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Trust and Investment FAQs

Purchasing a home is a one of the most important financial decisions of your life, so at LANB we do our best to find a financing option that will fit your needs. We've provided a few commonly asked questions to help you if you're considering a refinance or the purchase of a new home. For additional questions, contact us at lanb@lanb.com or (505) 662-5171.


Should I continue to invest in my 401K and if so, how?

Wow, this is an interesting time in our markets. I know this may seem contrary to what your gut is telling you, but definitely continue to fund your 401k. The reasons are that this is your retirement plan and dollar cost averaging. The retirement plan explanation is pretty obvious as this is the reason why you invested in the first place. Dollar cost averaging is the buying of shares even when markets are up or down at the same dollar amount so that when the markets recover and you have been buying in a down market you'll have more shares, hence more value.

The allocation or what to invest in right now is a much more difficult question. There are several factors such as your risk tolerance, meaning is this market making you sick or do you know that it's going to recover and you don't worry about it? But, if you are close to retirement, like I wish I was, then you should definitely have more in bond funds. If you are 20 years old and have another 40 years, then equities or stock funds are okay because you have time on your side to recover the losses you are incurring. But, in a market like this you need to do what feels right, just so long as you continue to contribute.

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Is there any way to tell how much of a loss is too much to be taking in this market?

The current market environment is extremely difficult. This is because of a wide range of issues occurring in the world some of which we have touched upon in earlier emails; financial institutions, housing, recession / inflation fears, presidential election, oil prices, food prices, etc. There are a lot of things that aren't so bad in this market; companies earnings, unemployment (which is still historically low), global economies, presidential election, etc. But, is the market going to rebound, yes, when, I have no idea.

What this market allows for in a retirement account is dollar cost averaging. This is the concept that you continue to invest the same amount whether the market is up or down and thereby creates more shares in the account. If you buy with the same dollar amount when prices are down you purchase more shares and conversely receive less shares when prices are up. So, when the market rebounds you will have larger gains since you purchased more shares at a cheaper price and hopefully make more money.

Regarding adjusting your portfolio a lot of different factors become involved. First, hopefully you believe in your existing funds. If not, then perhaps a change is required. Now, if you are closer to retirement than you probably will want more bonds to create a more conservative portfolio, but if you are young and have plenty of time till retirement than you will want more equity. Historically, given time, the stock market has outperformed the bond market.

Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off. You get a lower rate with an ARM in exchange for assuming more risk.

For many people in a variety of situations, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for three to five years.

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What are "Junk Bonds?"

A bond is an obligation by the issuer to pay you a stated rate of return or yield for buying their bond. Bonds are typically sold in $1,000 increments and that price is known as "par". Sometimes they sell for less than $1,000 a bond or at a "discount" and sometimes they sell for more or at a "premium". You might see bond prices stated at 98.01 or 102.34. This means that the first one actually costs $980.10 and the second costs $1023.40 (I know this is strange to quote a price by moving the decimal, but that's bonds). Anyway, when you buy a bond it has a yield that will be paid until maturity or until it is called away, if that feature exists. The yield is interest that is paid typically either semi-annually or annually. At maturity you receive $1,000 back and if it is called, this means the issuer pays you back your $1,000 before maturity, you get your $1,000 back per bond and you are done with that bond.

Bonds have ratings and this tells you the credit worthiness of the bond. Companies exist that review bonds and decide how risky they are, which means is there a chance you won't get your $1,000 back. The two main ratings companies are S&P and Moody's. Their rating system is AAA for governments, treasuries and some municipals. Then AA which may be a corporation and some municipals, then single A then BBB. There is also + and - between ratings to further differentiate. So, a "junk bond" is a bond that is rated BB or lower, down to a single C (after that the lights have probably been turned off).

Typically junk bonds are corporate and they have to pay more yield or interest to get you to buy it. As an example, a two year treasury may yield a 2.25% while a single B corporate may have to yield a 7.5% to justify the risk you assume by buying this bond. So, if the company that issues junk bonds stays in business and you get your higher yield then they are a good investment, but if the company cannot pay you the interest they owe, then it wasn't a good investment. You become in essence a creditor of the company, not what you really wanted to do as there is a chance you won't get your $1,000 back. Therefore, junk bonds can be very risky if you don't understand the company and why it has a junk bond rating. Back to top


Why "paper only assets" can be very high risk investments?

"Paper only assets" are bonds that are not backed by any collateral. It is backed by the "word" of the company that they are going to make good on the bond. Obviously, risky.

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