Marketplace

Treasury Bills--Safe?

Question: Given the national debt, the federal deficit, the bailouts, the war, the sliding stock market, etc., are T-bills still a safe place to put a retiree's money?... Pat, Lakeville, MN

Answer: Yes. Treasury bills, notes and bonds are backed by the full faith and credit of the federal government. They are a default-free investment, a bedrock investment. Your money in Treasury bills is safe.

08/02/08 by Chris Farrell

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Keep or Sell Vacation Home?

Question: Hi, Chris. Perhaps you can help solve a debate between me and my husband. Here's the background: In 2000, we bought a vacation home in the Catskills, 3 hours outside of New York City (where we live). We refinanced in 2004 and got a 4.75% 15 year mortgage and our payments are affordable for us. The home is now valued at 2-3 times what we paid for it, but I'm worried that the real estate market in second home areas won't hold up under prolonged high gas prices and I'm thinking about selling (we could use the money for other things, such as buying a primary residence). My husband wants to hold on to the place indefinitely, thinking that our mortgage rate is very low and high gas prices might actually help vacation spots that are close to big metro areas, since people will still want to vacation but might want to stay closer to home. There does still seem to be plenty of wealth in New York City and prices in its ring of vacation-home areas seem fairly stable so far. Is there any historical precedent you're re aware of or advice you could give that could help us think through what might happen to the second home market over the next few years? Thanks, Erin. Brooklyn, NY

Answer: This is a truly intriguing question for the new world of high-priced energy. I hope Getting Personal readers weigh in with their thoughts.

I do think that high energy prices will impact real estate values over time. For instance, although it's commonplace for financial advisors to recommend that retirees downsize, few do. One reason may be that families often pay almost as much for a smaller home. A two bedroom condominium in an attractive part of a city with all the amenities typically sells for nearly the price tag of a comfortable four-bedroom home in a tony suburb. The same economics hold for moving from a McMansion to a villa.

That may be true, but I think the calculation will change. Large homes cost significantly more to maintain, and are subject to higher property taxes. The savings from running a smaller home compound over time. The combination of high energy costs and an aging population could signal a fundamental shift in the retirement home market toward small is beautiful. Bud Hebeler, who runs the website www.analyzenow.com, believes that over the next decade small homes are going to be relatively pricier than large ones, at least on a dollars-per-square-foot basis."

With that type of thinking in mind, I do think that vacation spots nearer a major metropolitan area like New York will do well, especially as fuel efficient cars become more commonplace. Demographic trends, such as the aging of the population, suggest that vacation homes will continue to attract buyers (once the current downturn reaches the history books). The problems with housing and energy will lie more with exurb developments and larger homes.

So, on this side of the investment ledger I am with your husband.

However, let's say you really want to own your own place. If you can find a good value in today's market (it's better to be a buyer than a seller these days) and you can end up with a conservative financing by selling your vacation home, then I'd sell. It's partly a question of how much you actually use your vacation home, and how much you want to own your own place near to where you work. If the answer is yes--we want to own a home--I'm with you. Sell.

In other words, you're both right. The answer then depends on what is a greater priority for you--a vacation home as an investment or owning a primary residence?

By the way, the vacation market isn't doing well after several years of hype and speculation. Last year, according to the National Association of Realtors, vacation home sales fell by more than 30% in 2007. Weakness in the market was also reflected in a 2.5 percent decline in the median price to $195,000. It's a pretty safe bet that the market is doing worse in 2008. Nevertheless, surveys consistently show that vacation homes are alluring to an aging population.

Anyone else have thoughts on thinking through this question?

08/04/08 by Chris Farrell

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Recession? Or Not?

Question: I write a personal finance blog (pfblueprint.com) and one of the things that my readers have been mentioning a LOT has been the true state of the economy. The official figures indicate that we aren't technically in a recession but all the headlines scream recession. There are headlines every day about banks are failing, 1 in 171 homes is in foreclosure, the deficit next year will be half a trilling bucks, oh, and the sky is falling. So what's the deal? Thanks, Thanks! Jim in Maryland

Answer: I am in the camp that believes we are in a recession. Yes, government statisticians recently reported that the economy is expanding at a 1.9% average annual rate. And it takes the National Bureau of Economic Research--the official arbiter of when and if the U.S. economy is in recession--between 6 month to 18 months after a downturn begins to label it as a recession.

