Navigating Troubled Times: Answers for Readers

provided by

With the cloud of uncertainty still looming over financial markets, hundreds of readers responded to an invitation to submit questions about the effect on their personal finances. And several recurring themes emerged. Many individuals are still concerned about the safety of their money market mutual funds, as well as the specifics behind the alphabet soup of insurance, from F.D.I.C. to S.I.P.C. Some are worried that they will not be able to get student loans for college, while others have questions about their retirement funds. Answers to many of these questions appear below.

Getting a Student Loan

I am a recent college grad and have been planning on going to law school next fall. How will the crisis affect my ability to get loans? — Adam Sinton

Getting a federal loan should not be a problem. Congress passed legislation that essentially guarantees the availability of federal loans for both the next two academic years: 2008-9, and 2009-10. Colleges can also fall back on the Direct Loan program, where students can borrow directly from the government.

But the amount on federal loans — which include Perkins, Stafford and PLUS loans — is capped, so a lot of borrowers must rely on private loans, too. Securing a private loan will probably be more difficult than it has been in the past because providers will suspend their programs as they run out of liquidity. And the loans that are offered will almost certainly become more expensive.

Mark Kantrowitz, who runs the comprehensive college planning site finaid.org, said he would not be surprised if interest rates on these loans jumped by 2 percent in October. “Interest rates on these loans will increase as the lenders pass on their increased cost of funds,” Mr. Kantrowitz said.

Making College Savings Secure

My daughter goes to college in less than one year. — We had almost $30,000 in mutual funds for her. I haven’t even looked at the balance now — I am too nervous. What should I do to protect the money in there for her college costs? Thank you for any advice! (The money is invested with TIAA-CREF.) — Randi Millman-Brown, Ithaca, N.Y.

With college just a year away, your daughter’s college savings should have been allocated to more conservative investments by now. But if you still have a lot of exposure to stocks, it is probably wise to start selling the riskiest pieces of that portfolio — gradually and systematically — and to reinvest that money into one of the most conservative investment options on your investment menu. If your mutual funds are in a 529 college savings plan, it probably offers a money market mutual fund option, or another investment suitable for such a short horizon. It’s probably best to check in with a financial adviser if you are still unclear on how to proceed with a strategy to reduce exposure to stocks.

Safety of Bonds

I’m 75 — are my bonds safe? Everybody in my senior complex is panic-stricken. What should we be doing? — Anonymous

First, keep in mind that as long as you hold your bond until maturity, it doesn’t matter how much the price swings. As long as the company remains healthy, and you hold the bond until maturity, you will get all of your money back. So you want to be comfortable with the fundamentals of the company issuing your bond. If you are confident your bond is not issued by the next Lehman Brothers, stick with it. If you own a bond mutual fund — say, in your 401(k) account — the value is most likely down. But it should recover over time.

Some readers were also wondering whether it made sense to deploy new money into bonds. At the moment, the only bulletproof bonds are Treasuries, which are issued and backed by the U.S. government (so you had better have faith in Uncle Sam). But since a flood of investors has rushed into these investments, it has pushed their yields down significantly. Some Treasuries — with maturities in the one week to three-month range — are yielding anywhere from 0.10 percent to 0.50 percent. Right now, investors aren’t concerned about earning money; they just want to know their money is safe.

In fact, some investors have paid a premium — meaning they’re paying more than the face value of the bond — to purchase a Treasury bill with an extremely low or negative yield. (Negative yield means you’re paying more for the bond than you will get back at maturity.) “That is unheard-of,” said James Grady, director of fixed-income trading at TD Ameritrade. “That has never happened before.”

If you are thinking about parking your cash in Treasuries, think about it how long you want to tie your money up. A lot of investors have been pouring their money into these securities, and then selling at a loss so that they can get back into the stock market, Mr. Grady said. As we have seen today, the market has already recovered a portion of Monday’s losses.

Corporate bonds are really illiquid right now, as are many municipals. But Marilyn Cohen, of Envision Capital Management, said there are some safer municipal bonds, like those that are issued by transit authorities. They tend to do well during economic downturns because more people rely on mass transit, she said. “Escrowed-to-maturity municipals” are also pretty solid, she said, because the payments that must be paid to investors over the life of the bond are held in an escrow fund, usually comprised of United States government securities. A prefunded municipal would also fall in this category, Ms. Cohen said.

Money Market Funds

In your opinion how safe are money market funds with the volatile market? — Charles Ziga

I recently pulled out of the mutual fund I had invested in and put everything into a money market account. I have no background in finance, so I’m trying to get a grasp on this situation solely on what I’m reading in the papers. Is my money safe in a money market account? — Lara Maurino

Last week on the Oprah show, Suzi Orman said (and I paraphrase): If your money is in a brokerage that is not F.D.I.C.-insured, you’d better get it out now; this is serious. My question is, how safe is one’s money in a cash reserve account that is S.I.P.C.-insured? — Marion Roberts

There is still a lot of confusion about money market mutual funds. The Treasury Department has said it will insure the shares of all money market investors held as of Sept. 19, as long as the fund company takes part in the program. You should contact your money market fund directly and ask whether it is taking part. The insurance program will last for three months, at which time the Treasury will review the need for continued coverage. If the markets are still nervous, the program will probably be renewed through next September.

When it comes to money market funds, it is probably wise to stick with larger companies. Many investors use the funds offered by their brokerage firm because it’s convenient to transfer money between accounts. But you should make sure your money market account is with a large, diversified money management company that would have the resources to make you whole, even if its funds ran into trouble. Companies like Fidelity and Vanguard fit into this category. And many other companies have come out with statements assuring investors that their money market mutual funds are safe.

A money market deposit account, on the other hand, is something entirely different. It is an interest-bearing bank account that is insured — up to $100,000 per account and up to $250,000 for some retirement accounts — by the Federal Deposit Insurance Corporation. Joint accounts are insured for $100,000 per account holder.

The Securities Investor Protection Corporation, on the other hand, protects assets if there is a problem at your brokerage firm. For instance, if your brokerage firm went bankrupt or was acquired by another firm — and assets went missing — the corporation would insure an account up to $500,000. Of that amount, it can insure up to $100,000 in cash. But the maximum amount covered can be much higher. For instance, if you have a brokerage account, a joint brokerage account with a spouse, an I.R.A. and a 401(k), each account would receive up to $500,000, totaling $2 million in protection.

Keep in mind that the S.I.P.C. does not cover investment losses, nor does it cover investment fraud.

Page 1 | 2