Is % rate gauranteed?

[Guest MLF]

My mom has a roth IRA and I'm in England rigth now. On the phone my mom

said she lost money in her IRA. I don't know if she meant that she withdrew

money or not. So I was wondering if someone could be kind enough to answer a question. Are the rates quoted when opening a IRA guaranteed or are they dependent upon the performance of the investment scheme used by the company she has the account with? And does economy slow down or increases effect the interest rate? Any response will be appreciated.thanks.

[david rigby]

Depends on the type of investment. If invested in marketable securities (or mutual funds of securities), the value can certainly go down with market fluctuations. If invested in an account at a bank or savings & loan association, then there is probably a guaranteed rate of earnings, which changes over time, but the rate will never be negative.

[John G]

I agree with Pax's comments above but want to expand:

"Guarentee" ussually refers to guarentee against loss of principal. For example, in the US almost all bank accounts are guarenteed against loss of principal. Exceptions include extremely large deposits or assets in bank offered non-guarenteed investments like mutual funds.

A second meaning of "guarentee" is that the rate of return is fixed, which may be the case for certificates of deposit (CDs) which are generally offered by banks. So, if you have a modest amount of money in a fixed CD at a bank, you probably can calculate to the penny how much you will have at the end of the CD term. But... you give up a lot of return when you want a risk free investment. Bank CDs are in the 4% annual rate of return right now. Let's look at some of the non-guarenteed investment alternatives:

BONDS: offered by the federal government, states, municipalities, special authorities (like airports) and corporations. A bond is an IOU. You get interest and your initial principal at the end of the term. Bonds are either backed by taxing authority or based upon expected revenues/profits (like MSFT earnings or tolls on a bridge). Bonds are not guarenteed, their "safety" is directly related to who issued the bond. A Dot.com bond is next to worthless, while Federal paper is backed up by the taxation power of Congress.

STOCKS: never guarenteed. You are buying the future in a successful capitalist economy. Bond holders get paid first, equity holders (shareholders) come second... or third if there is a preferred class of stock. Companies can issue dividends, but dividends are at the discretion of the Board of Directors. Example, Florida Power and Light in the 1990s decided to cut their dividend to keep earnings for growth. Over the long haul, stocks go up about 10% a year. Good years out number bad years from 6:1 to 8:1 and good years are generally many percent better than the stinkers (like 2000 and 2001).

MUTUAL FUNDS: only guarenteed to the extent they are purchasing CDs or equivalent product. Risk is directly related to the underlying investments.... bonds, stocks, cash, etc.

Lots of folks have seen their assets shrink in the last two years as part of a market pullback. Big shrinkage if you where invested in telecom or internet stocks or NAZDAQ tech stocks. But, if you were heavily weighted toward thrifts/banking or energy you might be up a little.

Are interest rates related to economic vitality? Yep. When the economy slows down, governments want to cut interest rates to stimulate business activity. When the economy is over-heating with very high growth, governments often will raise interest rates to cool things down, making rapid growth more expensive. Every article about Alan Greenspan and the Fed is centered on the interaction between the economy and interest rates.

A smart investor does not panic or get upset by the month to month swings. The really clever folks use downturns in the stock market to pick up "bargains" in the hope that 12 months later they are winners. Contrary to some of the media hype in the last five years, investing is measure in years and decades.