Still, the job market is weak, and getting worse. Layoffs are hitting more industries. Home prices keep spiraling lower, and we haven't seen bottom yet. The credit turmoil in the financial system is spreading, most recently reaching the credit card market. Consumers are strapped for cash, with higher energy and food prices sapping budgets. Exports are one of the few bright spots in the economy.

What's more, official history is being revised downward. It's intriguing to note that when the government revises previously published statistics the figures are usually worse than initially reported. For example, the fourth quarter of last year was recently revised down to negative growth: -0.2% from the previous 0.6%. Mike Mandel, chief economist at Business Week, has been making a strong case over at his blog that the consumer spending figures are too high.

It feels like a recession. It looks like a recession. And eventually I think it will be labeled a recession.

08/05/08 by Chris Farrell

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Gifts

Question: My parents are really excited for my wife and I to buy a house, as is my grandmother. So much so that between them they'd like to give us $30K to help with a down payment. Would this gift become "income" and therefore be subject to taxes? If so, are there any clever ways to make this money non-taxable? Thanks! David, Walla Walla WA

Answer: There's no need to be clever. In 2008 you can gift up to $12,000 to a person without paying taxes on it. Your parents and your grandmother could gift you $12,000 each for a total of $36,000 without tax consequences. They could double that sum by gifting the same amount to your wife.

08/06/08 by Chris Farrell

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Catching Up on Retirement Savings

Question: I have a unique "problem" when it comes to planning for my retirement. In my early 20s, I struggled to overcome a life threatening illness. In my 30s, I was only able to work part time. I also went through a financially debilitating divorce. Now, I am in my late 40s, healthy and 10 years into good career. However, because of my health I had no chance to save any money. Though I'm thrilled to be alive, I realize that I may face a bleak retirement. Where do I start? Marianna. Liberty. NY.

Answer: I'm glad that you're now healthy and enjoying a good career. While the particulars of your situation are unique to you, you'd be surprised how many people in their late 40s are in similar financial circumstances when it comes to retirement savings.

There's no reason why your retirement should be bleak. Yes, you're starting late with your savings. That means you'll have to try and salt aside more going forward. There's no getting around it.

Even more important is the demand on you to plan ahead. Specifically, you'll need to work longer than someone who has been savings the maximum every year since she was 20. The real financial kick comes from working during those years when a number of your peers are retiring. That's not necessarily a bad thing, either. For many of us, work isn't just a paycheck. It's also a social environment with colleagues and friends. Work keeps our minds active and our outlook young.

A couple of "investment" implications follow from this: First, invest in your health. Eat right and exercise. Second, invest in your network--colleagues, friends, and acquaintances. This way, if you lose your job other opportunities will open up to you. And if you want to make a career shift your network will help make it happen. Third, invest in your job and career. Is this something you'll want to do in your 60s. If not, start investigating other options now while you're still young. Finally, invest the time to understand your Social Security benefits.

I've recommended this book before, Get A Life by Ralph Warner. It's for anyone without a lot of savings and plenty of zest. Warner gets you thinking about creative solutions for your later years. The book's sub-title says it all: You don't need a million dollars to retire well. Amen to that, no?

08/07/08 by Chris Farrell

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Rent--Or Buy?

Question: My husband is 52 and I am 51. He works and I retired in 07 taking my pension in a lump sum which I now take small amount from each month. Husband earns $73,000/yr and stows away 20% in his 401k. He has a chronic degenerative disease which will necessitate him going on disability within the next 5-7 years. A substantial amount of his income goes toward his medical copays, Dr, visits and massive amounts of prescriptions. We sold our SoCal home in December 07 and feel fortunate to have lost just $1,000 on it. With prices continuing to slide, we now rent a home, but rent costs us much more each month than what our former mortgage payment was. I put the $154,000 equity from the sale of the home into CD's and savings for the short term. We can easily find a nice home for $250,000. by putting down our $154,000, we would then have money left each month to spend on other things like traveling, which my husband won't be able to do in the future after he can no longer work. When he does quit working, we will move back closer to family in the upper midwest. What is your opinion on buying in a SoCal market which is still falling; or should we find a more affordable apartment and pay to store our furniture and save some money? Even the nicer apartments rent for higher rates than what a mortgage payment would be. We have no debt of any kind and excellent credit scores. M. Yucaipa, CA.

