What the experts say

Buy your first house now; High yield, high risk; Don’t raid your retirement

Buy your first house now

It’s hard to imagine right now, but one day we’ll look back on this dismal housing market as a “golden age” for first-time home buyers, said Ron Lieber in The New York Times. Not only are prices at their lowest in years, the 30-year fixed-rate mortgage is hovering around a modest 5.5 percent. Unlike existing owners, newcomers to the market don’t have to worry about selling an old house before taking advantage of fire-sale prices. Still, this is no time for hasty decisions. “The basics are back, like spending no more than 28 percent of your pretax income on mortgage payments, taxes, and insurance.” Something else to keep in mind: Prices could fall further before they eventually go up. “Allow yourself to consider how it would feel if you bought and then prices dropped another 10 or 15 percent.” If that idea makes you queasy, keep renting for now.

High yield, high risk

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Investing in high-yield bonds is like lending money to a “slightly seedy” brother-in-law who promises to pay 25 percent interest on the loan, said John Waggoner in USA Today. You may not get your money back. The only way companies with poor credit ratings can attract creditors is by offering incredibly high interest rates—historically, yields on junk bonds have traded at about a 5 percent ­premium over ultra-safe Treasurys. Currently, the spread is about four times that. “The reason yields are so high, of course, is because traders are worried about default—in which case, bondholders would have to stand in line to get their principal back.” While the market may be overreacting, experts warn against chasing yield. If you really want to invest in junk, buy into them via a conservative high-yield fund, such as Pax World High Yield. These funds don’t promise the highest possible return. But they do know the difference between a deal and a deadbeat.

Don’t raid your retirement

Many unemployed Americans may be forced to dip into their 401(k)s and IRAs if their severance packages and emergency savings run out, said Robert Powell in Marketwatch.com. Already, 18 percent of Americans have raided their retirement funds prematurely, according to a recent survey by Bank of America. Selling your nest egg early must be seen as a last resort, however. Among other reasons, you’ll owe state and local income taxes on the proceeds, as well as a 10 percent penalty on early withdrawals. If you have no choice, consider the least-taxed ways to tap funds. For example, you can effectively give yourself a 60-day, penalty-free loan by rolling your IRA over to another IRA. Whatever you do, though, wait until after the new year to withdraw funds. “That way, you won’t have to pay any taxes due on that money until April of 2010.”

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