Marketplace

Buying a few shares

Question: I am 20 years old and am working and going to school part time. My question is, I want to invest a little money, somewhere between 100 and 200 dollars. The purpose would be to buy into some of these historically low stocks in company's that are still pretty solid. It would be for the personal fun of watching what will happen over the upcoming years since I don't plan on doing and serious monetary investments for several years. Now to get to the question. Is there an easy way for me to do that myself online? And what sites would that be? And can I even by shares with such a little investment? Thank you for your advice. I really enjoy your program. TJ, Finlayson, MN

Answer: I like your idea and your approach. Investing a small amount of money is a good way to learn about the markets and to have some fun. However, if you could up the amount you can invest a bit it would help. The cost of an online trade will run you about $10 or so. But I don't want to discourage you. It's the kind of curiosity and educational opportunity I'd love more young adults to pursue. Its money well spent. I also agree that there are intriguing values in the market.

You can do what you want to do online. One low cost provider is sharebuilder.com. It's owned by the ING Direct, a U.S. subsidiary of the giant Dutch financial conglomerate.

Another option if you're going the buy-and-hold route is to purchase stock directly from a company rather than through a broker. "Direct Purchase Plans" are mostly offered by large, blue chip companies. The typical plan allows you to buy stock for small amounts of money, usually the value of a share. You can get more information about companies that offer a DPP option at enrolldirect.com.

There are a number of good options for researching stocks. The major business newspapers and magazines like the Wall Street Journal and Businessweek offer a wealth of detailed information, as do online sites like morningstar.com, finance.yahoo.com, and google.com/finance. Have fun.

I'm curious. Does anyone have a different suggestion or alternative for a novice investor who wants to learn about the markets with a small amount of money?

08/03/09 by Chris Farrell

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Tax-exempt bonds vs. taxable bonds

Question: If a corporate bond paid 9% interest, and you are in the 28% income tax bracket, what rate would you have to earn on a general obligation municipal bond of equivalent risk and maturity in order to be equally well off? Given that municipal bonds are often not easily marketable, would you want to earn a higher or lower rate than the rate you just calculated? Sandra, Upper Marlboro, MD

Answer: Ah, this is the kind of question that number-crunchers love and everyone else hates. So, I'll keep it simple. The good news is that I don't need to write out the basic formula and you don't need to do the math. There are calculators on the web that will do it for you.

Yes, you do want to make an apples-to-apples comparison. A key step is to put investment yields on a level playing field. When you're comparing a taxable bond to a municipal bond you'll use the tax-equivalent yield formula to do just that.

So, with your 9% corporate bond you would need a tax exempt bond that yielded at least 6.48% to match it. I plugged the numbers into this calculator. It only takes into account federal taxes. A more detailed calculator that lets you plug in state and local taxes is at CNNmoney.com.

You do want to make sure that you are comparing bonds with similar maturities and credit quality. I'm not a big fan of owning individual munis and corporates. I think most individuals will do better with low-fee bond mutual funds with these securities. With some 48 states in the red a bond fund is allows for prudent diversification.

I would stick to high-quality blue-chip corporate and muni bonds. I would steer clear of low-rated junk, especially with a long maturity. The lush yields you can earn on high yield corporates and high yield munis isn't enough to compensate for the risk of the investment going sour.

08/04/09 by Chris Farrell

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IRA withdrawal

Question: If I borrowed amount $x from my IRA and invest it and make $x + 10% and return $x back into my IRA within the 60 day limit, what is the status and treatment of the 10% profit? Treated as ordinary income? Paul, Bethesda, MD.

Answer: Yes, short-term gains are taxed at your ordinary income tax rate. But for a whole host of reasons it's a really bad idea to take money out of your IRA and try this strategy.