Answer: Bloomberg recently ran an article suggesting that California could be the first state to hit bottom. "California led the U.S. into the worst housing recession since the 1930s," write reporters Dan Levy and Daniel Taub. "Now the most populous state may be the first to find the bottom." Sales are picking up, with about 40% of sales foreclosed homes. In the article, Mark Zandi, chief economist at Moody's Economy.com, estimates that nearly $1.3 trillion of homeowner equity was lost in California since home prices peaked in December, 2005. ``California is having a wrenching decline in wealth, but this is a cathartic event that will lay the foundation for a recovery,'' says Zandi. ``This signals the beginning of the end.''

It's a good article and Zandi is smart. He knows real estate and credit markets. Still, the downward pressure on home prices doesn't seem to be letting up, and it could still get a lot worse, especially when option ARMs come due later this year and next in California. Even the Bloomberg article expects home price discounts of up to 50% will extend into 2010.

Rather than trying to predict the direction of the real estate market, what struck me in your note was that your husband won't be able to travel in the future. He faces a disability. I say "buy" if owning a home frees up cash flow to travel and do things together while you can. So what if you buy too early and miss bottom? You'll be accumulating experiences and memories while you can. Assuming you're right on the finances and quality of life, I think you already know the answer to your question.

When you look to buy I'd focus on homes that are designed for ease of use when your husband is disabled. In other words, everything should probably be on one floor, with wide doorways (in case he needs a wheelchair), a shower without a lip (again in of a wheelchair or walker), and other so-called "universal design" features that are geared toward making it easier to age in place and deal with a disability.

08/08/08 by Chris Farrell

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Custodial Account

Question: My daughter is 17 years old and has been working as as a barrista at Starbucks. She managed to accumulate more than $3000 and would like to invest it in a Roth IRA and buy a life cycle fund. However because she is under age, she can not open her own account.

Do you know of a way to work around this limitation and begin tapping the magic of time and interest accumulation now? Yoram, Livingston, NJ

Answer: It's easy to do. You need to establish a "custodial account" for your daughter. Any mutual fund company or financial institution will set one up for you. You manage the account, but it is owned by your daughter. The account reverts to her when she reaches the age of maturity which in most states (including New Jersey) is 21 years old.

08/11/08 by Chris Farrell

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A 0% Capital Gains Tax Rate?

Question: I have been told that in 2009, if my income is under $65,000, I do not have to pay capital gains tax on some stocks that I would like to sell. My husband and I make less than that, if we don't count our dividends and real estate investments. Could you please clarify the situation for me? Janet, Columbiaville, MI.

Answer: Ah, taxes. I'm sure you won't be surprised if I tell you the answer isn't simple! Most importantly--and this is not just boilerplate--you should work with a professional in figuring out your actual tax liability. But this question is coming up more and more, so here is a brief introduction. It's a tax benefit well worth knowing about for some middle class families.

Under certain circumstances between 2008 and 2010, the long-term capital gains rate for some investors will drop to zero. That's right 0%. The same goes for dividends. It's a genuine opportunity to sell some highly appreciated assets with a zero capital gain tax liability. You've heard right.

That said, don't sell your taxable portfolio just yet. (Withdrawals from a 401(k), 403(b), and comparable retirement savings plans are still taxed at your ordinary income tax rate.)

The long-term capital gains tax break is limited to those in the 10% and 15% income tax brackets (which is a lot of people, although far fewer have sizeable taxable stock, bond, and mutual fund portfolios). These folks have been paying a long-term capital gains tax rate of 5% in recent years.

Looking it up, in 2008 a single filer is in the 10% bracket with an income cutoff of $8,025. The single filer jumps into the 15% bracket after that with an income up to $32,550. The comparable 10% and 15% income bracket limits for a married couple filing jointly are $16,050 and $65,100, respectively. Of course, your actual income could be much higher. These numbers represent taxable income after deductions and exemptions.

Still, the capital gains from the sale of stocks or mutual funds are added to your income. That additional money could push you into a higher bracket. For instance, let's say you earned as a couple filing jointly $40,000 (after all deductions but before capital gains and dividends). You sell sold $20,000 worth of stocks eligible for long-term capital gains treatment. The gain would not be subject to capital taxes.

But if you earned $65,000 and sold $20,000 worth of stock, almost all the stock profit is subject to the 15% capital gains tax treatment.

This is only one example, and there are other permutations that can affect the capital gains taxes of those living on Social Security, children that want to gift stock to their parents, and so on. The capital gains tax treatment could change in a new administration, too.

The bottom line: It pays to investigate this short-term capital gains wrinkle in the tax code for anyone in the 10% and 15% tax bracket.

