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January 5, 2009

QUESTION: I carry a large balance on my Chase card. Previously my interest rate was at prime all round, inclusive of cash advances. I have not had any new transactions but Chase is now charging me a very high rate on the cash advance portion of my account. As this balance is not diminishing due to the bank applying my payments toward the lower rate transactions, would it pay me to apply in writing now for the application of payments to comply with the new legislation to be implemented in July of 2010?

-- Geoffrey S. Koonin

ANSWER: You can try, but don’t hold your breath. Issuers are expected to drag their feet in implementing the Federal Reserve’s new credit card regulations, particularly those that are going to put a serious dent in their profits. And it’s a pretty safe bet that issuers will be slow to implement the rule that says they must allocate consumers’ payments toward the highest-rate balances before lower-rate ones. Assuming your credit is good, a better option would be to take advantage of one of the rapidly disappearing low-rate balance transfer offers. Then, your whole balance will accrue interest at the same low rate, enabling you to pay it off faster.

December 30, 2008

QUESTION: I purchased common shares of Washington Mutual before JPMorgan "bought" them out. Since then, the ticker symbol has changed to WAMUQ. My question is this: What happens to these shares? Are they completely worthless now?

—Kevin Suess

ANSWER: Washington Mutual's (WAMUQ) collapse and takeover by JPMorgan Chase (JPM) is a complicated story with a simple if unsatisfying end result: Shares of Washington Mutual still exist, they trade over the counter, and for better or for worse shareholders still own them. Sorry.

As a poster child of the subprime mortgage boom, Washington Mutual Bank reaped huge rewards for its corporate parent company, Washington Mutual Inc., the sole shareholder of the bank business and other subsidiaries. Common shares, which traded under the ticker WM, were shares in Washington Mutual Inc., and before the waves of loan defaults sent everything crashing down, investors reaped fat and happy dividends. Those shares traded above $42 as recently as June 2007.

The stock price plummeted as the size and scope of the subprime crisis widened and investors realized that WaMu's fortunes were substantially built on a shaky foundation of risky adjustable-rate mortgages. The bank's business went into a death spiral as its loan losses mounted, and on Sept. 25 the Office of Thrift Supervision of the FDIC, the nation's main bank regulator, seized Washington Mutual Bank and put it into receivership. Shares of Washington Mutual Inc. had a final closing price of 16 cents.

On Sept. 25, the FDIC sold Washington Mutual Bank and all of the stock in the bank unit — the shares owned by the corporation, not investors — to JPMorgan. On Sept. 26, Washington Mutual Inc., the parent holding company, filed for Chapter 11 bankruptcy reorganization, canceling its common stock until the company is restructured. The problem for shareholders is that there's not much left to reorganize, and the value of the stock of a bankrupt holding company whose liabilities exceed its assets is minimal.

"Washington Mutual, Inc. is informing investors that, at this stage of its Chapter 11 case, it is too early to determine what recoveries will be available for investors," the company said in a prepared statement. At last check the shares went for a little over two cents apiece.

December 29, 2008

QUESTION: I moved much of my investments into "good" bond funds like DWS Short Duration (DBPIX) and Loomis Sayles Bond (LSBRX) several months ago only to have them decline by 25%. Should I stay in these funds expecting them to improve or move somewhere else?

--Jan Murphy

ANSWER: Bond funds are suffering the same forced selling pressure and aversion to risk that's causing prices of pretty much every security except U.S. Treasurys to decline. Both these funds have good long-term track records (though LSBRX has underperformed over the past year), and given enough time they should recover. The question you must ask yourself is how long are you willing to wait? A 25% decline requires a 33% gain just to get back to break-even.

Selling now and locking in losses might make sense if you need access to that cash in the next, say, five years. If that's not the case, pulling out of these bond funds for a couple of other comparable ones isn't likely to make you whole again anytime soon. You'd just be buying high and selling low.

December 24, 2008

QUESTION. I have money invested in six American Funds. They have all lost approximately 40%. Should I take out the remaining monies and put it in a CD, or keep the money in the mutual funds in hopes they recover some day? Obviously it is only a paper loss at this time, but the way things are going I'm afraid I am going to lose it all.

