Queuing Up For the Answers

One of the most popular features at Work & Money is the Question & Answer column, generally found on the page to the right, every Monday.

Our personal-finance correspondent, Guy Halverson, sorts through the mail bag each week, extracts a sampling of questions from readers, and puts them to the experts.

What to do with an inheritance? What investment strategy is safest?

Since space permits only two Q&As each week, a lot gets left in the bag. So today, we've expanded the feature. Keep the questions coming, and we'll do it again.

Q Due to a long-term disability (which has now been healed), my finances have been almost completely wiped out.

I am 54. My wife and I can invest about $100 a month until I get a job (after nine years of unemployment).

All of our real estate and other assets are long gone. Our savings have been reduced to around $5,000, earning about 2 percent. Any suggestions?

- J.B.,

Beverly Hills, Calif.

A At age 54, you still have many productive years ahead of you in which to rebuild your finances, says Tim Shmidl, a financial planner with Guardian Group, in Overland Park, Kan.

Even after retiring, many individuals choose to take on part-time work "that they enjoy doing right into their 70s," he says.

For starters, Shmidl suggests that you shift the $5,000 savings account into a money-market mutual fund, which should pay you around 5.25 percent.

He would also put your monthly investment into a solid growth/income mutual fund. Mutual Beacon, a Franklin-Templeton fund (800-632-2350), requires only $25 a month in a systematic investment plan. The fund is earning about 11 percent, year-to-date.

Also, the Investment Company of America Fund (800-421-0180) is up 13 percent this year. It requires only $250 to open and as little as $50 a month.

Finally, moving from your area may be too drastic a step, Shmidl, says, but if a relocation to a less expensive area were ever offered, you might want to quietly consider the possibility.

Q The largest portion of my savings is in two American Association of Retired Persons mutual funds, which have done well.

The remainder is in two annuities. I am living on my pension and Social Security, while drawing on investments for occasional trips, etc.

Do the mutual funds represent too large a portion (75 percent) of my savings. Should I be more diversified.?

- N.L.,

Sequim, Wash.

A "Your question is hard to answer because we don't know what types of mutual funds you have," says John Markese, president of the American Association of Individual Investors, Chicago.

"The issue is never just what percentage of assets you have in financial markets or how many funds you have, but always, what do the funds cover and how suitable are they to your individual risk-tolerance and income goals," he says.

If, for example, one of the funds is a US government bond fund, and the other is a broad-based stock fund covering the Russell 5000 index of stocks, then you would be considered well-diversified, says Dr. Markese.

If your funds are performing well, and don't duplicate each other, then you are probably on firm ground. Just make sure the funds don't overlap each other.

Q I am in my early 20s and thinking about investing in mutual funds.

My employer doesn't offer a 401(k) retirement plan or a pension plan.

Should I start out with an individual retirement account (IRA) or a regular mutual fund?

- C.J.,

Jersey City, N.J.

A "Start up an IRA," says Lewis J. Altfest, who heads up Lewis J. Altfest & Co. in New York.

The amount set aside for the IRA (up to $2,000 for an individual), is tax-exempt. Moreover, no tax is due on the earnings until you withdraw the funds.

"With your combined state and local taxes, you are probably in the 28 percent tax bracket," says Mr. Altfest. That means that you would actually contribute only about $1,400 out of your paycheck. In effect, Uncle Sam kicks in the rest, thanks to your tax deduction.

Altfest recommends a "solid growth fund, such as Baron Small Cap Fund." (800-4421-3814, up 16 percent this year.) The fund requires a minimum investment of $2,000, or $500, plus $50 a month until the account reaches the $2,000 level.

Q I never purchased more than a few shares of stock in any company and, then, with the reinvestment services offered, let them build up over the years.

The portfolio is now quite substantial. For example, my original investment of 300 shares in Northwest Utilities at $7 per share is now worth over $20,000.

I have stopped the reinvestment program.

I now give my son and daughter each a check for $10,000 a year, out of my stock. Any thoughts on what I've done and what I'm now doing?

- F.S.,

Beverly, Mass.

A You have done an "excellent job of investing," says Charles Carlson, editor of the DRIP Investor, a newsletter published in Hammond, Ind. .

The results "show the power of compounding and stock dividend reinvestment plans over time," says Mr. Carlson.

Many companies allow you to buy additional shares of stock through reinvestment of dividends or systematic cash investments. These are called DRIPs (dividend reinvestment plans).

If you are selling stock to give your children $10,000 gifts, Carlson says you are seriously reducing the value of your estate by incurring capital gains taxes. If the money is coming from dividend earnings, however, there's no problem.

By avoiding capital gains taxes, the stock's cost-basis is "kicked up," that is, given a more favorable tax treatment, within the estate. But if that is not possible, then just "keep doing what you are doing," says Carlson.