08/12/08 by Chris Farrell

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Saving for College

Question: My husband and I have three sons who are five years old and younger. We have saved $15,000 for them so far in an interest advantage account. After the recent bank failures, my husband and I looked into these accounts and found out that they are not FDIC insured. Our goal is to save for their college education or training. Could you please give us some suggestions on what to do with the money that would give us a good return and does not have much risk? Thank you for your time and we look forward to hearing from you. Janet, Henderson NV.

Answer: You're right that an interest advantage account isn't FDIC insured. It's essentially a money market fund. I'm aware of two interest advantage funds, one run by Ford and the other by GE.

How about putting the money into a 529 plan for each of your children? Of course, a 529 plan isn't FDIC insured either. But you have the safety of a well diversified portfolio. The investment compounds tax free. The gains are tax free too if the money is withdrawn to pay for qualified educational expenses. The investment gets favorable treatment in the financial aid formula. It's a tough combination to beat. You can learn more about 529 plans by searching the Getting Personal questions and answers. A good resource for research is www.savingforcollege.com. The personal finance magazine Kiplinger's (www.kiplinger.com) also has good information.

A 529 plan is my number one college savings option at the moment. For those interested in putting their money into a FDIC insured account the College Savings Bank may be worth investigating. It's at www.collegesavings.com. The CollegeSure certificate of deposit is a variable rate CD indexed to college costs. Principal and interest are FDIC-insured to at least $100,000 per depositor.

08/13/08 by Chris Farrell

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CDs

Question: Lately, I've been noticing lots of ads for CDs at various rates. What advice do you have to help me (and others) make a decision? What questions should we ask the financial institutions? How safe is our money? Many thanks. Anonymous. Gaithersburg , MD

Answer: Investors are putting more of their safe money into certificates of deposit. For one thing, so long as your investment is under $100,000 you're money is backed by the FDIC. That's a real relief in these turbulent financial times. For another, CD yields are on the rise. However, compare the after-tax return or yield on a CD to owning a comparable U.S. Treasury (which also has no default risk). Put your money where you get the higher after-tax yield.

One well-known place to check out CD rates around the country online is at www.bankrate.com.. When shopping for a CD make sure you understand the terms of the contract. Only put in money you can afford to lock up until maturity--6 months, 1 year, 2 years and so on. There are penalties if you need to get the money early.

08/14/08 by Chris Farrell

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Diversify Financial Companies?

Question: We have just finished our annual retirement portfolio re-balancing. All of our accounts are with Vanguard. Should we consider having some accounts at a different company to spread the broker risk around? Howard, Bozeman, MT.

Answer: This question is coming up a lot recently, and with good reason: The collapse of the investment bank Bear Stearns, the handful of bank failures, the frozen auction rate preferred market, and the ongoing turmoil from the credit crunch.

What do I think? For many of us, it's easier to manage our retirement portfolio if the money is at one institution that offers good service, low fees and investment choice. But does convenience increase your risk? It does a bit, but not by much in most cases. I've gone back and forth on this issue several times over the past couple of years. In essence, my answer is "no", but...

First of all, the biggest protection you have is that your money is invested in securities. So, even if Vanguard, Fidelity, or some other major financial institution got into trouble you still own the securities. (Of course, ownership doesn't prevent the value of your portfolio from going down.) There is also Securities Industry Protection Corp. backing that provides an additional layer of security in case of fraud and malfeasance. (You can learn more about it at www.sipc.org.)

What's more, most of us end up with a kind of natural financial institution diversification. You have your retirement portfolios with Vanguard. I bet you have savings at a bank or credit union, a life insurance policy with a life insurance company, and so on. If you look at your household as a single entity you're probably reasonably diversified overall--even if your retirement portfolios are managed by one firm.

Now for the proverbial "but." In an era of financial supermarkets and one-stop-shopping it's possible to concentrate amost all your financial assets with one firm. At that point say "stop," and diversify. The lack of diversification is one reason why I have never been enamored with the financial supermarket idea. The other is that experience shows a firm good at managing mutual funds isn't necessarily the best at creating other competitive financial products. It always pays to shop around.

08/15/08 by Chris Farrell

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It's Not Fair, Right?

Question: Everything in the news and from Congress is about bailing out subprime mortgages and people with poor credit. Are there any programs out there for people who have very good credit and are a seeming good risk for lenders? I heard that lenders are going to try and recoup their losses on the backs of less-risky borrowers. I would think it would be the opposite. For those of us with excellent credit numbers, why aren't we being courted by lenders? Thank you. Brian, Ortonville, MI

Answer: I wrote about this on my other blog, My Two Cents.