--Betty Kerns

ANSWER. The answer depends on several factors. Are these funds down much more than other mutual funds in the same category? If not, the problem might not be the funds per se but the lousy market. If that's the case, how many years do you have before you want to tap this money? If you have a long time horizon (five to 10 years), wait for the market to rebound rather than locking in those losses. The most common mistake investors make is to sell low and then buy again when prices are high.

In other words, one bad year for these funds amidst a very tough market isn't reason enough to sell. Before selling, also consider the funds' historical track records, their expense ratios relative to other funds and the overall record of American Funds as an asset manager. Also check out SmartMoney.com's mutual fund coverage for more background.

December 19, 2008

QUESTION: American Express has recently started chasing my balance. Among the reasons they gave was that "other cardholders who have shopped at establishments where you have recently done business have a poor repayment history." Since when can other people's credit habits be used to determine another's financial status? This is also hurting my credit score. Any advice, other than the obvious pay down balances, which I'm already doing?

-- A.M. Wilcox

ANSWER: Scary but true -- the fine print of that cardholder agreement you sign when applying for a credit card includes plenty of nasty surprises. Among them: the right to assess your creditworthiness by any means, including looking at the similarities between your purchases and those of problem cardholders. (It's called behavioral risk assessment, and it's one of many tricks credit card companies have reintroduced in recent months.)

Issuers aren't saying which purchases increase your risk level, so the best recourse is to adopt smart borrower behavior. Paying down your balances is a great start, but you should also polish your credit score by making payments on time and checking your credit report for errors. (Click here, here and here for resources.) Also, consider switching your spending to another card. Issuers are quick to offer enticements like lower interest rates and higher credit limits once they realize they’ve been abandoned.

December 17, 2008

QUESTION: I would like to introduce my 10-year-old grandson to the stock market, but I don't have a lot to spend. I thought about buying some penny stocks so that he could watch a number of different stocks instead of just one expensive one. Would this be a good idea?

--Kathleen Hilgart

ANSWER: Giving your grandson an early education in investing and financial matters is a laudable goal, but we would urge you not to do it through penny stocks because they don’t really represent how responsible markets work. A lack of listing requirements, liquidity and regulatory oversight make these stocks a poor fit for almost all retail investors.

A better idea would be to build a diversified portfolio of brand-name companies that happen to be trading at affordable per-share levels. The market’s collapse has left no shortage of these stocks. Indeed, we recently highlighted 11 stocks in the S&P 500, including Starbucks (SBUX) and Southwest (LUV), that go for less than $10 a share. If you purchased one share of each of these 11 companies it would cost you about $70 (plus brokerage commissions).

December 16, 2008

QUESTION: I have 1,000 shares of Dime Bancorp warrants held by Washington Mutual and have not been able to find out what has happened to them after WaMu was shut down. Can anyone tell me the status of these warrants?

-- Richard F. Wrobbel

ANSWER: Even though Dime Bancorp was purchased by Washington Mutual back in 2001, the holders of Dime Bancorp warrants still own them. That's about the only good news. The bad news: The warrants, which are derivative securities that give investors the right to purchase shares at a specific price within a certain time frame, aren't worth much, if anything at all. While JPMorgan Chase (JPM) bought Washington Mutual's banking business, it didn't buy the bankrupt holding company Washington Mutual Inc. These holding company shares now trade over the counter under the symbol WAMUQ. They were recently quoted at three cents apiece. According to Washington Mutual Inc., the company believes that the rights of Dime Litigation Tracking Warrant holders are limited to the recovery of securities through the issuance of Washington Mutual Inc. stock. Since that stock "will have little to no value going forward, WMI anticipates that there likely will be no recovery for holders of the Litigation Tracking Warrants."

QUESTION: Our mortgage broker contacted us this week because rates are down to 5% and asked us if we want to refinance. Currently, we have a 30-year fixed mortgage at a rate of 6.25%. What I wonder is, because of closing costs, should we wait and see if they will go lower or lock in at 5% fixed for 30 years. Does it appear, given the current market situation, that rates will continue to fall?

