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?