Why should folks who didn't get caught up in the real estate frenzy of the 2000s pay for the financial mistakes of those that did? Many people didn't stretch their finances to buy as big a house as possible or invest in several "sure-fire" properties. They didn't take out interest-only mortgages, option ARMs, or apply for so-called liar loans. They were prudent with their money, perhaps continuing to rent while their friends bought homes or maybe staying in their smallish abode because the mortgage payments were affordable. Now they're on the hook for bailing out Wall Street, bankers, and irresponsible borrowers. That's not fair, is it?

No, it isn't.

That said, I'm in the camp that believes the bailout hasn't been a mistake. Would it be fair to put the economy into a deep recession or depression? I don't think so.

What about people like you who have been prudent with their money? In essence, I believe you'll have plenty of opportunity to buy good assets or attractive investments at a good price while others are struggling to pay down their debts. You have money and good credit which are invaluable right now. Eventually, creditors will loosen their lending policies a bit, and you're just the kind of borrower they'll want. I would use this time to think about and research where would you like to invest your money?

That's fair play, no?

08/18/08 by Chris Farrell

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A Healthy Bank

Question: As Freddie Mac and Fannie Mae attempt to recover after a government bailout, my wife and I have become more and more interested in the health of other banks. We noticed that today Washington Mutual recently posted a huge loss of 3.3 billion dollars for the last quarter, and that this loss is part of a trend for that bank. Presumably this is still part of the home loan catastrophe the country is trying to recover from.

Our question though, is this: as banks like Washington Mutual struggle, how does a normal bank customer (not a bank "investor") know how to digest this information? We know that the FDIC was designed to assure people not to make bank panicked bank runs, but aside from that assurance, how does one know whether to stay with a bank or not? What kinds of warning signs should a customer watch for? Thanks, David, Seattle,WA

Answer: First, don't worry about the financial health of your bank so long as your accounts are covered by the FDIC. (By the way, one way to monitor the health of many banks is to watch their publically traded debt. Investors are sensitive to a banks financial condition and if the interest rate on a bank's debt is going up relative to its peers that's a signal that the market is getting nervous.)

Second, you want to evaluate your bank as a customer. Is service deteriorating? Is the bank hiking fees? Is its website easy to navigate and use? If you don't like the way your bank is treating you then I would move your money. It's much easier to judge bank service than bank finances.

08/19/08 by Chris Farrell

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What now?

Question: I am notoriously bad with my finances, and for basically the past five years since I graduated college, I have ignored them. Of course that never works out well. I found myself in about $4000 of credit card debt on top of my student loan of $22,000 which I had deferred for as long as I was able to. About a couple of years ago, it all caught up with me and I enrolled in a debt management plan, consolidated my student loan, and have been making paying both regularly each month.

Now I have paid most of my credit card debt with less than $1000 left to go, and I have stopped the debt management program because I realized that I was simply paying them to write one check a month. I have a 401K plan with a couple of thousand and a couple of hundred in cash savings. I also listen to your show to try and understand my relationship with money.

Finally here's my question: I am young and live on my own in New York. Where should my next financial goals be placed? My expenses are still pretty high but luckily manageable. How do I keep moving forward financially? Thanks, Amelia, Brooklyn, NY

Answer: Congratulations for seizing control of your finances and paying down the credit card debt. That's terrific. I'm always distressed when I hear about debt management programs that essentially take money from people who can't afford it.

How you should move forward financially is a big question, and the answer will evolve over time. But here are some thoughts. I'd continue with whatever system you devised to pay down your credit card debt, but use it to build up savings from this point on.

I want to share this email I got the other day (in a different context). It's from John. He's 69 years old and lives in Ham Lake, Minnesota.

... Some advice I was given when I was 20 years old in 1959 was to save something out of every pay check, having it invested before I ever saw it. AKA, Stock purchase for one company, savings bonds with another and the 401K the last 20 or so years. It has put our children through college, help up purchase a home and gives us retirement income without losing the funds necessary to keep the $$ coming....

You want to save for retirement, which you're already doing. Keep building up that nest egg. By the way, are you putting away the maximum?

We live in a harsh economy. I would also focus on building up your "emergency" savings. This will give you a cushion in case you lose your job. It will also give you the freedom to take a risk and try another employer, to buy a home, or to seize some other investment opportunity that might present itself.