--Anonymous

ANSWER: Go ahead and jump on those favorable mortgage rates. According to Bankrate.com, the current rate on a 30-year fixed mortgage is hovering around 5.5% -- one of the lowest levels seen since 2005. There is speculation that mortgage rates could go as low as 4.5%, but that information is based on leaked details of a Treasury program that would only affect new mortgages and nothing is set in stone. Even if the Treasury’s plan went through, homeowners looking to refinance are unlikely to benefit. When looking to refinance, keep in mind that rates can fluctuate on a daily basis. To make sure you’re ready to pounce on a rate that appeals to you, collect all of your application materials and program your mortgage broker’s number into your speed dial.

December 12, 2008

QUESTION: The value of my Roth 401(k) is less than my contributions. If I take a nonqualified withdrawal, can I deduct the loss on my tax return? Is it a capital loss or ordinary loss? What form would it be reported on?

--Gary Groff

ANSWER: You can take a loss on a nonqualified withdrawal from your tax-exempted Roth 401(k), but there are limits on its utility, says Maureen McGetrick, a partner at tax consultant BDO Seidman. The loss would be recorded as a miscellaneous itemized deduction on Schedule A. In order to take the loss, the tax code requires a complete withdrawal of the account, and the amount of the loss would be the amount you put into the Roth, less the amount distributed. For example, if your contribution totals $100,000, and the value now stands at $80,000, you'd have a net loss of $20,000. The catch, says McGetrick, is that you can only deduct the loss to the extent it exceeds 2% of your adjusted gross income, so that total would be further reduced, and you may need more miscellaneous itemized deductions to get any benefit. Also, if you are subject to the alternative minimum tax, none of the above is valid, since the loss is an add-back for purposes of the AMT. "I think the best bet is to wait for [those 401(k) assets] to recover," she says.

December 11, 2008

QUESTION: If I have significant losses in some of my holdings, why would I not at a minimum sell and immediately repurchase them? Unless I am missing something I can't see why this would not be the standard process for losing positions you want to keep long term. Do you think if I used this method it would raise a red flag with the IRS?

--Pete

ANSWER: This method would trigger what's called the wash-sale rule, which disallows the loss if you (or your spouse) sell and then buy the same or "substantially identical" securities, including mutual funds, within 30 days of the sale. "When it comes to the IRS, there is no free lunch," says Shashin Shah, president of SGS Wealth Management, a Dallas financial-planning and investment-management firm. "If you want to sell a stock and then repurchase it, in order to lock in that loss you would have to stay out of the stock for 31 days. If you repurchase that stock during that period, that loss is disallowed."

Harvesting tax losses before the Dec. 31 deadline can make a difference at tax time. It's certainly keeping Shah busy these days. But every case is different and there's a sneaky new twist to the wash-sale rule this year. Since so many (or most) investors have losing positions these days, it's imperative to understand the wash-sale rule, and be aware that the IRS is trying to cast a wider net when it comes to this area of the tax law.

December 10, 2008

QUESTION: I was lucky enough to transfer my 401(k) funds into the lowest-risk option offered: a short-term fixed income that provides 5% growth. It consists of 56% SSGA Govt STIF, 7% each of JP Morgan Chase Global Wrap, Monumental Life Global Wrap, Royal Bk of Canada Global Wrap, as well as several other bank and life insurance company funds. My question is just how safe is this 401(k) option and what would need to happen to the economy for these to be affected? Are these nearly as safe as FDIC-insured CD accounts?

—Bob Bitter

ANSWER: Defining safe is no easy proposition these days, says Pam Hess, director of retirement research at Hewitt Associates, a human resources consulting and outsourcing company. First, nothing in the mix of investments in this 401(k) plan is insured by the Federal Deposit Insurance Corp., which protects bank account holders from old-fashioned bank runs in which everybody demands their money at the same time.

