If you’ve ever heard people refer to a time when there was
panic, this fall has been pretty close to one of those times.
If you’ve ever heard people refer to a time when there was panic, this fall has been pretty close to one of those times.
Stocks are falling throughout the world as investors worry about the strength of financial institutions, the ability of banks to provide the loans businesses and consumers need, and the potential for a global recession.
People are nervous: Those who invest money regularly, those hoping their 401(k) and college savings funds will be adequate for the future, and those who simply hope their bank accounts and insurance will be OK. Investment advisers are inundated with calls. Some, such as Steve Weinstein of Chicago’s Altair Advisers, have been making house calls to assure clients they will be OK.
Everyone has the same question: Should I sell stocks? Financial advisers are discouraging people from selling now because it would lock in huge losses, but everyone’s circumstances are different.
Below is a sample of the questions I have received.
Mutual funds
I will retire in 12 years and have a 2020 mutual fund in my 401(k) plan. I am losing money in it. Should I keep the money in it or take it out?
Many people are shocked by funds like yours. The date in them – in your case, 2020 – is the year you plan to retire. And the mutual fund was designed to make your money grow so you would have what you need for retirement.
Unfortunately, a lot of people simply assumed these funds would never lose money.
You cannot ever assume that a fund with stocks won’t lose money. And your fund includes stocks.
Many 2020 funds have about 60 percent to 70 percent of the fund invested in the stock market and the rest in bonds and money market funds. Given that mixture, your fund probably has declined about 14 percent in the last year.
That’s not as serious a drop as the overall stock market. Still, if that’s too frightening for you, you can cut your exposure to the stock market by directing future 401(k) contributions into a money market fund or stable value fund.
Make sure you add enough money to your 401(k) each payday so you receive every penny of any matching money your employer provides.
That free money will help you build up your retirement savings after taking this rather large hit fairly close to retirement.
In addition, pay attention to saving beyond your 401(k). The economy is in a recession, and some experts are expecting the unemployment rate to climb. Make sure you have an emergency fund that will cover your living expenses if you lose your job. People in their 50s can have difficulty finding new jobs, so start building savings. Having savings equal to six months to a year of take home pay would be wise.
Insurance annuities
I have an annuity. Is that safe?
Some insurance companies have faced financial difficulty because of their exposure to the toxic mortgage bonds that are at the center of the world’s financial troubles. If an insurance company fails, however, your annuity should be covered by insurance at the state level.
There is no Federal Deposit Insurance Corp. to cover insurance the way it covers savings in banks. But state governments set up funds guaranteeing people will receive their life insurance, annuities and other covered insurance products if the insurance companies collapse and can’t pay policyholders. They charge insurance companies fees to cover these situations.
Instead of relying on that, however, make sure you buy insurance from a stable company. Look at A.M. Best.
The top rating would be A++, or AAA through Standard & Poor’s. If you find your insurance firm has a low rating, maybe below A, it may be cause for concern, but pause before yanking money out of an annuity or insurance policy. You could suffer a large penalty.
College loans
I will be sending a child to college next year, and our college savings have been hurt in the stock market. Will we have trouble getting a loan?
You should not have trouble obtaining a low-interest federal Stafford loan at a 6 percent interest rate through your college’s financial aid office. But that will cover only part of most college costs. People frequently need to borrow more.
Parents also can obtain federal loans called PLUS loans.
If, however, you try to borrow from a bank, you could have trouble finding a lender, and the loans are very expensive, at 12 percent to 15 percent interest rates. This is a result of the credit crunch. Lenders often don’t have the money to lend, and charge a lot for the loans they give. In addition, if you don’t have a high credit score, you could be turned down.
That’s not the case for federal loans. There is no credit score requirement for a Stafford loan. Talk to the college financial aid office for details.
The stock market
I have been putting money into my 401(k) and am scared I will lose everything. Should I pull it out?
No. If you pull money out of a 401(k) before you are 59 1/2, you face harsh penalties.
You don’t have to pull your money out of a 401(k) plan to make it safe. If you are truly afraid of the stock market, you can move all the money, or some of the money, within the 401(k) to a money market fund or a stable value fund.
You won’t make much money, maybe 2 percent to 4 percent, so it’s a bad idea for people of any age to leave their money in such a fund for many years. But if you are particularly nervous now, moving some money to one of these safer funds may give you the breathing room you need.
Keep in mind that the stock market has always recovered, although it could take years. So leaving the money in a fund that earns 2 percent for 20 or 30 years is a mistake.
If you were 35 and did this with $30,000, by the time you retire you would have about $50,000.
Yet, if the market stays horrible for 10 years and then heals, $30,000 could grow to about $116,000 if your investments in stock funds grow at 7 percent a year. That seems impossible now, but it would be a modest return based on what has happened in the stock market in the past.
International funds
I’m 26 years old and was saving diligently in my 401(k) plan. I had been using an international fund that was doing great last year. Now, I’ve lost about a third of my money. Should I stop investing in the fund? Should I pull my money out?
Your losses are understandable. Since October 2007, stocks in developed countries like Europe and Japan have fallen about 37 percent, and the U.S. stock market, as measured by the benchmark Standard and Poor’s 500 index, has dropped about 30 percent.
The mutual funds in your 401(k) plan have probably dropped about the same amount. There is nothing wrong with them; they are simply reflecting what the stock market is doing.
Financial advisers suggest that you keep adding money to your 401(k). Here’s why: You will be able to buy more shares now than you could have before. Let’s say you invest $30 a week in your fund. In the past, if a share in your mutual fund cost $30, you could buy only one share each time you contributed to your 401(k).
Now, with the same $30, perhaps you could buy two shares. So when the stock market heals, as it always has at some unknown point, you will have more shares and will have the potential to earn money on all of them.
But one reason you are hurting is you were counting on just one mutual fund, and your 401(k) money consequently depended on one segment of the world’s stock market, international stocks. That’s a mistake.
You receive protection from multiple types of funds: a U.S. stock fund, an international stock fund, and a bond fund. Add a bond fund to diversify now. When you get paid, put at least some of each paycheck into a bond fund. For your age, advisers often suggest putting 70 percent to 80 percent of your money in stocks and 20 percent to 30 percent in bonds.
