BERKO: Don’t panic – the stock market will stabilize
Dear Mr. Berko:
Before the stock market plunged, our Individual Retirement Account (IRA) was worth $343,000, and now it’s valued at $301,000. We have 22 stocks – oil and gas pipelines, electric utilities, telephone stocks, exchange-traded funds and business development companies – that you recommended during the past two years, and they still have good gains. We have 12 other issues recommended by our broker. Our IRA yields 6.9 percent. Our broker wants us to sell everything and put the money in a variable annuity (VA) that is guaranteed never to lose money and pays 5.5 percent. We need to do something right away, because we are afraid the market will crash. We need your advice.
J.S., Oklahoma City
Dear J.S.:
Whoever told you that a VA is guaranteed never to lose money is not being truthful. I suggest you pose the following question to your broker: If I purchase a VA when the Dow Jones industrial average is at 12,000 and have to sell it a year or two later when the Dow is at 10,000, will I sell it at a loss?
Before the recent debacle, I finished a column in which I suggested that the Dow could fall to the 8,000 level in the coming 12 months. As I was watching the market plunge, I wondered how it was possible for Ponzi-scheme artist Bernard Madoff to be convicted for swindling $65 billion from investors by the same government that swindled trillions from the American public.
Well, when people begin to recognize that they can vote themselves largess from the public treasury, their collective demand soon reaches a critical mass that throws the equilibrium of their democracy out of balance. Basically that’s what has been happening for decades.
Casting blame does not solve problems, although we are all to blame. Don’t panic, and don’t listen to the fear-mongers who ooze from the woodwork with horror stories. Still, this is the end of an era, and the ripple effects may change the future dreams and hopes of hundreds of millions of Americans.
If the United States ever had to suffer a downgrade, however, this is the best time for it, because we are now wallowing in the same dirty laundry basket as hundreds of other countries. On the plus side, the United States has the best and cleanest dirty laundry of them all. So this too shall pass.
Sell your business development companies, but please keep your other good dividend issues.
It’s not the value of your investments that matters; it’s the income that is important. If you had $343,000 in dependable dividend issues, such as pipelines, utilities and telephone shares, with a combined yield of 6.9 percent ($23,000), don’t make a single change. If your portfolio declines to $220,000 in value, those dividends are still likely to total $23,000 annually.
Do not allow yourself to be pushed into a VA by a charming, articulate incompetent who will make a sweet 6 to 8 percent commission. If you do have a VA, keep it, and do not allow the salesman to move it to another annuity product. If you have cash, keep it in cash.
I think the market could have another 2,000 points on the downside, which would give us some time-honored investment opportunities with attractive dividends to warm the cockles of your bank account.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or email him at malber@adelphia.net. ©2011 Creators.com
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