Personal Finance Q & A
By Guy Halverson Staff writer of The Christian Science Monitor
Keep the mortgage, and the stocks Q. Should my wife and I sell our stocks to pay off our mortgage? We would still have about $5,000 in cash, plus our workplace retirement accounts. Were we to sell the stocks, however, we would be stuck with a substantial capital-gains tax bill. M.R., Boston
A. "Keep the stocks," says Tim Shmidl, a financial planner with Prism Financial Group, Overland Park, Kan.
"Your mortgage is probably in the 6 to 7 percent range, certainly under 8 percent," he says. "But you can earn 10 percent to 11 percent or more on your stocks," based on historical trends.
So you gain more from holding the stocks than from paying off the mortgage. "I would also keep the mortgage deduction for tax purposes," says Mr. Shmidl.
Finally, he asks, "why subject yourself to a big capital-gains tax?"
Q. I've read that instead of putting money in an index fund linked to the Standard & Poor's 500, a person should now invest in a fund linked to the Wilshire 5000 Index. Why? The S&P 500 funds, such as the Vanguard 500 Index Fund, continue to outperform the Wilshire 5000 Index. N.D., New York
A. "Yes, S&P 500 Index funds have been outperforming Wilshire 5000 Index funds, but the gap is narrowing," says Larry Solomon, research director for the No-Load Fund Investor, a newsletter.
The S&P 500 Index covers large-cap companies; the Wilshire 5000 Index covers the entire stock market. There has been a slight shift in the market away from large-company stocks to the small and mid-size companies found in the Wilshire index.
"If the market continues to broaden, then you will definitely want to be in a fund linked to the Wilshire 5000 Index," says Solomon.
Q US Treasury bonds are supposed to be safe investments. But a friend says that I could actually lose money in a Treasury bond fund if interest rates keep rising. Is my friend right?
S.F., Edison, N.J.
A Yes. Treasury bonds, if held to maturity, are guaranteed by the US government. But a bond mutual fund holds many bonds and is subject to market volatility.
If interest rates rise, then the price of bonds falls. The net asset value of a bond fund could then move downward, causing you to lose money.
Questions about finances? Write: Guy Halverson The Christian Science Monitor 500 Fifth Ave., Suite 1845 New York, NY 10110 E-mail: halversong@csps.com
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