To learn more about how to put a DRIP plan together, check out "Chuck Carlson's 60-Second Investor" (McGraw-Hill, $12.95).

Q I want to sell some shares of a small company. The company says its stock can be bought and sold on the "pink list."

I don't know how they should be priced or where to find the pink list and how much I'd have to pay to sell them.

What's the best way to take care of this?

Name withheld,

via e-mail

A You are referring to what are called "pink sheets," which are lists of stocks traded on the over-the-counter market.

Pink sheets contain hundreds of companies whose prices are not included in newspaper stock quotations.

"Just go to any broker, bring in your stock certificate, and the broker will handle the sale," says a broker with Merrill Lynch & Co., in Westfield, N.J.

You will have to pay a commission on the sale. But the whole transaction can be handled fairly quickly.

With Merrill Lynch, for example, current buy and sell share prices can be pulled up online.

Q Diversity is not necessarily safety. The more diverse - for example, investing in a world mutual fund - means that one is more vulnerable because if anything economic goes wrong anywhere, then the fund suffers. Right?

- J.B.,

Gansevoort, N.Y.

A The important point you missed is that investing in a world fund, "is only one part of the diversification picture," says Stephen Savage, managing editor of Value Line, a mutual-fund investment service.

"You want to have a broad sense of diversification," that includes different investment instruments, such as stocks and bonds; different investing styles, such as buying for value, or growth; while also ensuring that you have picked the best funds in any particular investment category, he adds. In the case of your world fund, Value Line says it has "average risk."

Q I inadvertently got into a 457 plan instead of a 403(b) retirement plan.

The biggest drawback seems to be that when I retire I won't be able to roll my 457 into the IRAs that I have.

Since you can't move 457 money does that have implications for which ones I should spend out of first?

- B.W.

Charleston, Ill.

A"I usually recommend that clients spend down their 457 plan first, since many of these plans are underperforming other types of investment plans and have high expense ratios," says Gary Schatsky, a fee-only financial planner in New York.

Section 457 retirement plans are for employees who work for state and local governmental agencies. They cannot be rolled into an IRA.

Typically, says Schatsky, they offer "choices that are not as comprehensive as the 401(k) plans offered by private employers, or the 403(b)s offered by nonprofit groups."

Workers in 457 plans should lobby their bosses to upgrade the plans, a number of financial experts say, because they usually lack the necessary flexibility.

Money Market Fundamentals

Q Where do I find a rating on money-market funds so that I can pick the best?

Do these operate like a checking account?

I also would like to earn more from a cash account than what I'm getting from my bank.

- J.B. via e-mail

A Most money-market accounts provide check-writing privileges, although you will need to make certain before you open an account.

Usually a minimum check amount is specified, such as $250, or $500 or more.

Money-market accounts are like checking accounts, although they are not federally insured. But they are considered very safe.

The funds invest in short-term financial instruments. The share price virtually always remains the same, at $1.

Mutual-fund accounts pay about 5 percent. Bank money funds pay less, about 3 percent, and often require high balances.

For a list of top-performing money-market mutual funds, see the Money Fund Reports, published by IBC Financial Data, at (508) 881-2800. (See chart below.)

Perhaps your library has a copy. You can also ring up their Web site: www.ibcdata.com/mfs/

Fund Spotlight

Top performing money market funds as of July 14

Minimum ------- 7-day yield -------

Fund investment simple compound

Strong Step 1 $1,000 5.68% 5.84%

800-368-3863

Aon Funds 1,000 5.41 5.56

800-266-3637

Kiewit 10,000 5.41 5.56

800-254-3948

Transamerica Premier 1,000 5.38 5.52

800-892-7587

TIAA-CREF 250 5.37 5.51

800-223-1200

Marshall Class A 1,000 5.36 5.50

800-236-3863

Janus 2,500 5.31 5.45

800-525-8983

Lake Forest 2,500 5.31 5.45

888-295-5707

Fremont 2,000 5.29 5.43

800-548-4539

JP Morgan Prime 2,500 5.29 5.43

800-766-7722

Source: IBC Financial Data Inc.

WHITNEY DODDS WOODRUFF

Just how good an investment is a money-market fund?

- Name withheld, New York

A A money-market fund is a good type of savings account, not an investment.

As noted by Andrew Tobias, in his classic book, "The Only Investment Guide You'll Ever Need," once you subtract the inflation rate and taxes from your earnings, you have little left over.

A money-market fund is a place to park money for short-term purposes, such as saving for a home.

For investing, think stocks and bonds.

Questions about finances? Write:

Guy Halverson, The Christian Science Monitor

500 Fifth Ave., Suite 1845, New York, NY 10110

E-mail: halversong@csps.com