Tuesday, October 14, 2008

Other Potentially Risky Holdings: Gift Cards, Traveler's Checks, and Municipal Bonds

"It ain't over 'til it's over." Yogi Berra

Although the government intervention is having a positive impact, I continue to take steps to minimize exposure to potential risks caused by the credit crisis.

Recently, we learned that supposedly safe investments such as money market funds can be risky. This got me thinking that there are probably other money equivalents that are no longer as safe during this financial crisis. Here's my short list so far:

  1. Gift cards. Bankruptcy of a company can significant reduce or eliminate the value of a gift card, as demonstrated earlier this year with the Sharper Image. Holders of gift card are unsecured debt holders, who get funds before shareholders, but after secured debt holders. Usually, unsecured debt holders get little or no money from a bankrupt company.

    Currently, we have about $75 of gift cards from a local restaurant and about $20 from a book store. We'll be spending them before the end of the year.

  2. Traveler's checks. We use American Express Traveler's checks during vacations and other long trips. Although advertised as safer than cash, I suspect the checks would be worthless if American Express were go bankrupt.

    Currently, we have several hundred dollars of leftover checks from vacation. I think it's time to cash them.

  3. Municipal Bonds. With declining real estate values and higher unemployment, I expect that the revenue of municipalities will decline significantly, leading some to go into default.

    Currently, we have municipal bond money market funds and several individual municipal bonds. We'll be moving the money market funds into a bank money market fund that is paying about 3.5%.

    We will continue to hold the bonds we have since most mature from 2008 to 2010. The bonds are all insured against default, although the bond insurers may be solvent enough to cover the defaults. At this point, I don't plan to buy any more individual municipal bonds.

In the end, I expect that these holdings will prove to be relatively safe. However, just in case the credit crisis worsens, I want to minimize potential losses if possible.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial advice. Please consult a professional advisor.

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