What do you do in a crisis that’s unprecedented? That was the question that faced the country in late 2008 as we got hit with a financial tsunami. The government seemed a little confused. (First there was a bailout to buy troubled securities. Then, no, scratch that, it would put the liquidity directly into the banks. Then it decided to loan out $800 billion, to finance consumer loans and push down home mortgage rates. And by the time you read this, new ideas will no doubt be in play.) No surprise, then, that most ordinary citizens have also felt somewhat uncertain — all of us who, up until now, had pretty much played by the rules, buying houses we could afford, maxing out our 401(k)s, and passing up a lot of lattes so our kids could go to college. What the hell are we supposed to do next? Well, calm down and grab a chair. What you need is what we’ve got: targeted advice on the issues that are keeping you up at night.
Q. What is a good investment other than the stock market?
A. If good, in your opinion, also encompasses safe, "I’d go with FDIC insured CDs, because they offer the most peace of mind," says Philadelphia financial adviser Mark Eskin. That said, CDs are not a great tool for increasing your principal over time: If a CD today is paying two or three percent and inflation is running at about the same level, then you’re treading water. For most people, good should be defined as a portfolio that includes stocks (both domestic and international, so you’re diversified), as well as bonds and cash. "Virtually every investor needs to have some piece of their portfolio in the stock market," Eskin says. "Over a long period of time, that’s the best way to fight the effects of inflation."
Q. Is there a simple formula for the percentage of risk you should take versus the number of years remaining before you retire?
A. Once you decide to stay in the stock market, the question becomes, how much exposure should you have? Asset allocation is an art, not a science, but the basic formula — which still holds in today’s troubled market — is to subtract your age from 100. The answer is the percentage of your assets to keep in stocks. Roughly 25 to 33 percent should be invested in international stocks, with the rest split between bonds and cash or cash equivalents.
Q. Let’s say the worst happens, and my bank fails. How do I go about getting my money out?
A. This is a really good question, considering that the number of bank failures in 2008 (20-plus through November) was more than seven times that in 2007. And before that we hadn’t had a bank fail since 2004. To understand what happens in a failure, let’s take the case of PFF Bank & Trust of Pomona, California. PFF shut its doors on November 21. All deposits — insured and uninsured — were transferred to U.S. Bank, and the next business day those same PFF branches opened their doors at their normal hours, under their new name. Customers could still access all of their deposits by using their ATM cards or writing checks on their old accounts. Anyone who had borrowed money from PFF, in the form of a mortgage, for example, was instructed to keep making their payments and writing checks to their old bank. U.S. Bank took over both insured and uninsured deposits, but that doesn’t always happen — in a bank failure, sometimes uninsured funds are forfeited — which is why it’s important that you limit your deposits in a single institution to the amount insured by the FDIC (see table below).
Q. How do I know my financial adviser is doing all she can for me?
A. What happened when the market hit the skids? Did your adviser pick up the phone and call, or send you an e-mail? If she didn’t, and you called her, how long did she take to respond? In a crisis, the most important thing a financial adviser can do is not take action but answer your questions. (That’s because the heavy lifting — the building of a balanced, diversified portfolio — should have been done long before.) If she didn’t step up and address your concerns when the markets were most volatile, you may want to shop around for a new adviser.
Q. Is my life insurance safe?
A. In general, if the company that holds your policy is rated A- or better by A.M. Best or has a similarly high rating from Moody’s or Standard and Poors (check ambest.com, moodys.com and standardandpoors.com), you are probably in fine shape.
Of course, we buy life insurance to protect the financial safety of the people we love; do we really have to worry about the odds on the product itself? Right now, a little worry is a good thing if it spurs you to do your homework and check your insurer’s ranking. But even if you find out that the company has a less-than-perfect rating, you may still want to hold on to the policy; you need to check the costs associated with selling before making any decisions. And be aware that a ho-hum rating doesn’t indicate that customers will lose money or that death benefits won’t be paid. More likely, it means that your premium could go up or, if you decide to cancel the policy, you could lose full access to premiums you’ve paid.
The bottom line, says Glenn Daily, a fee-only insurance adviser based in New York, is that insurance is a "relatively secure corner of the financial services marketplace. The life insurance companies didn’t make as many bad investments as other types of companies did." (It was a different, noninsurance division of AIG that dragged that company down.) If you’re still concerned, then diversify just as you do in your other investments: Buy smaller policies from a number of well-rated carriers. That way, if one runs into difficulty, you’ll have the others to fall back on.
Q. We’ve always been told that we should stay in the stock market until our retirement is imminent. Is that still the prudent advice if you’re 40 or 50?