08/20/08 by Chris Farrell

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A Merger

Question: I own about 400 shares of Anheuser Busch common stock. I have been accumulating the stock slowly since 1976 mostly through a DRIP program. So my tax basis is relatively low. A company, I think it is "In Bev" is offering to buy out Anheuser Busch stock holders for about $70 per share. I would like to avoid paying taxes on the gain by putting the proceeds from the sale into some vehicle where the principle and interest will be available for my 8-ear-old child in the future, say college or high school expenses. Do you have any suggestions? Thank you. Brian, Brooklyn, NY

Answer: Yes, it's the Belgium multinational InBev that is buying Busch. You won the stock-owners lottery. . The price tag for your good fortune is that Uncle Sam will take part of your gain. Most of the tax bite should be long-term capital gains, which is currently at 15%. One time-honored method of limiting the tax take is to comb through your portfolio and see if there are any stocks or mutual fund you'd like to get rid of at a loss. You can use a capital loss to offset a capital gain. You may be able to avoid paying capital gains altogether. The long-term capital gains rate for investors in the 10% and 15% income tax bracket will drop to zero between 2008 and 2010. The same zero rate holds for dividends.

My tax reactions are just quick ideas. It is well worth your while to work with a professional accountant to delve into the details of your portfolio to see how to best handle the gain.

In terms of taking the gain and saving for your 8 year olds college education, I'd vote for putting at least some money into a 529 college savings plan. The contribution must be in cash, and it's made with after-tax dollars. But the money compounds free of taxes. The gain is also tax free when the money is withdrawn to pay for qualified educational expenses. A 529 plan is treated favorably when it comes to the basic financial aid formula.

08/21/08 by Chris Farrell

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Getting a CFP

Question: I am always inspired by Chris Farrell who is so knowledgeable and can answer any questions. That makes me want to pursue career as a financial planning. I am thinking of taking classes to become CFP but looks like there are so many other qualifications you can get. What do you recommend in terms of preparing for future career as a personal financial planner? I have worked in investment banks but never as a personal planner. Kumi, Carlsbad, CA.

Answer: Thanks for your kind words. I'm a fan of the certified financial planner designation. From my experience as a journalist, plus knowing several friends that got a CFP, it gives the practitioner a very broad overview of household finances. The CFP offers the kind of broad background that will enable you to deal with everything from managing a portfolio to dealing with long-term care insurance to philanthropic gift giving.

That said, in quiet conversations over the past year or so I have been told by a number of CFPs that the new generation is having a hard time building up a business. The current generation of successful financial planners are having a tough time letting go.(Of course, another way of looking at the succession problem is that a good CFP can easily work well past the normal retirement age.) What's more, we've lived through an enormous expansion of the financial services industry over the past two decades. One implication of the current credit crunch is that the industry will consolidate in coming years.

So, while I admire the CFP professional degree, it pays to investigate what your career prospects will be once you have the designation in hand. You might want to visit the Certified Financial Planner Board of Standards at www.cfp.net.. I'd look for a conference or CFP gathering near you to ask some tough questions of current practitioners about the CFP as a career. Good luck.

08/22/08 by Chris Farrell

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Borrow to Fund 529s?

Question: My wife and I have no debt except for $23,000 from a home-equity line. This year, she took some time off, reducing our income and meaning that we might not be able to save into our 529s for two sons, ages 6 and 4. (We will save $36,000 for retirement this year.)

My question: Should I borrow $10,000 from our Home Equity line to fund these 529s? My argument is that I immediately get the NYState 6% tax reduction for that whole $10,000 ($600), that the Home Equity interest rate is small (4.75%) and deductible so effectively even smaller (3.5%), and that there is a lot of upside with the market at about 11,500. My wife's argument is that I am completely nuts. Thank you for your (gentle) reply. David, Amherst, NY.

Answer: No, I'm not going to say you're nuts. And you can make the numbers work if you use the stocks market's average annual rate of return of some 7% (after taking inflation into account). Problem is, the flaw with using averages is that Lake Erie never freezes and stock market returns don't fluctuate.

We get variations of this question all the time. What's unusual about your query is the timing. Usually people want to borrow and put the money into whatever asset is flourishing at the time--Internet stocks, residential real estate, and so on. Right now, it seems that just about everything is weak: The economy, the job market, homes, stocks, even commodities.

Leverage is risky. Borrowing to invest in stocks and bonds can backfire badly since you need to make those interest and principal payments even if the assets you've bet on cratered. So I wouldn't do it.