The bulk of this 401(k) is in a short-term investment fund, or STIF, which operates very much like a money-market fund, with low costs and a high level of stability, Hess says. The wrap products, known as stable value funds, are also pretty conservative investments, and are usually bond portfolios guaranteed by the insurance companies.

"Generally, the insurance company will guarantee that participants can access their money on a daily basis," Hess says. But in these uncertain times, when September saw the rare instance of a money market fund "breaking the buck," Hess says nothing is certain. "It's not an easy equation — what's safe and what's not," she says. "What we've seen in last few months is that the area of the market that has had the most problems is cash."

These funds aren't in imminent danger, but investors should be concerned if insurance companies start to fail. Given the government response to massive problems at AIG, a widespread collapse is unlikely, though not impossible. "Things could go wrong if participants all wanted their money out tomorrow — that could be tough," she says.

While a plan like the one outlined above was usually the most conservative 401(k) option, Hess says some employers are now offering Treasury-bond-based money-market funds, which won't pay out much, but which offer the most safety available.

December 9, 2008

QUESTION: Is Daimler responsible for the payment of a corporate bond even if Chrysler goes bankrupt?

--Ken

ANSWER: With the scope of any government rescue plan still up in the air, it's natural to worry about securities connected to the car maker. But based on all the information we could gather your bond appears safe to hold, even if Chrysler succumbs to the worst. A spokesman for Daimler, the German parent of the awkward and unsuccessful corporate marriage of Detroit and Stuttgart, confirms that all DaimlerChryler-issued bonds remain Daimler's responsibility. (Daimler sold majority ownership of Chrysler to Cerberus Capital Management last year.)

That's fortunate for bondholders, since the possibility of a Chrysler bankruptcy remains very real. In general, bondholders of companies filing for Chapter 11 usually get a fraction of the value of their bond holdings if a company emerges from bankruptcy. Bondholders usually get paid after secured creditors like banks but ahead of stockholders. It's explained here by the Securities and Exchange Commission.

Steven Lubben, a corporate bankruptcy expert and professor at the Seton Hall University School of Law in Newark, N.J., says bondholders, along with other unsecured creditors, generally shouldn't count on getting much money back, though they may get some fraction of their holdings reissued as convertible stock. Stockholders often get nothing.

"In a bankruptcy case, being in the middle would be being at the bottom," he says of bondholders. "It's better than being a shareholder of a company that's in Chapter 11, but not much. In a reorganization, it's quite common to convert unsecured creditors into new shareholders and lop off the old ones."

December 8, 2008

QUESTION: I have access to real-time quotes. I see a stock quoted at, let's say, $99/share. I put in an instantaneous buy ticket online and it shows I bought the stock for $101.36, let's say. I don't believe the stock price moves that quickly. Why the large differential?

--Joel S. Feldman

ANSWER: A real-time stock quote is no guarantee that you'll get the price you see when you place a buy order, for several reasons. First, stock prices can move quickly, especially if you're trading based on news. Second, a quote of $99 means that's the last price the stock traded at. Stocks carry bid and ask prices that indicate where you can sell and buy now, respectively. For a stock of that price, the spread between the bid and ask can be a dollar or more.

Third, bid and ask quotes are for specified numbers of shares. If you're buying more shares than are on offer at the ask price, your trade might be executed at a higher price. Fourth, trades placed online are sometimes held up for review by a broker (to determine, for example, if a margin account has sufficient buying power).

If you suspect you got a bad execution, ask your broker to review the trade. They'll have access to a detailed history of bid and ask prices at the time you placed the trade. (They might even provide you with that information, so you can see for yourself.) If they conclude that you're due a better price, they'll contact the exchange or market maker that executed the trade and have the price adjusted.

December 5, 2008

QUESTION: I was just downsized, and this tough market has me wincing at the thought of rolling over my 401(k). Should I wait it out?

--Michelle Russo

ANSWER: There’s no reason to wait it out. Rolling over your 401(k) is just a transfer from one holding place for your retirement savings to another. It’s not like changing mutual funds or selling a stock, in which paper losses become real ones. “There is no penalty for rolling your 401(k) into an IRA,” says Ron Roge, of investment advisory firm R.W. Roge & Co.