08/06/09 by Chris Farrell

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I-bonds

Question: Do you agree with the U.S. Dept. of Public Debt that the current inflation rate is MINUS 5.56%? I have 3-I bonds purchased August 2000 with a 3% fixed rate. When I saw a zero interest rate for my bonds I asked Public Debt what happened to my 3%? They added the new MINUS 5.56% to my 3%. Are they manipulating the word inflation? I think of it as being zero at it lowest. Valerie, San Francisco, CA

Answer: It's a hard number to believe with the everyday pressures on our budgets to pay for gas, food, insurance, and the like. But the green-eyeshade brigade at the Bureau of Labor Statistics isn't manipulating the data. The government statisticians there live for these numbers. They take it seriously. So, although the price index IS incomplete and has flaws, no one is trying to be the number-crunching version of a Bernie Madoff.

What the decline in the consumer price index reflects is the downward momentum of the global recession, the longest, most severe recession since the Great Depression. It isn't just in the U.S., either. Inflation rates in almost all economies have fallen sharply along with declines in commodity prices, the lack of consumer demand at the mall, and the steep drops in housing values.

Against this backdrop, any increase in the overall price level is a long way off. Right now, I think the fear of deflation or a decline in the price level is haunting central bankers worldwide. But at some point--hopefully soon!--the economy will revive and we'll get a good inflation scare. Most economists expect one considering all the money the Fed has pumped into the system to shore up the economy over the past three years. That's the risk an I-bonds is designed to protect you against and it's why I think there is value for the long-term saver in owning I-bonds.

08/07/09 by Chris Farrell

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529s and student loans

Question: I have a 529 fund for my daughter. she graduated in May. In the process of her going to school we went ahead and took out school loans. There is enough money in the 529 fund to pay the loans off. It seems to me since the funds are going to pay off an education fund there should not be any tax issues but the fund management company says paying of the school loans is not a an "approved" use of the funds. They are right that is is not "listed" on the approved list but it is paying off college loans by definition the loan was for school and went toward tuition etc. I have checked with several accountants no one seems to give me a straight answer. Eric, Grand Island, NE

Answer: I'm taking your question because it highlights a common pitfall. Student loans are not listed as one of the Qualified Higher Education Expenses for a tax free withdrawal from a 529 college savings plan. The list usually includes tuition, fees, books, and supplies and equipment needed to attend a college. For instance, a personal computer is considered a qualified expense. Room and board counts for students who are enrolled at least half-time, although there are some restrictions. Student loans aren't on the list. I don't make up the rules.

Two quick thoughts: Your daughter can use the money for graduate school if she has plans to attend one in the future. The account owner can also change the beneficiary of the plan. The restriction is that the new beneficiary must be a member of the family of the old beneficiary. Here is how the IRS defines family: The beneficiary's family includes the beneficiary's spouse and the following other relatives: Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them; brother, sister, stepbrother, or stepsister; father or mother or ancestor of either; stepfather or stepmother; son or daughter of a brother or sister; brother or sister of father or mother; son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; the spouse of any individual listed above; and first cousin.

I've recommended these web site before, but two good sources of information on 529s are savingforcollege.com and finaid.org.

08/10/09 by Chris Farrell

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Medium-term savings

Question: I am a 24 year old engineer who has been extremely fortunate in this economic downturn. My wife and I have no college or credit card debt and a combined income of 100k. Up to this point the majority of our savings has been in retirement accounts, such as 401(k)'s and our Roth IRAs. We also have begun to build an emergency fund in a money market account for short-term savings. The glaring weakness I see currently is medium-term savings, such as for our next house or car in 5-10 years. My hunch is that some low-cost index funds are the way to go right now. Is this the right overall investment strategy to be taking in the short, medium, and long-terms? Adam, Hamilton, OH

Answer: You're smart with your money and you have a good savings strategy. Here's a suggestion for your medium term savings. I like the idea of investing in a low-cost broad-based equity index fund in a taxable account. Your annual tax liability is fairly small, most reflecting dividends payments. The capital gains impact is minimal since index funds mostly don't sell their holdings unless it's to take into account changes in the underlying index. You'll face the capital gains tax hit when you sell shares, assuming the investment has appreciated in value over the years. I like the idea of setting up an automatic investment plan so that every month a small sum of money goes out of your checking account and into the index fund.

