Market slides on higher rates Dow loses 8.09

August 18, 1994|By JULIUS WESTHEIMER

Stocks gave back some of Tuesday's big gains yesterday, as investors reflected on the dampening effect of higher interest rates. Drug stocks were a big exception, as prices rose amid takeover speculation in the medical industry. The Dow Jones industrial average fell 8.09, to 3,776.48.

Today, we answer your letters.

Mrs. Marian G., Severna Park, writes: "My stockbroker recently called and told me that the stock market was going down fast, and he persuaded me to sell most of the blue-chip stocks I've owned since my husband died in 1981. Some stocks he sold were Procter & Gamble, AT&T, McCormick, American Home Products, Texaco and Fidelity Magellan mutual fund. Then he talked me into putting that money in his firm's income mutual funds instead. Did I do the right thing?"

I don't know your individual situation, but I think your broker persuaded you to do the wrong thing. In the first place, just because the stock market is going down is no reason to sell; often it's a time to buy. Second, those stocks are all of high quality, and raise their dividends annually, so why get rid of them? Third, you probably have to pay large capital gains taxes on those sales.

Sorry, but I think your broker did you wrong. You should switch brokers and find someone who cares more about your situation and less about his or her commissions.

Horace G., Highlandtown, writes: "You often write that stocks and bonds fell because interest rates went up. What's the relationship? Could you explain this to me?"

Yes, and it's a question many people ask. First, bonds. When interest rates move up, that increase lowers the value of bonds now in existence. For example, if you own $10,000 of a 6 percent bond, you receive $600 a year in interest. But -- to take an extreme example -- if interest rates shoot up to, say, 9 percent, new bond buyers would receive $900 a year, and your 6 percent bond would obviously be worth less. Conversely, if interest rates fall to, say, 4 percent, your 6 percent bond would become more valuable.

Now, regarding stocks, higher interest rates hurt stocks for three reasons. First, people often turn their backs on stocks when interest rates climb and buy higher-interest-rate bonds and CDs instead. Second, higher interest rates hurt the economy -- and hence stock prices -- because businesses must pay higher rates for their borrowings, and that cuts their profits. Third, higher rates may force consumers to delay or cancel purchases of homes, cars and other items consumers buy on credit.

J. L. Stevens, Dundalk, writes: "Where can I get a list of companies that sell their stock directly to the public without paying a broker's commission? Can you list a few of the more best-known firms?"

You may buy stock from more than 900 companies, including Pepsico, McDonald's, AT&T and Du Pont by using a dividend reinvestment plan, or DRIP. In most cases, you must first buy one share through a broker.

A growing number of companies -- including Texaco, Dial, Exxon and U.S. West -- are taking their DRIPs one step farther by allowing any investor, including non-shareholders, to make their initial purchase directly.

For a free list of companies, write to the DRIP Investor, 7412 Calumet Ave., Hammond, Ind. 46324.

Mrs. J. L., Cockeysville, writes: "My infant son's grandparents recently gave him a U.S. Savings Bond. Would it be better to report the interest every year, or wait until he redeems the bond many years from now?"

You might save your son a few dollars by filing a tax return on his behalf for the year he received the bond, and reporting the accrued interest for that year. After that, be sure to keep track of the interest that accrues on the bond each year, but you need not file a tax return for your son unless his income exceeds $600.

By doing it this way, your son won't owe tax on the interest the bond has earned over the years when he eventually redeems it. For further information, send for Form PD3501; it's free from the Savings Bond Marketing Office, 800 K St. N.W., Suite 500, Washington, D.C. 20226.

Etta G., Mount Washington, asks: "Can I deduct medical expenses I pay for my elderly parents?"

You may deduct medical expenses for any dependent, including those claimed under multiple support agreements, and those paid for persons who would qualify as dependents, except that they have income exceeding the personal exemption amount of $2,450.

Stated another way, if you claimyour parents as dependents, or you pay more than half their support and could claim them as dependents but for their income level, you can deduct medical bills paid on their behalf.

Note: Medical expenses are deductible only to the extent that they exceed 7.5 percent of Adjusted Gross Income. See your tax person for further details.

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