To put it somewhat differently, I don't think the potential rewards justify the risk. It's wonderful that you are saving for your children's college education. But they'll still be able to go to college even if you don't save in their 529s for a year or two. Maybe they'll have to borrow a bit more to pay for college. But that's the biggest downside I can see.

08/25/08 by Chris Farrell

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Emergency Stash?

Question: I'm a retired Police Officer. I have gotten a post retirement job. With my pension I don't need the money to pay bills and I have been putting in a savings account. I would like to know if there is a better place to put my extra money where I can still get it in case of emergencies and other unexpected expenses. Glen, Anita, IA

Answer: You should think about a money market mutual fund. For instance, I put part of my monthly savings automatically into a conservatively run money market mutual fund. You'll make a shade more interest than in a bank savings account. And when the Federal Reserve starts hiking its benchmark interest rate, you'll participate in that higher short-term yield. Typically, you can write several checks a year off the account, so it works for emergencies and large unexpected expenses.

Two cautions: First, invest in a large brand-name financial institution with the reputation and financial resources to support the money market fund if that becomes necessary during the ongoing credit crunch. Second, most firms offer different kinds of money market funds, with the most conservative option paying the lowest yield and the riskier flavors higher interest rates. Stay conservative. This isn't risk-money. You want it to be there when you need it. Don't reach for yield.

08/26/08 by Chris Farrell

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Investing in China

Question: Big fan of your show on Saturday mornings here in Cincy. Unfortunately, only caught last few seconds on 8/23 when heard you talking about ADRs and possible tie in with ETFs? Anyway, I'm thinking of investing in China as there's been a significant correction in their markets. I was trying to figure out the most efficient, cost-effective way to do that so I'll start researching on the 'Net for a good ETF. But, maybe you had a better idea? Thank you, Ruth. Cincinnati, OH

Answer: Check out From Wall Street to the Great Wall by Burton Malkiel and several co-authors. Malkiel, an economist at Princeton University and author of the well-known investment A Random Wall Down Wall Street, believes China will become the "world's mightiest economic power". However, while investing in China should be lucrative over the long haul, the ride will be wild and hazardous.

There is no shortage of investment opportunities when it comes to China. For instance, a number of exchange traded funds (ETFs) have been created, and it seems that more are being created nearly every week. Among the better known ETFs are the SPDR S&P China ETF (GXC), the Vanguard Pacific Index Viper (VPL), the iShares MSCI Hong Kong (EWH), iShares FTSE/Xinhua China 25 Index (FXI) and PowerShares Golden Dragon Halter USX China (PGJ). They are all down sharply so far this year. There are traditional open-ended mutual fund companies that specialize in the China and the Far East, and you can also research the "H" and "N" shares of Chinese companies. The H shares are traded in Hong Kong and the N shares in New York.

Malkiel and his co-authors don't only make the case for investing in China, but they offer up plenty of investment examples and strategies. Good luck.

08/27/08 by Chris Farrell

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A Financial Planner

Question: I am 66 years old, retired in Feb 08, and my portfolio is down by about 30% since then. I have not withdrawn from the investments. Instead, I've withdrawn cash from my bank savings to supplement Social Security and pension payments. The Rollover IRA (from 401K) was all in Fidelity Freedom Fund 2010 until April when I invested 20% of this into Fidelity Gold and another 20% into Fidelity Canada--all down the last time I looked. Is there a sane way now to get out of these investments and into cash or Treasury inflation protected securities (TIPS)? Or must I wait it out so I don't mess it up further? And, yes, I am past due for making an appointment with a Certified Financial Planner (CFP).(PLEASE WITHHOLD MY NAME-CALL ME MS DIZZY) Durham, NC

Answer: Well, I would never call you Ms. Dizzy, let alone think it. In general, I like target date funds: As Lauren Young of Business Week recently put it: "These funds, which automatically adjust their asset mix as an investor's retirement date approaches, were seen as a way for individual investors to achieve the discipline, diversity, and typically higher returns of pension funds."

You put your money into two commodity funds. Gold has recently peaked, and come down sharply as the dollar's value has stabilized in the international currency markets. The Canadian fund is essentially a commodity fund since the performance of energy, agriculture, metals and other commodities were behind its run-up and current down-draft. In other words, you aren't well diversified and you are in riskier sectors of the financial markets.

I can't give you a better suggestion than you did in your last sentence: Work with a personal financial planner. Before you start bouncing around between funds I'd spend time a financial planner you can work with, especially one with the certified financial planner (CFP) designation. The big drawback to a fee-only certified financial planner is they are expensive. It's easy to spend $2,000 to $3,000 for a comprehensive plan. If that's too much you could negotiate for a smaller deal that focuses primarily on your retirement portfolio.

