Stock drop heightens investors' money worries
By The Associated Press | Posted: Tuesday, October 07, 2008
The panicked selloff in the stock market that sent the Dow Jones industrial average down as much as 800 points Monday before it recovered left investors' jangled nerves further on edge.
It also exacerbated worries about money that have grown as the credit crisis that exploded last month shows signs of worsening.
With the blue-chip indicator sinking below 10,000 for the first time in four years, many are wondering how much lower it could go and how vulnerable are their holdings in stocks, CDs and other investments as the credit crisis continues.
The Associated Press addresses some of the concerns with answers to common questions, based on interviews with experts.
Q: Where's the best place to keep money I may need in the short term?
A: Much like your overall portfolio, you might want to consider diversifying even your cash reserves. Right now, for example, rates on tax-free money-market funds are better than certificates of deposits, or CDs. To mitigate any difference, consider splitting your money between the two.
To find the best rates for CDs and money-market deposit accounts, check Bankrate.com, which includes listings from online banks. The average rate on a 1-year CD was 3.7 percent Monday, according to the site, while the average rate for money-market accounts was 2.44 percent.
If you've got cash to invest for the long-term -- at least 10 years or more -- putting a little in the market in stages might not be a bad idea, said Lisa Kirchenbauer, a certified financial planner and president of Kirchenbauer Financial Management & Consulting in Arlington, Va.
Q: What should investors who are within five years of retirement do when they see their portfolio's value declining so sharply?
A: "If your portfolio is way down, you don't want to start withdrawing from it when the market is in a trough, because you'll just be making things a lot worse," said Christine Fahlund, a senior financial planner and vice president with T. Rowe Price.
If you're near retirement, you may want to fight your instincts to retreat. "If you can afford it, consider increasing retirement contributions in the final years of your working life," Fahlund said. "You'll be taking advantage of the market conditions, and buying into the market when it's low."
Amid volatile markets, Fahlund said those close to retirement must become increasingly flexible about their plans, from deciding when to stop working, to how much money to set aside for retirement, and how much to spend. Soon-to-be retirees should avoid setting rigid plans if they don't have to, and make it clear to their employers that they're taking a wait-and-see attitude.
Q: How should investors whose college funds have taken a hit respond to the market?
A: The issue comes down to two factors: risk tolerance and time horizon, said Alan Gayle, director of asset allocation and senior investment strategist for Atlanta-based RidgeWorth Capital Management. "If the portfolio that they own is keeping them up at night, then that's a signal that they need to make some adjustments," he said, addressing the risk tolerance question.
The date for when the child is going to school plays a key role in the broader answer. Investors should reduce a college fund's exposure to the stock market at the student's enrollment date approaches. However, if the child isn't heading off to school soon, "this is a better time to buy stocks than to sell," Gayle said.
Q: How will I know when the market's hit a bottom?
A: Not until after it has recovered off the lowest point. Not even the smartest experts can predict when the market will turn, even though someone's guess will ultimately be proven right.
It also exacerbated worries about money that have grown as the credit crisis that exploded last month shows signs of worsening.
With the blue-chip indicator sinking below 10,000 for the first time in four years, many are wondering how much lower it could go and how vulnerable are their holdings in stocks, CDs and other investments as the credit crisis continues.
The Associated Press addresses some of the concerns with answers to common questions, based on interviews with experts.
Q: Where's the best place to keep money I may need in the short term?
A: Much like your overall portfolio, you might want to consider diversifying even your cash reserves. Right now, for example, rates on tax-free money-market funds are better than certificates of deposits, or CDs. To mitigate any difference, consider splitting your money between the two.
To find the best rates for CDs and money-market deposit accounts, check Bankrate.com, which includes listings from online banks. The average rate on a 1-year CD was 3.7 percent Monday, according to the site, while the average rate for money-market accounts was 2.44 percent.
If you've got cash to invest for the long-term -- at least 10 years or more -- putting a little in the market in stages might not be a bad idea, said Lisa Kirchenbauer, a certified financial planner and president of Kirchenbauer Financial Management & Consulting in Arlington, Va.
Q: What should investors who are within five years of retirement do when they see their portfolio's value declining so sharply?
A: "If your portfolio is way down, you don't want to start withdrawing from it when the market is in a trough, because you'll just be making things a lot worse," said Christine Fahlund, a senior financial planner and vice president with T. Rowe Price.
If you're near retirement, you may want to fight your instincts to retreat. "If you can afford it, consider increasing retirement contributions in the final years of your working life," Fahlund said. "You'll be taking advantage of the market conditions, and buying into the market when it's low."
Amid volatile markets, Fahlund said those close to retirement must become increasingly flexible about their plans, from deciding when to stop working, to how much money to set aside for retirement, and how much to spend. Soon-to-be retirees should avoid setting rigid plans if they don't have to, and make it clear to their employers that they're taking a wait-and-see attitude.
Q: How should investors whose college funds have taken a hit respond to the market?
A: The issue comes down to two factors: risk tolerance and time horizon, said Alan Gayle, director of asset allocation and senior investment strategist for Atlanta-based RidgeWorth Capital Management. "If the portfolio that they own is keeping them up at night, then that's a signal that they need to make some adjustments," he said, addressing the risk tolerance question.
The date for when the child is going to school plays a key role in the broader answer. Investors should reduce a college fund's exposure to the stock market at the student's enrollment date approaches. However, if the child isn't heading off to school soon, "this is a better time to buy stocks than to sell," Gayle said.
Q: How will I know when the market's hit a bottom?
A: Not until after it has recovered off the lowest point. Not even the smartest experts can predict when the market will turn, even though someone's guess will ultimately be proven right.
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