S.N., Portland, Ore.
A: You shouldn’t have to do anything, says Morris Armstrong, a financial planner in Danbury, Conn. You should receive principal plus interest as stated when the CD matures. The Federal Deposit Insurance Corp. (FDIC), a government agency, insures bank deposits against the sort of calamity you have experienced at IndyMac. Deposits up to $100,000 are insured. The Securities Investor Protection Corp. (SIPC) is a private insurance program meant to protect you in the event that a brokerage holding your money-market account goes under but it does not protect against loss of principal in the money-market fund.
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Q: All of my investments are with AG Edwards and Wachovia. I’ve lost over $100,000 already. I know most people have lost money in today’s market, but I’m retired and not bringing in an income except from my investments. I need to stop the bleeding now. I do not want to buy any more of those 10-year penalty contracts. Any suggestions?
V.C., via e-mail
A: Eric Sheerin, a financial planner in Lenexa, Kan., has two questions for you: When was the last time you spoke with your advisers at either of the companies where your money is invested? How often do you meet with them each year?
If your advisers are not talking to you at least three times a year, in person, you may have the wrong advisers. Conversations with clients can be difficult in times like these, but they are critical.
Your tolerance for risk is not fixed and will change with your time horizon, market conditions, account balance, etc. It is time to have a candid conversation with the people who are supposed to be managing your money: reviewing the concerns you have about your portfolio and having them show you a step-by-step plan they have in place to protect your money from further market erosion.
“If they tell you they have no plan, or that you need to focus on the long term, run — don’t walk — to the door,” advises Sheerin. Find an adviser who will work with you to build a comprehensive plan to help you live the one life you have the best way you can.
Your concern over the 10-year penalty contracts is well founded and Sheerin recommends you not purchase any more.
Investing in a GNMA
Q: I’m 70 years old and in need of monthly income from my investments. What are the pros and cons of investing in a GNMA fund?
B.G., Pittsburgh
A: A GNMA is a bond made of a basket of residential mortgages from across the United States. Adam Bold, founder of The Mutual Fund Store (mutualfundstore.com), says their risks and rewards come from changes in interest rates because GNMAs are some of the longest-term securities available. When interest rates fall, the value of existing bonds rise.
Interest rates fell dramatically the last couple of years, and GNMAs performed well. People who took out 30-year mortgages at high interest rates refinanced as rates fell, turning their original mortgages into much shorter-term securities than originally expected. Holders of GNMAs got the yield of a long-term security with the volatility that characterizes short-term securities.
The opposite situation might exist now, says Bold. Interest rates are more likely to go up, and bond prices fall when interest rates rise. At higher interest rates, few people refinance mortgages.
An additional risk associated with GNMAs is that people overvalue the federal government’s guarantee of the securities. The full value of the guarantee is only realized when the bonds mature, typically in 30 years. This means you would be 100 before the guarantee fully kicks in. And the guarantee does not mean that the bonds’ value will not fall in the meantime, resulting in a loss if you sell the bonds before maturity.
If you want to invest in GNMAs, you should do so through mutual funds, not individual bonds, because of the diversification and professional management funds offer, Bold says.
Got a question? Submit it to Steve Dinnen at money@csmonitor.com. Dinnen’s Financial Q&A column appears the first week of each month.
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