Here are three questions from The Birmingham News readers:
Question: Are investment grade bonds riskier than the stock market? V. F.
This reader commented, “As we all know the stock market has both gyrated and gone sideways in the last decade. Yet when I seek to invest in A to BBB corporate bonds I am asked if I am aware of how risky my (Bank of America, Genworth, BP, Southwest Airlines etc.) bonds are. My reply is, ‘You wouldn’t tell me that my investment was risky if I invested in an S&P 500 Index mutual fund.’ I find this more risky than BBB bonds in the current environment. To me the risk in these relatively high yield (yet investment grade) bonds are primarily that of default. What’s wrong with my thinking?” This reader is correct in thinking that, theoretically, investment grade bonds are less risky than investing in the stock market. As with any investment, it’s important to diversify your holdings so that you don’t have too much money in any one bond or stock. There have been plenty of cases where investment grade bonds have, in fact, defaulted and the investors lost all of their money. I would be particularly concerned about holding bonds of the big banks as it appears investors are not being fully informed of their true financial condition as I discussed in last week’s column.
Question: What’s the best tax strategy for the Alabama 529 plan? R. J.
One reader has about $50,000 in the New Mexico 529 plan and understood that if he transferred the funds to the Alabama plan, he’d receive a tax benefit of $500. His plan was to transfer all of the money before the end of the year. His question was, “Is that the right thing to do?” The great news is that Alabama now has one of the best 529 college savings plans in the country when you use Vanguard as your option as the custodian. Alabama also provides a tax incentive in the form of a state tax deduction for the deposit or transfer of up to $10,000 per year. My advice to this reader is to transfer $10,000 before the end of this calendar year; then transfer another $10,000 in January of next year; then $10,000 each following January until all the funds have been moved. By doing this, he’ll increase his tax benefits from $500 to $2,500 or more.
Question: Is Federal Reserve Chairman Ben Bernanke in trouble? G.C.
In last week’s column, I discussed that the Federal Reserve had secretly loaned the big banks $7.7 trillion of bailout money in addition to the $700 billion granted by Congress. One reader was outraged and asked, “What is being done about this situation and is (Federal Reserve Chairman) Bernanke in trouble over this situation?” First, I do not believe Chairman Bernanke exceeded his authority even though this was by far the greatest extension of lending in the Federal Reserve’s history…so he’s not in any legal trouble. By keeping the loans a secret from members of Congress, he may very well be in political trouble and his days may be numbered. In truth, he may have saved the world from a global financial meltdown. What’s most troubling is that the big banks took advantage of the near interest-free loans to ensure their way of life was essentially unchanged and today they’re 30% bigger than when they were ‘too big to fail’. Finally, don’t expect our congressional representatives to do anything about this until there is a very public outpouring of outrage or until there is another crisis.