A. Yes. The stock market has proven to be the best tool for growing capital. And don’t try to "time the market" (which means trying to predict the future ups and downs, then buy and sell accordingly); you may get hit with a day like October 13, 2008. That was the Monday after the market’s worst week since 1933, and individual investors were growing more panicky and emotionally drained every day. By the previous Friday, many couldn’t take it anymore, so they sold. And right after the weekend, on Monday the 13th, the Dow Jones Industrial Average jumped 936 points, the largest point gain ever in a single day. Everyone who sold missed the upside, and that cost them a lot of money.
Q. What’s the safest thing to do with $50,000 right now? And yes, I’ve already saved six months of living expenses.
A. If you’re looking for absolutely no risk whatsoever, then you’re talking about cash in an FDIC insured bank account or a CD. CDs are terrific if you can predict your need for the money. By laddering them — buying CDs that mature at different times — you can guarantee that you’ll have access to cash whenever you need it. Shop around, though. Banks looking to attract deposits often give higher rates. You could also consider a U.S. Treasury bill, which you can buy directly from the government (treasurydirect.gov).
Willing to take a little bit of risk? Then consider a safer haven, like municipal bonds, many of which are yielding in the range of three percent. Still, be sure you diversify. Instead of holding a position in only one bond, consider a municipal bond fund, which spreads the risk.
Q. I’ve just retired. How should I adjust my investment strategy to deal with the stock market disaster?
A. People who have just retired are feeling the strain more than anyone. You’ve heard that short-term assets belong in safe places (cash, CDs), while longer-term ones can withstand some risk. If you’re retired, you should always have three years of living expenses in safe investments. This offers substantial protection because when markets are at their lows, you don’t have to sell stocks to fund your normal life. You can use cash for your expenses and give your longer-term investments time to recover.
The new way of the world is this: If you want to take out a mortgage or car loan anytime soon — and do so at a decent rate of interest — you are going to need pristine credit. In the olden days (that is, last year) a credit score of 720 would have entitled you to borrow at the best rates; today you need a score of 760 or higher. Improving your credit score means doing all of the following things without fail.
- Pay bills on time. Every one of them. This accounts for 35 percent of your score.
- Use as little as 10 percent of the credit available to you on plastic. This means paying down your revolving debt. (A backdoor way to do this: Ask for increases in your credit lines, but don’t increase the debt you carry.) Your total debt of all types accounts for 30 percent of your score.
- Maintain long credit relationships. This is one reason you shouldn’t close out old cards. (The other is that doing so decreases your credit lines, which will ding your total.) This represents 15 percent of your score.
- Don’t get a new credit card unless you have to. Applications take down your score because they are interpreted as a sign that you’re short on cash. If you’re applying for cards, put out your feelers within a 45-day period when they’ll count as a single inquiry. Your credit inquiry status represents 10 percent of your score.
- Keep a good mix of creditors. You want to demonstrate that you can borrow from and then repay all kinds of companies — car dealerships, mortgage lenders and, of course, credit card issuers. However, this is only 10 percent of your score.
Finally, any outfit claiming it can painlessly clean up your credit or settle your debts is overpromising. The one DIY strategy that’s working — at least for now — is called piggybacking. If you have, say, a spouse, partner or child with not-so-great credit, you can give their score a boost by adding them to your accounts as an authorized user. (If it’s your credit that’s not so hot, they can do the same for you.)
Q. I’m in the middle of a divorce, but all the financial numbers — mine and my husband’s — are changing. How do I protect myself?
A. This kind of market should make you rethink your divorce game plan, says New York matrimonial attorney Lois J. Liberman. Primarily, you need to think carefully about what to do with the house. If you’re the one who’ll be living there, you’d be smart to take it at its current lower price — and angle for more in cash and stocks — and then sit on it (and in it) until home values rebound. On the other hand, if you’re the one who’s moving out and you think the house may recover its higher price in a few years, you might negotiate to remain co-owner in hopes of recapturing some of that value.
Also important to know: Even if you and your husband agree to transfer ownership of the marital residence to you or to him, you may not be able to do so. That’s because a transfer usually requires that the mortgage be refinanced in the single owner’s name, and he or she must have the income to support a refi. So if the transferee has been laid off or has suffered financial reversals in this climate, the transaction may be impossible in the short term.
Q. Has the tightening of credit affected college loans?
A. The market for private student loans has dried up somewhat, but federal loans are still available. In fact, new legislation was passed last May that provides for higher borrowing limits on federally insured Stafford loans. The credit requirements for Plus loans have also been relaxed. "If you’re less than 180 days late on your mortgage, you can still pass the credit test for Plus loans," says Kal Chany, author of Paying for College Without Going Broke. "There are also provisions if you have outstanding medical bills."
