson, Chicago

Theoretically, it shouldn’t affect your score much. A home equity line of credit is labeled “revolving debt” on your credit report (same as a credit card), but it’s treated as an “installment loan,” essentially the same as a car loan, mortgage or other property-backed loan. That means the maximum limit on the loan isn’t factored heavily into your score.

Still, nothing is simple in the world of credit scores, so there are potential snags. First, if the increase is treated by the lender as a new loan, your score will likely be temporarily docked a few points for taking on new debt. In some cases, the lender can report a home equity line in such a way that it’s treated as revolving debt, in which case the credit limit and amount are factored in more significantly. (The less owed, the better.) Ultimately, it shouldn’t hurt much. The bigger worry these days is qualifying for an increase.

QUESTION: We have three annuities with Allstate. Are they safe?
—Gary Townsend, McKinney, Texas

Allstate says its balance sheet is in good shape, and independent rating agencies agree. But in general, if an insurer goes broke, things can get complicated for its annuity customers. With a typical fixed annuity contract, an investor gives an insurer a lump sum and in return gets a steady stream of income. But that assumes the insurer can keep making the payments. Some insurers are struggling, in part, ironically, because of their success selling a different kind of annuity. Variable annuities, whose payments are dependent on the markets, can become very costly when the markets go down.

Susan Voss, vice president of the National Association of Insurance Commissioners, says losing money on an annuity due to an insurer’s insolvency is still unlikely. If an insurer goes belly-up, state regulators will either find a company to acquire the policies or tap a guarantee fund to pay claims. Historically, most states, including Texas, have guaranteed annuities up to $100,000 per policyholder, but today many states are increasing that to $250,000 or more. These protections are more relevant to fixed-annuity holders; the value of a variable annuity is tied to its underlying investments and cannot be sought by creditors during insolvency. To find state coverage limits, visit www.nolhga.com.