By Sheryl Rowling
SAN DIEGO–Like Father, Like Son (Like Mother, Like Daughter) AKA “The Apple Doesn’t Fall Far From The Tree”
Q: Why is a dime smaller than a nickel if the dime is worth more? (Sam, age 8)
A: In the old days, dimes were made of silver. Since silver was (and is) worth more than nickel, the silver coins were worth more – even though they were smaller.
Q: Why should I buy a diversified mutual fund that’s expected to earn 8% when I can buy stock in my friend’s company for less money and make more? (Steve, age 48)
A: It’s all about risk and return. The diversified mutual fund has less risk, meaning it will fluctuate less and have a smaller chance of loss. To entice you to accept a high risk, your friend’s company must have the potential to earn a high return. If there were no risk, everyone would choose investments with high projected returns. Unfortunately, that’s not how the real world works. If you’re not prepared to lose your money, you shouldn’t invest in the riskier investment. So, like the dime, even though the mutual fund looks less valuable, it’s probably not.
Q: Why do I have to listen to my parents? (Jennifer, age 13)
A: Your parents care about you and, since they have more experience, they know more than you. By following their rules, you will get into less trouble and have a better time.
Q: Why should I pay for a financial adviser? (Melanie, age 43)
A: A good financial adviser cares about his or her clients. Also, your financial adviser knows more about finances than you. By hiring a qualified advisor and following the recommendations, you will get into less trouble and have a better chance of reaching your financial goals.
Q: All of my friends are getting tattoos. Should I get one too? (Terrie, age 16)
A: If your friends were going to jump… Really, Brittany, do you think you’ll still want this tattoo when you’re as old as your mother? Also, remember that if your mother won’t go along with it, you might have to wait until you’re 18.
Q: All of my friends at work have their 401(k)’s invested in our company’s stock. Should I do this too? (Erika, age 46)
A: If your friends were going to jump… Oh, wait, that’s what we tell our kids! Even if you believe that your company’s stock is a good investment, it’s not a good idea to put all your eggs in one basket. Your livelihood (your job) depends on the company; do you really want all of your investments tied up there too? The best plan of action is diversification. You can have some company stock in your 401(k), but be sure that most of your investments are diversified.
Q: I cashed in a $50 savings bond that I received as a gift several years ago. The bank only gave me $38! Are they ripping me off? (Joshua, age 19)
A: No, the bank is not ripping you off. Your bond’s original cost was only $25. After earning interest over a period of many years, the bond can be worth $50 or more. Since you cashed in the bond early, you received less than $50. If you held on to the bond longer, it would have been worth more.
Q: I bought a $10,000 corporate bond several years ago. My broker told me I could only get $9,400 if I sold it today. Am I getting ripped off? (Raul, age 49)
A: Not really. When you bought the bond, you were essentially loaning $10,000 to the issuing corporation. In return, the corporation promised to pay you interest annually and to repay the loan after a period of years. So, let’s say you bought a 15-year bond that pays interest at 6% per year. After several years, assume that comparable interest rates rise to 7%. A savvy investor will not buy your bond for $10,000 when he or she can buy another bond that pays 7%. So, if you want to sell your bond, you’ll have to accept less than $10,000. If you really don’t want to settle for less than $10,000, you’ll need to hold the bond until maturity.
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Sheryl Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com