In addition, moving into an IRA has some benefits if you're looking to change investments, Roge says. “An IRA gives you more flexibility, because you’ll usually have more choices.” Many 401(k) plans are limited to a few investment options or a single fund family. See recent 401(k) articles at SmartMoney.com.

QUESTION: Is it smart to dump my small-cap and midcap losers and buy the now depressed blue-chip stocks, hoping that when the market does rebound the blue chips will come back faster?

--Joseph Tang

ANSWER: Moving big chunks of money around based on sophisticated trading strategies, be they market timing, sector rotation, long-short, growth vs. value, or, in your case, flight to quality, is usually best left to professional traders and registered investment advisors. Since it's impossible to know which asset classes, sectors and strategies are going to work at any given time, the soundest approach is to diversify your portfolio more broadly than ever and maintain a disciplined dollar-cost averaging plan. Avoiding a lump-sum investment lessens the likelihood of buying at a market top.

True, blue chips might come roaring back, but then let’s not forget the astounding bull run small caps so recently enjoyed. The small-cap benchmark Russell 2000 index more than doubled from 2003 to 2007. In more recent, and less pleasant, history, the Russell is off 40% (as is the S&P 500 index), while the blue-chip Dow Jones Industrial Average has fallen 35%. One could even argue that small caps have a better chance of racking up bigger gains much faster than the “quality” large-cap stocks. Then there’s the complicating reality that small-cap value happens to be the best-performing asset class over long periods of time. And as for midcaps, well, our SmartMoney screener has been spitting out some intriguing ideas lately, too.

So at this point it might be wisest to go with a so-called lazy portfolio, which typically consists of four to a dozen highly diversified and cheap index funds or exchange-traded funds. Money manager Merriman Berman Next publishes suggested lazy portfolios for free on its FundAdvice.com web site. Note that even their Fidelity Balanced portfolio still allocates about 25% to small caps alone.

December 4, 2008

QUESTION: I'm thinking about opening up an account with an online broker. Which ones do you prefer? I'm concerned about fees, account balances, minimum balances, etc.

--Robbie Pope

ANSWER: SmartMoney’s Annual Broker Survey is a great place to research online brokers. This comprehensive guide covers everything from commissions and fees to research and trading tools. Once you’ve narrowed down your options, make sure to read the fine print. Cheap trading commissions and other enticing offers often come with strings attached.

December 3, 2008

QUESTION: I'm 19 and in the military. I'm wondering if it's a good time for me to jump into the market. I received some extra pay and was thinking of getting a mutual fund. What would you recommend?

--Steven

ANSWER: It's very commendable of you to start thinking about investing and saving at such a young age. With stocks trading at depressed levels and given your long horizons, you should have ample time -- decades, really -- to weather the inevitable ups and downs that will eventually grow a small starting stake into a healthy nest egg.

A diversified mutual fund is a good place to begin. Individual stocks carry too much risk, plus the brokerage fees will put you in the hole from Day 1. You might want to start with an inexpensive no-load balanced fund that holds both stocks and bonds. You’ll get the benefit of professional management and exposure to two uncorrelated asset classes. As your portfolio grows you can check out our mutual fund center for additional ideas.

Importantly, don't forget to put your money to work a little at a time at regular intervals. That's a strategy called dollar-cost averaging. It helps reduce the chance of buying at a market top, a risk you'd run with a lump-sum investment.

QUESTION: I have been watching some inverse ETFs such as UltraShort MSCI Emerging Markets ProShares (EEV). EEV is based on the underlying MSCI Emerging Market Index and is supposed to move double the opposite direction of that index. Therefore, in theory, if the emerging-market index goes down 1%, then EEV should go up 2%. Over the last four months the emerging market index has dropped 50%. Therefore, EEV would've been expected to go up by around 100%. It hasn't. How can that be?

