Index investing; pension account; variable-rate loans; tenants' insurance
ETFs vs index funds for the novice investor
Q. I want to begin investing in the stock market by buying shares in an index fund at regular intervals. A friend suggests that I consider going into an exchange traded fund (ETF) rather than a mutual fund. Which would be a better choice?
A. Probably a mutual fund, since you're just starting out. You'd have to use a broker to acquire ETF shares, and if you buy (or sell) them in small lots, the commissions can pile up. With a no-load index fund, you pay no sales charges. As you gain experience and invest larger amounts, ETFs might deserve a place in your portfolio, because they offer more trading flexibility than mutual funds. For one thing, ETF share prices vary during the day, so you may shave costs or boost profits by staying alert. Mutual fund shares always trade at the day's closing price. ETFs are also potentially more tax efficient than index mutual funds, since funds sometimes must sell profitable holdings to meet redemption requests.
Q. An employee who quit nearly a year ago still hasn't informed our pension plan administrator how to distribute the $4,000 in her account. Can we close the account and send her the money?
A. If your plan doesn't currently provide for such distributions without the participant's consent, you can amend it to allow the administrator to open an IRA for the employee and transfer the unclaimed funds to it, provided the account balance doesn't exceed $5,000. In the case of an involuntary rollover, the IRA trustee must be unrelated to your practice, and the employee must be given an explanation of how the funds will be invested and a full description of what the fees are.
Choosing between variable-rate loans
Q. I'm dickering with two lenders for a home equity loan. One charges variable interest tied to the "LIBOR," and the other uses the "COFI." What's the difference?
A. The COFI (short for 11th District Monthly Weighted Average Cost of Funds Index) tends to be more stable than the LIBOR (London Interbank Offered Rate), so it's less likely to trigger sizable increases in loan costs when market rates are rising. However, your costs can also be affected by other factors, such as how often your loan interest rate is reset and what limits ("caps") apply to the increases. So compare these as well before deciding.
How tenants' insurance helps a landlord
Q. An insurance agent tells me I could cut the premiums on my landlord's policy if I require tenants to take out renters' insurance covering their liability for negligence and their losses from fire or other causes that they might be responsible for. But would it be legal for me to force them to do so?
A. Generally yes, if you mandate it for all your tenants and the property isn't subject to local or state rent regulations. Of course, you can't force existing tenants to buy the insurance until their leases come up for renewal. If a tenant balks, point out that, for a relatively small premium, a package policy will not only protect him against negligence suits but also cover the contents of his apartment, which the landlord's policy doesn't. On average, renters' insurance is fairly inexpensive-around $150 a year for $30,000 of property coverage and $100,000 liability, with about a $250 deductible.
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