On money

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

© St. Petersburg Times,
published October 14, 2001

Don't load up your portfolio with corporate bonds

Q. Eight months ago I bought $80,000 worth of bonds in ATT Canada Inc. that mature in March 2005. I paid $102 per $100 and recently they have been valued at half that. My broker says I shouldn't be concerned because I will receive my original payment if I hold the bond to maturity or it is called. Although I have received monthly interest from the beginning, I am concerned about the price drop and wondering how low it can go. Is my broker correct, and I can stop worrying?

A. You can stop worrying if you have a very large bond portfolio and this investment represents only a very small percentage of your holdings.

You should not buy individual corporate bonds unless you have enough money to assemble a diversified portfolio. Even if they are highly rated, corporate bonds from a single issuer should never make up more than 5 to 10 percent of your portfolio. In addition, your holdings should be diversified by industry so you don't have too much money in a single sector such as telecommunications.

Your broker is correct that bond investors get their money back at maturity, if the issuer does not default. But as the economy weakens, the risk of default grows, particularly among companies that are not in top-notch financial condition. Bond-rating agencies attempt to assess the risk of default in the ratings that they assign. If safety is your highest concern, you should stick with AAA-rated issues. Many investors are willing to give up some safety in exchange for higher yields. But as you move down the rating scale, it becomes even more important that you keep your portfolio diversified.

Greg Ghodsi, a broker with Robert W. Baird & Co. in Tampa, offers this rule of thumb: For highest-quality bonds, limit your holdings to 10 percent for a single issuer. For lower-quality bonds, such as your ATT Canada holdings, which have a BBB rating, limit yourself to 5 percent.

Q. My grandsons, ages 11 and 7, have gotten $14,000 and will be receiving $300 a month until they are 18. We're looking for a safe long-term investment that can be taken out in five to seven years without a penalty. This will probably be used for college. What do you suggest, and whose name do we put it in?

A. Take a look at the 529 college savings plans available in most states. The investment income is tax-free if the money is used for college. Most states offer several investment options, some safe and some involving more risk. Generally these plans are open to residents of any state. You can read more about them at www.collegesavings.org.

Florida still doesn't have a savings program ready, although the Legislature authorized one two years ago. But it does have the Florida Prepaid College Program, which guarantees tuition. The next enrollment period begins Monday and runs through Jan. 25. Call (800) 552-4723 for details.

If your top priority is safety, another option would be U.S. savings bonds. In particular, interest on savings bonds purchased in the name of the parent may be tax-free if the bonds are cashed to pay college tuition.

Still another option would be to open a bank or mutual fund account in the name of each child. I don't recommend this if there is a chance that your grandsons will be eligible for financial aid.

Q. Should my financial goal still be paying down my high-interest credit cards, or should I be getting some sort of CD or investing in the stock market?

A. If you have high-interest debt, getting rid of it should be a top priority. Reducing debt improves your net worth just as much as adding to savings. I think it's very important to have an emergency fund with at least enough to pay a couple months' expenses. If you have an emergency fund, you reduce the possibility that you will have to take on additional high-interest debt.

Online money map

If you find company annual reports valuable in researching your investments, you can find dozens available for free through World Investor Link's annual report service (http://vcall.ar.wilink.com). The site allows you to download reports or request that they be mailed to you.

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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