1. Archive

Bad timing illustrates need for diversification

Q. I had my IRA invested in the Kemper U.S. Government Fund. Last July my stockbroker advised me to take it all out and buy four utility stocks and one corporate note. I gave her $36,917 and now it's only worth $34,054, while the interest I'm getting is less than I was getting from Kemper. I need this income to meet living expenses. Did I do wrong by leaving Kemper? Would selling now and reinvesting on my own be wise? If I did sell, what should I buy?

A. Talk about bad timing! You jumped onto the utility bandwagon just before the analysts slammed on the brakes and utility stocks shifted into reverse. No wonder your portfolio is suffering from whiplash.

You don't say anything about other savings, so I presume that this account represents most of your financial assets. If it does, I don't think individual stocks and corporate notes are appropriate investments for you. I think you would be better off sticking with mutual funds or individual Treasury securities.

Selling part of your shares in the government fund was not a bad idea because it is risky to have all your money in one fund. However, you did not achieve much diversification by simply swapping your fund for utility stocks. You would have been much better off to have exchanged all or part of your shares in the government fund for shares in other Kemper funds. I question whether your broker was more interested in collecting commissions than in looking out for your well being.

I suggest that you sell your utility shares when you have figured out a better use for the money. One possibility would be to divide your portfolio three ways, choosing a growth-and-income or balanced fund, a high-yield bond fund and a short-term or intermediate-term bond fund. These funds will fluctuate in value, but they should be less sensitive to rising interest rates than either a government bond fund or utility stocks. An ultra-conservative alternative would be a portfolio of Treasuries that you intend to hold to their varying maturity dates.

If you are willing to do your own research, you can choose your own investments. If not, I'm sure your broker would be happy to advise you because revamping your portfolio will involve a whole new round of commissions.

Q. I read that the Federal Reserve Bank raised short-term interest rates a quarter of a percent, but my bank did not raise its CD rates at all. Why not?

A. When the Fed raises short-term rates, you can expect to see a general trend toward higher bank rates. However, individual banks are free to set their own savings rates. Usually they lower rates more quickly than they raise them in response to changes in the overall financial markets.

One consideration in setting savings rates is loan demand. You can expect your bank to raise its CD rates when it wants to attract more money to lend to borrowers. If a bank is getting all the deposits it wants at current rates, it has no reason to pay more.

Q. I am confused as to how to handle my 1993 tax return. I received my profit sharing in a lump sum from a previous employer. I took the check to my bank and the bank invested half the amount in an IRA. I kept out the other half to pay off some bills. I am 69 and have only my Social Security. My question is, must I claim the full amount of the check on my return or just the amount I kept out to pay bills?

A. You do not owe any tax on the money you rolled over to an IRA as long as you keep it there. Your company should send you a Form 1099-R that shows the total amount of your distribution. You report this amount on the front of your Form 1040, then subtract the amount of the IRA rollover to get the taxable amount.

It's possible that your distribution was more than the amount of your check. Look at the 1099 to see if your employer withheld any income taxes. If so, the amount withheld is included in the taxable part of your distribution, but also is reported on your return as tax already paid. If your only other income is Social Security, you probably are eligible for a refund of at least part of any tax you paid.

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. Questions should be sent to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.