--Mike

ANSWER: You're right to be skeptical of leveraged ETFs. UltraShort MSCI Emerging Markets ProShares is a good example of why many experts don't recommend these for individual long-term investors. Take a look at EEV's prospectus and you'll see that its goal is "daily investment results," not necessarily long-term ones. On "a given day" it tries to do twice the opposite of the MSCI Emerging Markets Index. On some days it’s successful. For instance, on Dec. 2, EEV closed down 12% while the MSCI Emerging Markets Index closed up 6%. On other days it isn’t successful.

That’s because there are multiple moving and complex parts here. If a leveraged ETF has a string of losses, with the effects of compounding, those losses can have a significant impact on long-term performance. This can help explain why year-to-date EEV is up just 10% even though the index is down 42%. Bottom line? These ETFs, even though they're correlated with indexes, have the same problem as any other investment: Their strategies aren't guaranteed to achieve their goals.

December 2, 2008

QUESTION: I own a 10-year-old house, which is worth about $250,000 to $300,000. I want to buy a newly built house, which costs $400,000 and is located in a better school district. I just finished paying my mortgage on my current house. I'm not sure if I should go for the new house and get stuck in another 15- or 30-year mortgage. Also, this new house has a $100 HOA monthly fee. What will the impact of that fee be on the future sale of the house?

--Sue Yalla

ANSWER: Although home prices are looking much more attractive than they did a year ago, you need to keep in mind that selling your existing home may take some time -- and may not be worth the hassle. The perk to staying in your current home is that rather than paying for a new mortgage, you can save that money for retirement or put it toward a private school that offers a better education for your child (although, often times, private schools can cost just as much as those monthly mortgage payments).

If you're still hell bent on buying that new home, meet with a mortgage planner who can tell you what type of financial package you qualify for. Borrowers need to have a credit score of at least 700 to land a mortgage with a low fixed interest rate and minimal fees, says Dave Muti, author of "Mortgages: What You Need to Know." Then, meet with an appraiser who, for $250 to $500 on average, will tell you how much your home is worth, says Muti. Place your home on the market with an asking price that's 3% above the appraisal value, he says. That way you have some wiggle room to negotiate with buyers without selling the house for less than it's worth. While the house is on the market, speak to the seller of the $400,000 home and make an offer to purchase contingent upon the sale of your current home. Many desperate sellers are starting to accept these offers. Just be aware that there's no guarantee that you'll end up with the home, says Muti.

Homeownership association (HOA) fees, which cover costs like property maintenance and security, are only worth it if the other developments in the neighborhood have them. These fees can vary depending on several factors such as amenities (pools, parks, etc.) and location (like an upscale neighborhood), says Danielle Babb, a real estate analyst and professor at Northcentral University in Arizona. Before buying the home, ask the homeowner's association or the county or state's realtor association for documents showing the development's financial status. If fewer than 80% of the homes are sold and occupied, the association may be facing bankruptcy, says Muti. And that can send your HOA fees skyrocketing.

QUESTION: In an economics class we recently had a discussion on 801(k)s vs 401(k)s. What's the difference?

--Vanessa Mina

ANSWER: A 401(k) is an employer-sponsored retirement plan. Most employers offer some version of this savings account to workers. Click here to learn more.

An "801(k)" is a loose term that refers to dividend reinvestment plans, better known as DRIPs. DRIPs allow individuals to buy shares of a company on a regular basis and reinvest the dividends into additional shares. DRIPs are offered by hundreds of publicly traded corporations, especially large ones, including most components of the Dow Jones Industrial Average. Check individual company web sites for details. (Look under the "Investor" or "Investor Relations" tabs.)

There are several advantages to DRIPs. Many companies don't charge for this service, so participants save on brokerage commissions. Partial shares can be purchased, which is a plus if you want to buy a high-priced stock. Most DRIPs also require regular investments, essentially forced dollar-cost-averaging, which helps to spread risk and lessen the likelihood of buying shares at the top, as could happen with a lump-sum purchase.

December 1, 2008

QUESTION: Do the credit-card companies have to notify you that they're lowering your credit-card limit?

--Kevin D. Johnson

ANSWER: In the fine print in most credit-card holder agreements, the credit-card issuer states that it reserves the right to change its credit card's terms -- anything from the interest rate to the credit limit -- whenever it sees fit. Most of the time, however, issuers will send a notification about this change and when it will go into effect. This notice is often part of the monthly statement or sent as a separate letter.