You can complement this risky slice of your savings portfolio with an investment in I-bonds. It's an inflation-protected savings bond. There are no commission costs to buy and sell I-bonds. You can buy $5,000 online in electronic I-bonds directly from the U.S. Treasury and another $5,000 in paper I-bonds from your bank or credit union. Your money compounds tax-deferred and you don't pay Uncle Sam at your ordinary income tax rate until you cash them in. If you sell the I-bonds before 5 years you'll lose three months interest as a redemption penalty. There is no penalty after 5 years. To be sure, I-bonds aren't in favor right now because the rate is zero. That's right, 0%. The rate reflects the steep decline in the consumer price index during the Great Recession. The reason it doesn't bother me is what if inflation surges in a year, three years, or five years from now? The dollars you put aside today will be protected against inflation, at least as it is measured by the consumer price index.

By the way, I look at this approach as a 5+ years strategy, especially with the index fund. If your time horizon is less than 5 years the stock market is simply too volatile a place for savings. .

08/11/09 by Chris Farrell

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30 or 15 year mortgage?

Question: Hi, I am a 34-year-old single woman with no debt, a comfortable, stable salary, and a high saving rate. I am planning to buy a home for the first time and need to get a mortgage. I can put 20% down for the down payment but the question is, what length of mortgage should I sign up for? My bank is advising me to get a 30-year mortgage (about 35% of my income) but my parents are pushing for a shorter-term mortgage (20 or even 15-year) with the argument that I would build equity in the home much faster. In their opinion, the total interest you pay over the course of the loan only benefits the bank -- not the owner. What is your opinion on this? Laura, Hanover, NH

Answer: Your parents are right. The 15-year fixed-rate mortgage does save you a lot in interest payments. For example, a $100,000 mortgage at 6.25% for 30 years will cost you $121,900 in interest if your marginal tax rate is 25%. The interest charge on a 15-year mortgage at 6% is $51,900. (The rate on a 15-year mortgage is lower than the 30-year rate.) So, it's a good move if you have the cash flow to absorb the higher monthly mortgage tab. The main advantage to you of the 30-year mortgage is that your monthly outlay is significantly less.

However, there is another option: The 13th monthly payment. Many people like locking in the lower monthly payment of the 30-year fixed-rate mortgage, but they don't want to pay the bank all that interest. They make an extra monthly payment during the year. You just tell the lender to apply the 13th payment to paying down principal. You cut your interest payments significantly this way. For instance, by making one more monthly payment on a 30 year fixed rate mortgage at 6.25% you'll shorten the life of the loan by 5 years 4 months, saving $27, 263 in interest.

The advantage of this approach is flexibility. Let's say your financial circumstances change--you lose your job, you need a new car, your children need extra tutoring--you can always go back to the 30-year payment schedule with no penalty. Just make sure there is no prepayment penalty with the mortgage if you go this route.

08/12/09 by Chris Farrell

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Automatic bill payment

Question: I understand that credit card companies take a dim view of certain credit-using behavior when deciding on your interest rate. For instance, I've read on this site that you shouldn't use credit cards at the salon, at bargain stores, or for purchasing alcohol. What about monthly bills, though? American Express offers double rewards points for setting up your monthly bills (utilities, cable, phone service) to be paid automatically with the card. I already have these bills set up to be paid automatically from my checking account each month anyway, so is there much difference in shifting them to my AmEx and gathering the extra rewards points (to transfer to frequent flyer accounts, or to help out with Christmas gifts, etc.)? And will this have a detrimental effect on my credit score? Suzanne, Rochester, NY

Answer: The biggest factor in determining your credit score is paying bills on time. (It accounts for 35% of the score.) So, it certainly doesn't hurt your credit score to pay them automatically, and it will probably boost it over time. By the way, it doesn't matter whether the bills are paid on time by check, automatic withdrawals from your checking account, or automatic bill paying through your credit card. Of course, the key to the latter method is paying the tab on your card on time.

The credit card companies are replicating the mistake of the recording industry. They are going after customers, changing the rules of the game without notice, closing accounts, raising interest rates, hiking fees, and cutting lines of credit. In trying to lower the overall risk of their credit card portfolios it looks like red flags were raised when customers shifted from shopping at premium stores to discount emporiums. The data mining into our habits and behavior is breathtaking--and disturbing.

