Financial Q&A: Patience thins over auction-rate securities

Have a personal finance question? E-mail us at work@csps.com

from the April 28, 2008 edition

Q: I have a big investment in auction-rate reset bonds issued by an investment-management and mutual-funds company. I was parking the money there to invest. When I tried to redeem my money, however, they did not give it to me as they say there is no market. Have I lost all my money? What can I do?

M.B., via e-mail

A: You haven't lost your money. But you have become yet another victim of the national credit crisis, says Bill Larkin, of Cabot Money Management in Salem, Mass.

By way of background, Mr. Larkin notes that seven-day auction-rate securities are alternative short-term investments that are offered in three basic forms: taxable, tax-advantaged, and tax-free. These loans are collateralized by the securities held in the mutual fund's portfolio, which allows the security to hold a triple-A credit rating. Because these securities are collateralized, preferred shareholders are first in line to be paid in the event the fund needs to be liquidated.

The problem is that a number of large banks have decided to no longer support any auction-rate leveraged loan operations. With the banks already straining from the credit crisis, they decided they would step away from facilitating these auctions. Their lack of participation caused auctions across all spectrums of securities that have their weekly rates set to be unsuccessful.

The failure of these auctions does not mean your securities defaulted, says Mr. Larkin. It just means a proper auction that determines a fair short-term rate can no longer be organized.

As long as the preferred securities you currently hold are fully taxable, the likelihood of receiving your money in the next few months is very high. Investors tend to have long memories when it comes to negative events that affect their finances, and the mutual-fund firms that offered these securities are scrambling to solve this problem because it could potentially damage the company's relationships with clients.

Mr. Larkin suggests that you check the website for the Closed-end Mutual Association (www.closed-endfunds.com) that should be updating events as they occur.

Q: My financial adviser tells me this is the best time to invest, now that stocks are low. Is that true? Or would it be better to wait and see what happens with the stock market? If so, how long should I wait?

J.A., via e-mail

A: A month ago stocks were low and we have seen the market fall even lower in the very recent past. So "best" is never a good term to use, says Morris Armstrong, a certified financial planner in Danbury, Conn.

Still, he thinks it's OK to embark on a program of investing now.

And is it an OK time to look at individual stocks and say "hey, these look attractively priced?" Sure is.

Remember, any investment in assets carries some risk. However, the theory is that you are compensated through the return. Do a little homework and don't be afraid.

Questions about finances? Ask us at:Money & Values Q&A

The Christian Science Monitor

210 Massachusetts Ave.

Boston, MA 02115

E-mail: work@csps.com