If you search the Getting Personal site you can get some more information on how to find a financial planner.

For a quick check-up you could tap into Fidelity. (I'm assuming you're with Fidelity since the 3 funds you mention are all Fidelity funds). It offers a free online, interactive service. There is a toll-free number to call to talk to an advisor with any follow-on questions. The service isn't comprehensive, but it's helpful.

08/28/08 by Chris Farrell

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Sell the Farm?

Question: My mother, (who is in a nursing home in ND with dementia) and I own as a life estate/remainder, approx 150 tillable acres of North Dakota Red River valley farmland--The farm building site, which includes a house in severe disrepair, is an additional 9+ acres. I had the tillable land appraised and it came back at $367,000 which is just over $2400 per acre. Mother will soon exhaust assets and be eligible for medicaid (In ND, owning farmland is not a disqualifying asset). She has no long term care insurance. I am wondering if it would be the right time to sell--prices at an alltime high. Some friends say I should play it for a year and then sell. Another factor, our tenants have farmed it for over 25 years and I would give them right of first refusal. They are interested in buying, but they are my age (50+) with no children to pass farm onto--right now they are interested, they may not be in a year due to being older. Of course, it is as much an investment for them also. I looked at IRS tables a couple of years ago and mother's share would be approx. 41%. She is now 82 years old. I came late to my current position and don't have a lot allocated for retirement. I rent an apartment and am single. I have not paid to have the building site appraised yet. The tenants would be interested in buying it also, but only for the grain storage bins and storage shed. The advantage of selling it as part of the farm is that I lower risk of inadvertantly missing something in disclosing about condition of house--I can think of at least 9 things, four of which are severe basement water leakage, needs new roof, and needs new windows and furnace.

The alternative would be to continue to rent it to tenants, but when mother goes on medicaid, no land income can be used to pay taxes and utilities. Approximate tax and utilities Tax: $1600, utilities about $50 per month. I either find a way to come up with that amount or I enter into a "net lease" with renters who would at least pay taxes. I could find the money to probably keep utility payments up. The big question, take the chance that grain commodities go up and land prices go up for another year and put it up for bids--or sell to tenants this year? Remember tenants are interested buyers. I grew up on farm and it is very hard to think about selling it because, I feel I am letting my late father and mother down, by not holding onto it. When they built house and married in 1948, I am sure they did not forsee the change in agriculture that would see family farms get bigger and fewer. K, St. Paul, MN

Answer: I can imagine how hard it is for you to sell. But I'm glad for you and your Mom that farm prices have soared in recent years. My own sense is that farmland has made a step up in value with the growing wealth and better food consumption in China, India and the rest of the emerging markets. That doesn't mean there won't be violent changes in prices

To be clear, you need more expertise on the farm value side than I can offer. It reads as if you are up on the Medicaid rules, but if not that's another complicated area to invest in getting some expert help.

However, since you're in the market for gathering information I had a couple of reactions.

When it comes to investing, buying and selling, we can't pierce the fog of the future. As Peter Bernstein, the dean of finance economists likes to put it, it's in the nature of the beast. Still, one way to grapple with a question like this involves regret. Let's say you sell now to the tenants, and a year later prices are up another 10% to 20%. You'll regret selling to early. Now imagine you don't sell but hold on. Prices for farmland fall by 10% to 20%. You'll regret not selling. Question is, which regret would you--and your Mom-- rather live with?

Even more important is your aging mother and her dementia. You have a very specific reason for contemplating a sale now: To help her out financially. If you sell today, you essentially know what you'll get. Will this money make a difference for her once you've taken taxes and Medicaid into account? Assuming the answer is yes, if it were me her condition would push me toward cashing in my known chips rather than gamble on an unknown future.

I lean on the conservative side with financial matters, and I'd rather sell early at a profit and into a strong market (missing the market's peak) than wait and take the chance of selling into a weak or falling market even if I still end up with a profit. One reason is that the seller has negotiating power in a strong market, while its the buyer that wields more influence in a weak market.

The condition of the house makes me nervous.

By the way, in 1948 your Mom got married and your parents built a home. Now, 60 years later, what they built and nurtured will go toward making sure she gets the kind of care she needs in old age. That's a moving arc to a life story.

After gathering more information and thinking it through, let us know what you decide.

08/29/08 by Chris Farrell

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