Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 11, 1990 TAG: 9006080829
SECTION: BUSINESS PAGE: B-5 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Medium
I'd like to invest toward my granddaughter's education and request information as to steps to take.
A: The state has not offered Virginia College Savings Bonds since the initial issue in June 1989.
Wheat First Securities was an underwriter for that first issue and its spokesman, J. Cameron Hoggan Jr., knows of no plans for sale of more bonds in the immediate future. He said only a few of the original bonds come on the secondary market for resale.
The bonds were popular because they were available with face values as little as $1,000 and because they were not subject to taxation.
Saving for college is no different from investing for any other long-term goal, however.
If your granddaughter is young, you might put some money in a stock mutual fund hoping that it will grow faster than the cost of a college education.
If she will soon enter college, you will want to stick with income investments such as money market mutual funds or zero coupon bonds.
\ Seek diversity
Q: In May 1987 I invested $12,000 at $10 a share in Massachusetts Financial Services Government Market Income Trust self-directed IRA (closed end). Then in June 1988 I invested $1,300 (130 shares at $10 a share) in Putnam Intermediate Government Income Trust.
My last statement for March 16 to April 16 said the average yield was 7.48 percent.
My total account value changes so much each statement. It has been as high as $16,102.21, but last month it dropped to $14,915.25. It is very depressing when it is up then drops down. Can you find out if this is a good investment?
A: Your two investments are very much alike. Both are closed-end funds that involve a set number of shares in a fixed portfolio of securities. This contrasts with traditional open-end mutual funds where both the number of shares and the contents of the portfolio fluctuate.
The shares of closed-end funds trade on the New York Stock Exchange like stocks, so the values can go up or down. In most cases, shares in closed-end funds have dropped from the original selling cost.
Like other shares traded on the exchange, a commission is charged. So only about $9.50 of your $10 was actually invested.
Richard Wertz of the Roanoke office of A.G. Edwards & Sons said the Putnam recently traded at 8], which is less than its net asset value of $8.73 a share.
The Massachusetts recently traded at 8[, also a discount from net asset value of $8.39 a share.
Wertz said that the income, if anyone purchased at the current prices, would be 11 1/2 percent and 14 1/2 percent, respectively.
Nothing is inherently dangerous in these shares. Both Putnam and Massachusetts are well-known sponsors of funds. The portfolios contain a variety of investments. Your income yield should be safe, but it remains to be seen whether closed-end funds will recover to their initial price.
You should have variety in your own personal portfolio. You should have some money in income investments, such as CDs, and other money in growth investments. A traditional mutual fund allows you to reinvest dividends so that you can buy extra shares in down markets.
Nobody likes to see an investment fall in value, but it's not wise to sell when values are down. If fluctuations make you feel truly depressed, however, you should consider getting out.
\ Mutuals less risky
Q: Is it better to use mutual funds than the New York Stock Exchange because the stock exchange is higher risk than mutual funds? Is it true that a mutual fund is low risk?
I bought some mutual fund shares in July 1987, and I still send $100 every month. I get some good from reinvestment.
A: A mutual fund is less risky than buying stocks. That's because the risk is spread through a portfolio of many different stocks. Small investors cannot buy enough stocks on their own for adequate diversification. The funds give you professional management as well.
You are also taking advantage of one of the other features that make mutual funds so attractive. By continuing to invest on a monthly basis through good and bad markets, you are taking advantage of dollar cost averaging. Down markets carry the opportunity for acquiring more shares. You are also plowing dividends back into the fund.
Your principal can be eroded if you must sell in a bad market, so it is not as safe as an income investment such as a certificate of deposit. The opposite side of that risk is the potential for growth that will more than offset inflation.
Mutual funds are long-term investments. If the overall performance is satisfactory, just keep investing and don't worry about daily fluctuations.
by CNB