Personal Finance
Faith in U.S. has a lot to do with investment decisions
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The stock market's performance recently has been brutal.
"There has not been a more intense, uncertain time, both politically and economically, for the markets, possibly since the end of World War II," says John Markese, president of the American Association of Individual Investors in Chicago.
If you're scared about where to invest your money now, you're not alone.
"My clients are having an emotional meltdown," says Jim Yarbrough, a chartered financial consultant at Successful Retirement Strategies in Dallas. "The fear is palpable."
Here are some answers to help you navigate through these times:
Q. Where should I put my money to keep it safe?
A. It depends on how much faith you have in the U.S. economy and its ability to withstand these pressures, says Douglas Gill, a certified financial planner and president of Gill Capital Management in Dallas.
"Those who have the ultimate lack of confidence might be well-served to be sitting in short-term Treasuries (U.S. Treasury securities)," he said. "They have very low or no interest rate risk, and they're backed by the full faith and credit of the U.S. government. That's the ultimate in safety and security for the person who is in the far extreme of the concern continuum."
You can also stash your money in a money market mutual fund, which invests in short-term U.S. Treasury securities, certificates of deposit and short-term corporate IOUs known as "commercial paper." However, the returns on cash investments is dismally low because of the many interest rate cuts that the Federal Reserve has initiated to stave off a recession.
"The average yield on a one-year certificate of deposit is 3.2 percent," says Greg McBride, financial analyst at Bankrate.com, which tracks consumer interest rates. "After paying taxes on that return and factoring in inflation — which currently is at an annualized pace of 2.5 percent — your real rate of return is close to zero right now. For some investors, they may be willing to take zero right now."
Q. How scared should I really be about the market's performance affecting my money?
A. Fear is much stronger than greed in its impact on an investor's psyche, so don't let fear lead you into making a financial move that you'll later regret.
The market's recent performance may be frightening, but ultimately, what drives your next move should be where you currently stand financially.
Do you have enough money to cover emergencies?
Financial advisers recommend that you save enough to cover about six months of expenses.
If you have enough in an emergency fund, avoid selling your stocks at a loss.
"If they don't (have enough savings), they should be looking at raising some cash over the next several months," Merrill Lynch's Crockett says.
Q. If I have a large amount of cash, where should I be investing this money?
A. Let your goals direct your next move.
"I would do my best to remove the emotion and say what is the best long-term asset allocation to help you achieve your objectives, and have that money deployed in that asset allocation," Gill Capital Management's Gill says. "Make your asset allocation based on your value system, not what happened a week ago, and not just because the market is low."
Q. I just found out about an investment that says it will give me high returns with very little risk. Should I jump in?
A. The higher the return on an investment, the more risk you will assume. State securities regulators are warning investors about scams similar to those from the Y2K bug.
Cold-calling telephone sales representatives, advertisements or Internet postings that tout commodities, exotic financial products or supposed anti-terrorist technologies should be a red flag, according to the North American Securities Administrators Association in Washington, the umbrella organization of state securities regulators.
"In times of tragedy, confusion, fear and uncertainty, there are always those who will attempt to prey on the investing public," says Joe Borg, president of the organization and director of the Alabama Securities Commission. "Investors should resist the temptation to make hasty decisions about their investments or finances."
Q. When will the Dow rebound?
A. According to a study of the Dow Jones industrials by Ned Davis Research, the indicator tends to fall immediately after military conflicts, then rebound in the months that follow.
In an examination of 28 crises, from the fall of France to the Gulf War, the average immediately fell an average of 7.1 percent. In the months that followed, it tended to rebound, ending up an average of 12.5 percent within six months.
The blue-chip indicator fell 6.5 percent after Pearl Harbor, then recovered some before plunging back down as World War II droned on.
