Q. Many of us middle class oldsters bought muni bond funds or unit trusts at par. Since we are in retirement our primary concern at this point is not for the interest, but for the effect of the flat tax rate on the capital which we feel must be preserved. Might the value drop---say--- 30 percent? Would you advise selling the municipal bond funds now?

In the case of a single muni like a turnpike insured bond, even though it dropped and became illiquid, couldn't you just hold it until maturity?

---W.N., Longview, TX

  

A. As this is written, long term tax free bonds are being priced to provide a yield that is 90 percent of the yield on comparable maturity Treasuries--- So much of what might happen with a flat tax is already "in the price" of long term tax free bonds.

You can read this two ways:

First, if a flat tax is passed, your capital loss will be no more than 10 percent, not 30 percent. Right now, you are receive a higher than normal tax-free yield. This may offset some of the possible future loss.

Second, a flat tax is being discussed. That isn't the same as being passed. The current tax system, however wretched, still has a lot of friends. The most vocal group against the flat tax concept, for instance, are realtors and home builders who fear the effect of losing the mortgage and real estate tax deduction on the value and sales of residential property. Remember, for all the hype of the Republican Revolution in Congress, the scope of the revolution was to get the President to agree to balance the Federal budget in 7 years, a period three elections away. It might take 7 years to get a flat tax, too.

The bottom line here is that most of the damage to municipal bonds has already been done.

  

Q. A recent issue of Newsweek says that most 401(k) plans are "awash" in their own company stock. "Firms often match employee contributions with their own issue, and employees have enough loyalty, lethargy or blind faith to hold it all. But at current levels approaching 40 percent of the average 401k portfolio, this is a hazard and the ultimate in non-diversification. If your company hits the skids, its your own nest egg, too.... a financial planner.... tells clients to switch to broad-based stock funds as soon as their company is vested."

I am unsure what this article is saying. Is it saying that it is legally possible ( even desirable) to transfer 401k funds out of company pension plans into investments no affiliated with your company... say a bank or any of the funds you regularly discuss in your column? Please clarify.

---D.U., Dallas, TX

  

A. No, it isn't saying that. A typical 401k plan has a 50 percent employee "match"; if the company stock does as well as your other selections in the plan, that means a single stock will account for 33 percent of your total 401k nest egg. To account for more, the stock will have to do better than your other investments, something few would protest.

Long term, however, matching in company stock does mean that employees will have a lop-sided portfolio with a good deal of risk in a single stock. The alternative is to redeem the shares INSIDE the plan when it is allowed--- usually after you are vested and have reached age 55--- and reinvest the proceeds, within the plan, in the more diversified options. This is not disloyal, it is prudent financial planning. It does NOT mean taking the stock out of the plan because you can't do that with penalties and taxes.

  

Q. What is the advantage, if any, of buying stocks as soon as they have split? It seems to me that there are certain advantages to buying at that time--- mainly because they have a definite tendency to go up in price soon after a split. Do you think so?

---B.C., Paint Rock, TX

  

A. No. It's just the reverse. Studies have shown that Stocks often climb rapidly in anticipation of a split and then fall afterwards. I guess its another version of "buy on anticipation, sell on the event." Failing to split, by the way, has not harmed the market appreciation of Berkshire Hathaway in spite of the current price, about $31,300 a share.