Consumers have little leverage over the decision. One option is to close the account. However, that's not exactly a smart move because it can result in a lower credit score. Instead, call the credit-card issuer and explain that you'll use a competitor's credit card in place of theirs because of this change. About half the time, the card issuer will have a change of heart.

Those cardholders carrying balances will have less leverage in negotiating. Many issuers are less concerned about keeping customers as they are about eliminating their bad debt.

QUESTION: Why is it that investors are buying stocks in companies that are on the verge bankruptcy like AIG (AIG) and General Motors (GM)? Is there any benefit to buying at this price, and what would be the worst-case scenario of my investment?

--Mike Ghazala

ANSWER: Let's get right to the point: The worst-case scenario is you lose your entire investment. When a company files Chapter 11 the business is reorganized, but there's no guarantee shares will be worth anything once the company emerges from bankruptcy protection. Ditto for a Chapter 7 bankruptcy liquidation, in which a company's assets are sold off. Rules governing corporate bankruptcies generally dictate that secured and unsecured creditors -- banks, bondholders and the like -- get paid off first. Stockholders are last in line, and often there's nothing left by the time their turn comes around. If there are assets remaining, stockholders may receive shares in the newly reorganized company.

So why do investors buy shares of companies on the verge of bankruptcy? Some may truly believe the company will avoid disaster and bounce back, making the shares an attractive long-term investment. More often than not, though, investors are looking to make a quick buck on a short-term trade. In that case fundamentals are thrown out the window. Hedge funds and institutional trading desks are often involved in highly leveraged trades of these extremely volatile stocks. With such heavy hitters in the game, and so much uncertainty surrounding the companies, we recommend that individual investors keep their distance.

One other note: Even in bankruptcy a company's shares may continue to trade, often for pennies apiece. While the low price might be tempting, liquidity is spotty because the stocks are usually forced to trade over the counter rather than on a major exchange like the NYSE.-Protected Securities, known as TIPS, is to hedge against the corrosive effects of rising prices. The static interest paid out by typical fixed-income investments loses its buying power over time as the cost of goods increases.

That's why TIPS make sense in an inflationary environment. As inflation, as measured by the Consumer Price Index, rises, the principal of your TIPS is adjusted upward, as are the interest payments. The opposite occurs during periods of deflation, or falling prices. Some economists fear the U.S. could be facing a protracted bout of deflation.

Whether to buy or sell TIPS depends on what your aim is and where you think the economy is headed. If you're looking for near-term outperformance and think we're in for a prolonged slowdown, then it's not a great time to buy since inflation isn't a big factor when the economy stalls. As for selling, if you own TIPS that are near maturity it's probably best to hold on. A nice feature of TIPS is that you'll get back your original principal even if a declining CPI has pushed the adjusted principal below that level. With deflation a looming threat, that's a nice guarantee to have.

QUESTION: When I retire, is it possible to roll over my 403(b) into a Traditional IRA account. When I roll over the 403(b) into the Traditional IRA, would it be possible to invest everything in municipal bonds so I don't have to pay taxes when I withdraw the funds for retirement?

—Angela Tulshi

ANSWER: Similar to a 401(k), a 403(b) is a retirement savings plan primarily used by teachers. It is possible once you retire to roll over your 403(b) into a Traditional IRA account and invest all those assets in muni bonds. But that isn't the best use of either muni bonds or your IRA for two reasons.

First, once you start taking the money from your Traditional IRA it'll get taxed as ordinary income, says Michael Gibney, president of the Financial Planning Association of New Jersey. So, even if you have all of your IRA invested in muni bonds you will still have to pay taxes when you withdraw the money.

Second, IRAs already allow you to grow assets tax deferred. Therefore the tax advantages of muni bonds are wasted in an IRA. Instead, put muni bonds in taxable accounts. For recommendations of muni bond mutual funds, a good alternative to individual muni bonds, read our story.

See More Questions and Answers Here