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I’ve been scouring the Web for answers to common questions that I keep hearing people ask. Here are some of the top answers I found.
How do I know my bank is insured?
Search the FDIC Web site to make sure your bank is on the list.
Is my money market fund safe?
- Yes, on Sept. 16 a money fund marked its net asset value below $1 â€” sacrilege for an investment meant to be the same as cash. After the Reserve Primary Fund “broke the buck” because of debt it held that was issued by the now-bust investment bank Lehman Brothers, institutional investors scrambled to withdraw their money. Sept. 18 brought additional worries: Putnam Investments said it would be shutting down one of its money market funds, and the ratings agency Moody’s warned it might downgrade 13 of Lehman’s funds. (Lehman’s asset management subsidiary was not part of the bankruptcy; it continues to operate normally.) Other asset managers tripped over themselves to proclaim their funds safe, going as far as to say they’d start publishing their holdings online daily to prove they don’t own a lick of dubious debt issued by other embattled financial firms. And then, on Sept. 19, the Treasury Department announced a $50 billion program to insure the holdings of any money market mutual fund â€” retail or institutional â€” that pays a fee to join the new program.
- But let’s go back to be beginning, to being a do-nothing. At this point, there is a greater risk from mass redemptions â€” like a run on the bank â€” than there is from a rash of money funds declaring that their assets have gone bad. Money market funds are designed to be low risk, and by law are allowed to invest only in government bonds, certificates of deposit, short-term IOUs issued by companies, and other highly liquid securities â€” though, unlike the similarly named “money market deposit accounts” found at many banks, they’re not FDIC-insured.
- The problem with the Putnam fund, which was sold only to institutional investors (such as pensions funds and insurance companies), wasn’t that it was losing value but rather that so much money was being withdrawn. The fund was going to be forced to dump a big block of its holdings, and flooding the market like that has the effect of driving down security prices â€” thereby driving down the value of the fund you want to keep at $1 per share. “The investors are almost as important as the investments here,” says Peter Crane, money fund expert and CEO of Crane Data. “A full-blown run would be perilous.” That’s why the Treasury stepped in with its guarantee program â€” to help prop up the price of any money market that needs it, and prevent investor confidence from being undermined.
- So far, there hasn’t been anything resembling a full-blown run. A lot of money flowed out of money funds for the week ending Sept. 18, but most of the redemptions were among institutional investors, says Crane. The person who can prevent it from spreading to retail investors: you.
(Source, Time.com, “Feds Back Money Markets: If Your Fund Safe?” Sept. 19, 1008)
Should I invest in the stock market?
Joe Magyer, senior analyst, Income Investor says on The Motley Fool:
- For long-term investors, now is an outstanding time to buy.
- It takes nerves of steel to buy in this market, but remember that no great investor ever made their fortune buying high and selling low. So keep making those 401(k) contributions and resist the urge to stash your cash under your mattress. Years from now, when the value of your retirement accounts actually matters, you’ll be very glad you did.
(Source: The Motley Fool, “The Fool Answers: Is Now a Good Time to Buy?” Oct. 21, 2008.)
What do I do about my 401K?
Melody Hobson says:
- Your money is safe
- You Should Keep Contributing
- You Should Not Cash Out of Your 401k
- You Should Roll Over Or Keep Your Money With Your Former Employe
- You Should Only Take a Loan Against Your 401k If It Is Your Last Option
I am a big believer in the 401(k) plan. For most of us, it’s the first and best place to invest, no matter how the current stock market is performing. And with the market down, one of my favorite market factors comes into play â€” that of dollar cost averaging.
- Dollar cost averaging is the approach to investing a set dollar amount over a specific period of time, which allows you to buy more stock when prices are low and less when prices are high. At the end of the day, the price balances out and you are able to take advantage of both the upside and downside of the market — a terrific opportunity in a market like we are seeing lately.
- I want to reassure people, yes, your 401(k) is safe.
- The one thing I would recommend people do is pull out their most recent 401(k) statement or ask someone in your human resources department for an update, to make sure your savings are diversifiedâ€”spread across more than one investment type.
- Again, one of my favorite sayings is that bull markets always follow bears. After the last bear market, stocks zoomed up almost 33 percent just one year later. You do not want to miss out on this rebound!
- There have been a number of studies that have shown that the negatives of missing just a handful of the best days of the market far outweigh the benefits of missing the worst days. (Source: Five Must-Knows About Your 401K, ABCNews.com, September 30, 2008)
What do I need to know about credit?
Suze Orman says:
- Stop using credit cards unless you pay it offer every month.
- Tighten your purse strings.
- Interest rates may go up on credit cards.
- Keep a little cash on hand for emergencies
- Take a look at exchange traded funds
(Source: Today.msnbc.com, video segment, September 2008)
- Consumers know all too well that going over their credit limit can mean a nasty fee, a higher interest rate and maybe even a lower credit score.
- Few people are aware that merely approaching their limit can have costly consequences.
- Your debt-to-limit ratio, or “debt utilization,” is a key component of your credit score.
- If you have a $5,000 limit and you’ve charged $4,000 this month, your debt-to-limit ratio is 80%, which is enough to signal to lenders that you are a high risk borrower.
- As a result, lenders may increase your annual percentage rate (APR) or deny you a loan – even if you pay off your credit card balance every month and have never exceeded your limit.
(Source: CNNMoney.com, “Credit: Know Your Limits” Sept. 25, 2008)
- Protecting Your Retirement: Melody Hobson video on ABCNews
- Five Must-Knows About Your 401K: ABCNews
- Helping an aging parent with financial matters: CNN Money
- Five Ways To Stop Buying Stupid Stuff: MotleyFool
- 10 Secrets To Help Your Children Handle the Financial Crisis: iVillage.com
- Variety of financial tips and information inThe Motely Fool’s “Panic 2008” section.