Still, the industry would go out of business if it denied credit cards or hiked rates on everyone who on a monthly basis got a haircut, went to a liquor store, picked up household items at a bargain basement store and groceries at discount warehouse. What they're really looking for is abrupt changes in spending that might signal financial trouble. In a sense, with regular bill pay you are steadfast and you get the rewards you want. (There is another whole question about rewarding credit card companies for their behavior, but that is for another forum.) For more on credit card company behavior and your spending habits check out this terrific interview my colleague Tess Vigeland had with Charles Duhigg.

If you're responsible with money it's probably best to use a credit card with an automatic payment instead of a checking account. The reason is that so long as you are well under your credit limit you don't need to worry about overdraft fees and the like from the bank--and those fees are costly.

08/13/09 by Chris Farrell

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Debit cards safe

Question: A year ago, I made the decision to use my debit card more and credit cards less. I currently have no debt - good feeling! I recently heard a financial advisor on a radio show (maybe it was yours) say he only uses his debit card. He doesn't have a credit card and says he can use his debit card. I am aware of certain protections that come with credit cards: limitation of loss if you report a lost card promptly or refund if say you purchase tickets for a cruise that gets cancelled. Does a debit card provide all the same protection to me that a credit card does? Are there any important differences between a debit and credit card that I need to be aware of? Thank you. Char, Bainbridge Island, WA

Answer: Going debit is popular. For the first time consumers are using their debit cards more than credit cards. It's a good trend. I'd probably use my debit card 90% of the time whenever I pull a piece of plastic out of my wallet. But I'm skeptical of going all debit, at least for anyone that travels, shops online, and buys a big ticket item like a washing machine or refrigerator. In certain circumstances I prefer the greater legal protections of a credit card over a debit card. It's a judgment call.

Like you, the driving force behind the widespread shift from credit cards to debit cards is the desire to stay out of debt. A debit card is really an electronic checkbook linked to your checking or savings account. A debit card offers the convenience of plastic and merchants welcome the card. The real issue with a debit card is not to overdraw your account. Banks have learned that it's really profitable to let you overdraw your account and sock you with hefty overdraft fees.

Now, to your question about consumer protection: Credit cards have more legal protections than debit cards. But in practice Visa and Mastercard have a policy of insisting that their issuing banks voluntarily extend credit card protections to debit cards. To ensure that you get the "zero-liability" policy protections when you use your debit card press the "credit" button and sign for the transaction.

Here are the rules. By law, if your credit card is lost or stolen and you tell the card company before any unauthorized charges are posted to your account you're not on the hook at all. But if the unauthorized charges do show up on your bill--and that's how we usually find out about unauthorized charges--your liability is limited at most to first $50 of charges. It's good protection. The debit card rules offer up a tired security system. Your liability is limited to $50 if you tell the issuer within two days of finding the unauthorized charges. Between 2 and 60 days, your potential liability rises to $500. After that you could be on the hook for even more.

However, if your debit card has the Visa or MasterCard logo you don't have to report fraudulent activity within two business days. The policy of the two giants of the industry is that you won't be held liable for fraudulent transactions made over their networks. (That's why you hit credit and sign for the transaction.) But it's a policy, not the law.

In practical terms I'm comfortable with the Visa and Mastercard pledge most of the time. For everyday use around town, going to the grocery store and the dry cleaner, debit cards are safe. It's a sound habit to develop for not taking on debt and spending more than you earn. However, I prefer the deeper legal protections of a credit card when I travel. It's easier to book and protest with credit cards with rental cars, airfares, hotels, and the like. I'm a cautious with the wild west of the Internet so I'll use my credit card for shopping online. If I buy an expensive item I'd rather make sure everything is okay before paying off the bill in full.

So yes, you can go fully debit. But I recommend being a debiter most of the time, just not all the time.

08/14/09 by Chris Farrell

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A bond ladder

Question: Looking for safe place for investing which pays a higher yield than CD's. As a senior, in these uncertain times, I am a conservative investor. Miriam, San Diego, CA

Answer: Today's low yields are tough on savers, especially seniors looking to live off their savings. However, even though it appears that the recession is ending there is still a lot of risk in the economy and markets. So, I think the risk of reaching for yield is too high. I'd stick with government-backed savings, from Treasury bills to CDs.

