Still holding Fannie, Freddie shares? Dump them

ByABC News
June 13, 2012, 8:48 PM

— -- Q: What should investors still holding onto Fannie Mae and Freddie Mac do with their shares?

A: When the housing market fell apart, speculators learned the dangers of real estate. But the debacle taught investors some lessons about stocks, too.

Prior to the bust, many investors added shares of the giant U.S. government-backed mortgage companies to their lists: Federal National Mortgage Association, or Fannie Mae and Federal Home Loan Mortgage Corporation, Freddie Mac. Both stocks did tremendously well during the housing boom, as the demand for loans continued to surge.

But with the housing bust, Fannie Mae and Freddie Mac lost their status as outstanding investments. Both saw their share prices crash and get delisted from exchanges. The companies lost nearly all their value as their businesses crumbled and both were taken under the conservatorship of the U.S. government in September 2008.

Unfortunately, at this point, there's not much investors can do other than learn a lesson from the debacle. You don't want to be anywhere near a company when it's headed over a precipice like the one these two stocks fell off of. Avoiding such massive losses is rule No. 1 for investors in individual stocks.

Furthermore, you don't want to be holding stocks that are delisted. Investors in delisted securities often don't even get access to updated financial statements. Owning stocks like these is like driving blindfolded.

If you own the stocks in a regular taxable account, you'll definitely want to sell this year and take the tax loss. You can use the losses to offset any capital gains you might have. If you own these stocks in a retirement account, not only should you sell, but learn from this experience. Betting on individual stocks in a retirement account is a risky proposition. Unless you learn to cut losses more quickly, you're likely much better off sticking with mutual funds.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz