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Local financial planners urge staying the course
| Friday, Sep 26 2008 3:08 PM
Last Updated: Monday, Sep 29 2008 7:24 AM
The calls started picking up about two weeks ago, when all the major stock market indexes were at or near their worst lows in years.
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1. Does my portfolio include any money market funds?
Why? Money market funds are short-term mutual funds that are highly liquid.
They are not the same as money market deposit accounts, often issued by banks and credit unions.
Currently the national average on bank money markets is 2.90 percent, according to Money-Rates.com.
Money markets in banks are covered by the Federal Deposit Insurance Corp. the same way as checking and savings deposits.
Consumers are insured for up to $100,000, and up to $250,000 for some retirement accounts.
The National Credit Union Administration (NCUA) is the federal agency that administers the National Credit Union Share Insurance Fund (NCUSIF), which provides comparable insurance for money markets in credit unions.
Money market mutual funds are not covered by either.
2. What kind of money market funds do I hold?
Why? The U.S. Treasury Department recently announced it would, at least temporarily, guarantee money market mutual funds against losses up to $50 billion.
Retail and institutional money market mutual funds would have to pay a fee to register for that program, so you will want to know if your particular fund is participating.
Only 2A7 funds would be eligible for the program. That’s a specific legal definition of a fund that meets certain standards for quality, maturity and diversity.
3. Do I have an appropriately diverse mix in my portfolio?
Why? A balance of stocks, bonds, money market funds and other types of investments helps spread risk.
4. This is when I want to spend my money. Are my investments right for that time frame or should I update my portfolio?
Why? The longer you intend to invest, the more risk you can take on. A person who will tap his or her money decades from now is a better candidate for high-risk, high-yield investments than someone who is retiring next year, or whose child starts college this fall.
5. What are the tax implications of pulling out of my investments?
Why? Earnings are taxed differently depending on where you are invested and when you make a withdrawal. Before you sell shares or take money out of an account, find out at what rate you will be taxed, and when those taxes must be paid.
Investors are reacting to an almost constant drumbeat of bad news about financial icons. IndyMac. Lehman Brothers. AIG. Merrill Lynch. WaMu. Financial advisers are inundated.
“They’re very worried. I talk to them every day,” said Glenn Allen, a financial adviser with the Bakersfield office of Edward Jones.
Like most of his colleagues, Allen is urging clients to stay the course.
“When you’re driving, if you run into a pothole or road construction, you don’t say, ‘Oh, God, I’m just going home. The roads are terrible.’
“You’re just patient and you keep driving until you reach your destination.”
That isn’t to say now isn’t a good time for investors to review their portfolios. It’s just that they shouldn’t do anything hasty, experts warn.
“Any decisions you make based on fear or other extreme emotions tend not to be good ones,” said Jason Cohen, an adviser with UBS Financial Services in Bakersfield.
So take a deep breath, slow down, and think, Cohen said.
Every investor has unique circumstances, and whether changes to savings for retirement, college and other big expenses are warranted depends on a wide array of factors including age, goals and how soon you’ll need to spend the money.
Mike Bowles of Bowles Financial and Insurance Group Inc. in Bakersfield says small investors are rethinking their risk tolerance.
“When times are good people start to think they can make money and might be a little more aggressive,” he said. “Times like this are sort of a reality check. A lot of people are finding out they may not be as tolerant of risk as they thought.”
Just remember, a fundamental rule of investing is that the higher the risk, the higher the reward.
“People who want no risk at all aren’t investors. They’re savers,” Bowles said. “If it’s retirement you’re saving for, you’re going to become poor very safely.”
A savings account that pays 1 percent to 2 percent interest, or a certificate of deposit that pays 3 percent interest, won’t keep up with the current inflation rate of about 3.8 percent.
“Already, your money is going to be going backwards, and you haven’t even paid taxes yet,” Bowles said.
As scary as the market is right now, UBS’ Cohen urges investors to look at some of the biggest recent blows to the economy: the real estate slump of the early 1990s, the bursting of the high tech bubble and Sept. 11, 2001.
“Then look at what happened in the years following each of those events,” Cohen said. “People who kept a level head got some incredible bargains.”
Bailing out suddenly just as stocks are tanking is the worst thing long-term investors can do, said Antonio Beccari, senior financial adviser with Beccari and Associates in Bakersfield.
It’s the complete reversal of the old adage to buy low and sell high, he said.
“It’s almost never a good idea to try to time the market,” Beccari said. “You should have a long-term plan and stick with that plan.”
Jay Millet, investment advisor with LPL Financial in Bakersfield, said the market remains “uncertain and volatile,” but he believes that’s temporary, and diversified investors should come out OK in the long-run.
“By not putting all your eggs in one basket, in the good times we’re not being as greedy and we won’t see value plummet in a downturn,” he said. “You lay the foundation well ahead of time so when the storms hit, you’re prepared.”