One time-tested strategy is to create a "ladder" of CDs or U.S. Treasuries. The idea is to invest in securities with different maturities. For example, using the national CD rates published in today's Wall Street Journal you could buy a 6-month CD at 1.25%, a 9-month CD at 1.45%, a one-year CD at 1.61% and a three-year CD at 2.61%. Now, let's imagine in six months that interest rates are higher. You will have a short-term CD maturing at that time and you can reinvest the money at the higher rate. What if rates go even lower over the next six months? You're still earning a relatively better return on your longer-term higher-yielding CDs. You can also do this with Treasuries bought directly from the federal government at treasurydirect.com.

08/17/09 by Chris Farrell

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Online budgeting

Question: Do you have an opinion regarding online budgeting websites? I inquire as my fiancée has recently discovered such a website at www.mint.com through a magazine she recently received. Specifically, as she told me, this particular site requires that you input certain credit card account and bank account information and then it shows you where your money is spent. I am perhaps a bit on the old-school side of things, but it sounds kind of odd to me and I told her I would look into it. I figured that I would ask a trustworthy and reliable source for their opinion on this particular site. Thank you for your time and I look forward to your response. Justin, Sacramento, CA

Answer: I'm a fan of the new generation of online services for budgeting. I did an informal survey among some friends this past weekend and mint.com got good reviews. It's easy to use. The site aggregates all your credit card, savings, investment, mortgage, auto loan and other financial data. You mine the information to see where your money is going. The program also has built-in guides for attacking your most expensive debts first if that's an issue. Mint is a monitoring tool--you can only read the data, you can't transfer money around--that facilitates budgeting. You did hit on the big caveat to Mint. You do have to give it your user name and password to various financial accounts. There are competing programs, such as Wesabe.com, that let you export and upload the financial information yourself. It's more cumbersome, however. Here's an interesting take on Mint and security.

By the way, check out your bank or credit union. The competition is spurring financial institutions to offer better yet simple budgeting tools. I live in an online world, but there is nothing wrong with monitoring finances with paper and pencil, either.

08/18/09 by Chris Farrell

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First time home buyer

Question: I am considering buying a house (for the first time) - the government incentives to do this are a big factor in this decision- However, I am in my 50's - Is it a good idea to buy a house, or should I continue to rent ? I would be buying it with a friend, so we would be sharing the mortgage payments-( I don't know whether that would factor into your answer)--What are your views on buying houses at a later point in your life? Thanks for any input! Rachel, Athens, GA

Answer: I don't see any reason why you shouldn't be a first time homeowner in your 50s. All the normal economic caveats about owning versus renting apply to you, of course. The $8,000 credit is really a drop in the bucket when it comes to the overall cost of owning. So, make sure that the motivation and numbers work first--the $8,000 is a bonus.

A couple of other points. I believe that it's generally a good idea to be debt free in retirement. So, in your financial planning with your friend I would discuss the practicality of being aggressive with paying down the mortgage. Since you will be buying with a friend both of you should make sure that you're legally protected.

I posted some more details about home ownership versus renting in your 50s responding to a similar question on 7/21/09. Check it out.

08/19/09 by Chris Farrell

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Check out landlord

Question: The rental market in Miami has gotten very soft, and I can get a much better apartment for the same money that I'm paying now. Virtually all the rentals in Miami are condos. There are almost no purpose-built apartment buildings. So, while I'd like to move into a nicer rented condo, I don't want to get myself into a situation where I have to move out in 6 months because the owner is in foreclosure. If I asked to see the owner's credit report I would just get laughed at, so how can I research the status of a condo and/or its owner? Thanks for your help. Jenna, Miami Beach, FL

Answer: It's a good question. There are a couple of steps you can take, but none of them is foolproof. Yet just as it's a buyer's market for homes, it's a renter's market for renters. You can't ask your potential landlord for her social security number and latest credit report, but you can do some due diligence on the person and property before signing on the dotted line.