What’s likely to become more onerous is the process of shopping for a lender. "You’ll need to do more homework," Chany says. Call the school’s financial aid office and ask for its list of preferred lenders. (Yes, there was a payola problem with a few of these lists a year or two ago, but the issues have been resolved to the best of our knowledge. Today, these lists eliminate more hassles than they cause.) Finally, know that if after you fill out your financial forms you lose your job or suffer other financial losses, you can ask the school for more aid.
Q. I have to move for my job. What should I know about selling my house?
A. It’s as simple as this: Don’t buy a new place until you sell the old one. You can always rent. If you’re short on cash, ask your company if it can subsidize your living expenses for even a few months.
Q. My kid lost his job and is coming home to regroup. Should I charge him rent? Give him money? Help!
A. Make him comfortable — but not too comfortable. There’s a reason disability insurers will cover you only up to 60 percent of your salary. They want you to have an incentive to return to work. You need to do the same for your son. Sit down and figure out what contributions he could make to the household. If he gets a part-time job (and he should), one of those contributions should be rent. Until then, he can pitch in by doing things so that you no longer have to pay others to do them, such as cleaning the house or walking the dog.
Q. Is now a good time to buy a house? Rents are rising in my neighborhood, and for sale signs are popping up everywhere.
A. As long as you plan to live in the house for at least five years (preferably 10), now is a great time to buy. If you put down at least 10 percent and keep the amount you borrow under $729,000 — the new limit for conventional mortgages — you should get a loan pretty easily, assuming your credit is good.
Q. What kinds of employment will remain strong? It seems silly to try to compete with young’uns in fields involving the Internet. Where else can we go?
A. First of all, you need an attitude adjustment, notes Cynthia Shapiro, author of What Does Somebody Have to Do to Get a Job Around Here? "There aren’t the limitations for women 40-plus that there used to be. If a woman is drawn to a hot field (see "Where the Jobs Are," below), she can jump in like anyone else." The key is to let everyone know you’re looking. "You can’t sit behind your computer," Shapiro says. "You have to go to lunches, industry functions, show up at every party. Get out there so people can hear what you have to say."
Where the Jobs Are: Top 10 Growth Fields
(Projected percentage of growth, 2006 to 2016, per U.S. Bureau of Labor Statistics.)
- 53.4% – Network systems and data communication analysts
- 50.6% – Personal and home care aides
- 48.7% – Home health aides
- 44.6% – Computer software engineers
- 41% – Veterinary technologists/technicians
- 41% – Personal financial advisers
- 39.8% – Theatrical makeup artists
- 35.4% – Medical assistants
- 35% – Veterinarians
- 34.3% – Substance abuse/behavioral disorder counselors
Q. How do I plan for a shift from full time to part time — or should I give up this dream for the duration?
A. Now is not the moment to go part time, says career consultant Jeri Sedlar, coauthor of Don’t Retire, Rewire. If you are dependent on your income, you don’t want to convey to your employer that you’re less than 100 percent committed. That said, if the company is clearly in cost-cutting mode, it might welcome your volunteering to shift into part time, because it would save your boss a head count. Outline the case for why you’re the best person to make it work — then gear up for a six- to eight-month transition where you give more and are paid less, to prove that the new schedule is ideal for all.
Q. Why do people tell me that a recession is a good time to start a business?
A. People are not necessarily telling you to quit your job, empty your savings, and fund your dream of opening a B&B. But if you are anxious about holding on to your job — or even if your job seems secure — you may want to place a side bet by moonlighting, says Stephanie Chandler, author of From Entrepreneur to Infopreneur. Since she believes that "the steadiest paycheck can disappear overnight," she recommends you start a business in your off-hours and work your way into full time. "There’s not much competition right now, because people are curling up from fear," she says. "This is the time when millionaires are made." Plus, many experts believe that a business that gets off to a decent start in bad times is poised for success when the economy rebounds.
Q. What if I get a buyout offer but still need to work? If I can hold on to the job instead, should I?
A. You can try. But understand, if the company makes you the offer, it’s signaling that your future with them isn’t very bright. That said, sometimes in periods of major corporate change, a new person is brought in and directed to cut heads, regardless of performance. If that’s the case, it makes sense to try to demonstrate why you shouldn’t be the one to go.
Q. I started a side business importing Hungarian wine three years ago. My initial investment is running out, and I am showing a loss. But I am getting good press and interest. Should I borrow more money to keep this business going, or give up and stay at my full-time job?
A. You shouldn’t give up any full-time job right now. Period. But if you’re thinking about continuing with your business part time, you have to look very closely at the numbers. Do you see profitability in your future? For help, tap into the network of the Service Corps of Retired executives (score.org) These folks, many of them retired accountants, offer free business advice.
— Additional reporting by Arielle McGowen
Originally published in MORE magazine, February 2009. Jean Chatzky is More's personal finance expert. Read more of her advice here.