It's surprising how much research you can do on the web. For instance, websites like www.rentalforeclosure.com let you see if your potential landlord is in foreclosure. Of course, as we all know the foreclosure data isn't always complete. That's why it pays to go to the county tax collector's website. The property is registered here and you'll want to see is if there are any back taxes owed. That's a classic sign of financial trouble. Depending on how diligent you want to be there are a couple of other steps you can take. For instance, head over online to the county's Clerk of Deeds or Recorder's office. You can learn whether the landlord may be losing the property. You can research at the General District Court for any civil, criminal or other legal cases against the landlord.

I'd also look at the property carefully. Is it well maintained? If it's a larger building is the lobby busy? Buttonhole a couple of tenants and ask them how the condo is doing. People love to gossip and share insights about where they live--especially if there are signs of trouble. I'd also ask your potential landlord for a look at the condominium association's latest budget.

08/21/09 by Chris Farrell

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New credit card

Question: My MasterCard company (Citicards) recently sent me a letter saying that my card number had been compromised by a large-scale theft of credit card numbers. They sent me a new card, which has a different 16-digit number than my old card. When I called to activate the account, the customer service representative asked permission to "close" the old account and "open" the new one. Will this show up on my credit report as one 7-year-old account closing and a new one opening (thus hurting my credit history)? And whom do I call to find out? I am conscientious about paying it off in full every month - I would hate to have this hit my record negatively. Jennifer, Boston, MA

Answer: No, the change in numbers shouldn't impact your credit score. Your credit history should be transferred into the new account when the old one is closed. The other thing is that your balance and credit limit are the same (that's what happened with me after a similar shift following a credit card security breach.) So, there shouldn't be any negative impact on your credit ratio.

08/22/09 by Chris Farrell

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Delaying Social Security

Question: I keep reading that for every year after age 62 you delay SS your payments go up an average of 8%. Is this assuming you keep working? Thanks. Bob, St Paul, MN

Answer: You're right that your benefits go up by 8% a year by delaying retirement if you were born in 1943 or after. The increase in benefits stops at age 70. This part of the benefit calculation isn't dependent on your work history. It's age based.

The Social Security Administration's website has a lot of useful information. You can look this table to see the impact of holding off retirement after age 62 on an annual and monthly basis.

08/24/09 by Chris Farrell

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Closing credit card account

Question: I have a high interest credit card--24.9% with Bank of America, with a large balance $12,000. I am closing the account and Bank of America says the interest rate on paying off the balance is 5.5%. Is this ok under the new credit card law signed into affect? Dennis, San Diego, CA

Answer: My guess is that you got an offer of a lower interest rate in return for closing the account. It's common practice these days.

Although many finance experts recommend against closing an account because it will nick your credit score, I often think it's a good move on your part, especially if money is tight. It can be tough to pay off a large balance at a loan shark rate of almost 25%. A 5.5% rate of interest can make a big difference. Just doing a quick calculation, if you paid the minimum payment at 24.9% you would fork out $5,095 in interest payments alone. At 5.5% the interest charge adds up to $774. Hopefully, you can put even more than the minimum toward getting rid of the loan.

The new credit card law that comes into effect in stages basically protects cardholders from unexpected interest rate hikes and significant changes to the terms of the loan. It also bans some bad practices, such a universal default. (A "universal" default policy hidden in the fine print of a credit card agreement meant that if you were late on any payment to any creditor, the rate on your credit card could automatically jump to the default rate of 30%.) I would imagine in the future that so long as credit card issuers give their card holders sufficient, clear notice they should be able to offer a lower rate in return for closing the account.

08/25/09 by Chris Farrell

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Credit problems

Question: I think that my daughter is in deep credit card debt. I would like to pay off some of her credit cards. Is that possible to do on my own without alerting her? Martha, Asheboro, NC

Answer: I don't think so. My answer is going to be short because the solution is for the two of you to talk. I don't know the circumstances, but it's probably much easier for me to say than for you to do. But if you want to help her out she needs to know what's going on and the two of you should come up with a plan together. Good luck.

08/26/09 by Chris Farrell

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FDIC

Question: Is it possible to lose money in 2 FDIC insured accounts if you have less than $250,000 in each FDIC insured bank but greater than $250,000 total in multiple FDIC insured banks and both banks fail? Ken, Rhododendron, OR

Answer: You won't lose a penny if you have $250,000 or less in several FDIC insured banks and they all fail. Your money is safe. The FDIC has a good summary of its rules and regulations at it's website. (The booklet on the insurance fund also explains how you can have more than $250,000 at one insured institution and still be covered; it has to do with the types of accounts the money is parked in.)

This money pledge holds even though the Federal Desposit Insurance Corporation issued today a bleak report card on the nation's banking industry. The money in the deposit insurance fund fell by 20% to $10.4 billion in the second quarter. That's its lowest level in nearly 16 years. Still, no one has lost a penny on a banking account that comes under the insurance limits since the fund was created during the depths of the Great Depression. And although many unthinkable things have happened during the Great Recession, I'm confident that the FDIC insurance is good.

08/27/09 by Chris Farrell

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Special Drawing Rights

Question: Can an individual buy IMF SDR'S? If so, how? Thank you for considering my question. Willy, Medford, WI

Answer: Well, this is the first time I've ever gotten a question about buying the International Monetary Fund's Special Drawing Rights. That's why I couldn't resist answering it even though it lies on the financial fringe. The quick answer is no.

The SDR is a kind of currency unique to the IMF and its international dealings. The SDR was created in 1969, and its value is currently fixed according to a weighted basket of four currencies, the U.S. Dollar, the Euro, the Yen, and the British Pound. SDRs briefly moved out of international accounting obscurity into the global limelight last spring when the G20 ministers announced a dramatic increase in the amount of SDRs. The idea was to get the IMF to use SDRs as one more financial tool to combat the global downturn. There was also some discussion among international economics about turning the SDR into a global currency. It would supplant the dollar. Since then, however, the SDR has faded back into shadows of IMF accounting.

08/28/09 by Chris Farrell

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Saving for retirement

Question: I am a 55 year old divorced female who owns my own fledging consulting business. I have no retirement savings except Social Security. As part of my divorce many years ago I will be shortly be receiving my portion of my ex-husband's retirement fund as determined by a QDRO. [A Qualified Domestic Relations Order allows for the division of retirement plan assets in a divorce.CF]

I must roll it into a 401K to avoid any penalties of course but wonder what is best to do with it once it is in a fund. What is the best kind of 401K? Should I invest in some medium risk stocks as long as I can do something to guarantee the principal?

I am very much a novice at this and as you can probably understand by the fact that I have virtually no retirement savings -- have not been especially good about savings in the past. Lucy, Baltimore, MD

Answer: Congratulations on getting your consulting business off the ground. You're already taking on a lot of financial risk by being an entrepreneur. That fact alone suggests your savings should lean toward the secure and cautious. What's more, you say you're a novice at investing. That, too, suggests investing conservatively in a retirement savings plan. Last, you want to avoid the temptation of rolling the stock market dice to make up for lost time. Stocks are simply too risky for that kind of bet.

In thinking about your question maybe the best advice I can give is for you to pick up a copy of "Worry-Free Investing" by Zvi Bodie and Michael J. Clowes. Bodie is a leading finance professor at Boston University. Michael Clowes is editor at large at Pensions & Investments, a trade publication. The book was published back in 2003 in the wake of an earlier bear market in stocks and it remains a book for the times. Instead of asking, "How much money will I make?" they're wondering about the more fundamental financial question, "How much can I afford to lose?" Their basic message fits in with your question.

What's the answer? Their preferred investment for long-term retirement savings is U.S. government inflation protected securities. These securities preserve the purchasing power of a dollar against the ravages of inflation. Inflation is the enemy of long-term savers. Think about it: One hundred dollars loses half its value in 20 years with a 3.5% average annual rate of inflation. The same sum falls by about a third over two decades even at a modest 2% inflation rate. Of course, you'll take a lower payout on your savings in exchange for the inflation protection, but it's worth it. The authors deal with other conservative investments. They aren't stock-phobic, they'd just prefer that individuals roll the stock market dice only after looking after their baseline financial goals. I think a book like this might give you some needed guidance.

08/31/09 by Chris Farrell

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