I know this is a very scary time for all of you. Every day brings news of another Wall Street meltdown that triggers a big market loss. So far this week we have had two days when the major stock indexes lost more than 3%. AIG, the world’s largest insurance company, was on the brink of its own meltdown; for any of you with an AIG policy, that had to have ratcheted up your blood pressure. The Reserve Primary Fund—which is a large institutional money market fund—had to reduce its price from $1 to 97 cents, committing the cardinal sin of safe investing by “breaking the buck.”

It is perfectly reasonable to feel like the sky is falling. But I need you to listen to me: There is no need to panic. In fact, if you do panic and make rash financial moves today you will probably do the most damage to your long-term financial security.

Here’s what I DO WANT YOU TO DO HOWEVER:

Keep Your Money in the Bank.
I want you to open up another browser window on your computer right now and go to your bank’s website. Scroll around and look for the FDIC insured label. Seriously, go do that right now, I’ll wait.

Okay, so if you found the FDIC label (or the NFCU label for a credit union) here’s what that means: IF YOU HAVE FOLLOWED THE GUIDELINES OF THE FDIC INSURED LIMITS YOU HAVE NOTHING TO WORRY ABOUT. That insurance means that in the event your bank ran into financial trouble, your deposits would be 100% safe if the combined total of all your accounts (that are just in your name alone at that bank) total less than $250,000 (new limit as of October 2008)*. Now if you have more than $250,000 (new limit as of October 2008)* on deposit, you might still be fully insured depending on the type of account; for instance a joint account for two people that has $500,000 (new limit as of October 2008)* on deposit would be fully insured because each person is entitled to $250,000 (new limit as of October 2008)* of coverage. So you could have a single account in just your name with up to $250,000 (new limit as of October 2008)* in it AND a joint account with your life-partner or spouse with $500,000 (new limit as of October 2008)* in it and you are still insured. However, just to be safe and sound—and to know for sure if you have more than $250,000 (new limit as of October 2008)* on deposit at any one bank—I want you to go to myfdicinsurance.gov. On this website you can use a terrific FDIC tool to determine if any of your money is not covered. You just might find someone familiar there waiting to help you.

Insider Scoop: I just want to make one thing very very clear: the FDIC insurance covers your savings deposits, such as your checking account, savings accounts, CDs and money markets. But if you happen to have invested in stock mutual funds through your bank, those are not covered by the FDIC. Savings are insured. Investments are not.

Play It Safe with Money Market Funds.
If you own a money market through your bank, it is insured by the FDIC. But that’s not the same as a money market mutual fund, which is offered by mutual fund companies and brokerage firms. Money market mutual funds (MMMFs) have been extremely safe in the past; they are run no differently than bank Money Market Deposit accounts (MMDAs). The only difference is that a MMMF is not FDIC insured.

Both MMDAs and MMMFs are meant to be super-safe savings vehicles. Their net asset value (NAV), or share price, is not supposed to ever waver from $1.00. All you earn from these accounts is interest; there is never any capital gains. But there’s also not supposed to be any chance of losing money either. Well, just yesterday one money market fund—the Reserve Primary Fund—said its NAV had in fact fallen below $1.00 because it owned a lot of securities of Lehman Bros. Instead of a $1.00 share price, that fund’s share price dropped to 97 cents, so institutional investors will lose 3%.

Now listen closely. Some of you, whether you know it or not, may have your cash invested at a brokerage firm where your money (via the brokerage firm) was invested in the Reserve Primary Fund. If the money market fund that you are invested in was exposed to this loss, and the brokerage firm decides to take that money out of the money market fund at a loss, you may very well lose 3% on money that you never expected to lose a penny on. So...call your brokerage firm and find out if they have any exposure to this risk within your money market fund. Remember we are talking about money market funds—NOT money market accounts, NOT money market deposit funds, just plain money market money funds.    

If you are at all concerned, you can easily move your money to ultra safe havens. One idea is to simply exchange out of your regular MMMF into the Treasury MMMF; most major fund companies and discount brokerages offer both. The tradeoff is that your yield will be lower, but you can sleep easy knowing that your money is invested in U.S. government securities. So, listen again closely. This is exactly what I did with my liquid money awhile ago. I decided I did not care about yield—all I cared about was safety. So I took 100% of my cash at all the brokerages firms and put it into the treasury money market funds. No matter how dire you feel things are right now, there is no way anything is going to happen to the “full faith and credit” backing of the U.S. government that comes with every penny you invest in a Treasury MMMF.

Also if you are really skittish, you can also move the money into a bank's MMDA or even into my Save Yourself Accounts that I wanted you to all open up. All of those are safe, because they are all FDIC insured. Just make sure that if you move more than $250,000 (new limit as of October 2008)* you read my directions on how to make sure you are fully insured.

Stay Focused on Your Long-Term Goals.
If you are investing for retirement and that is 10, 20 or 30 years off away, the smartest thing you can do is tune out what is going on right now. Yes, I know how hard it is to do nothing when you see your 401(k) falling 20% or more, but sticking with your long-term strategy will allow you to have a financially secure retirement.

I know what you’re thinking: I will sell my stock funds now and keep my money in a safe money market account. Sure a money market is safe in that its value isn’t going to go down. But when you do that, you put yourself at a much bigger risk: your money won’t grow enough over time to build a big retirement stash. Look, a money market account earns less than 4% right now, and inflation is above 4%; so long-term you are building no real wealth.

And don’t tell me you will just stay in the money market while the market is falling and then will jump back in when things get better. That’s called market timing. It sounds great. But it is impossible to pull off with any success; the problem is that you end up getting back in too late and aren’t invested in stocks when they they take off on a bull run. Being out of the market when stocks are rising pretty much guarantees that your portfolio will not grow enough to allow you a comfortable retirement.

Here’s some perspective to calm your nerves: Since 1950 there have been 10 times when the S&P 500 index fell more than 20%. What we are living through right now is the 11th bear market period. But if you invested in stocks in 1950 and just stayed invested through all the bad times—and the good times—your average annual return was more than 10%. See what I mean? If you have a long time until you need the money, you have time to ride out the down times and reap the gains in the good times. That is a far safer approach than trying to market time.

Make Sure You Are Diversified.
Okay, so I just told you to stick with stocks. But there’s a big caveat: you need to make sure you have the right investments. If you are at least 20 years away from retirement, I think having 80% or more of your money in stocks makes sense. If you are within 10 years of retirement, you might want to keep 30% in stocks with the rest in bonds. That’s the first bit of diversification. Then you need to own a lot of different stocks. Investing in two, three or four individual stocks is not the way to go. Make one mistake and your portfolio is going to suffer big time. Stick with diversified mutual funds or ETFs; each fund or ETF owns dozens, and often hundreds of stocks. That gives you great diversification. Not sure what to invest in? Well, if you are investing in a 401(k) and want to keep it simple, look for a Target Retirement fund. This is a fine one-stop solution: you pick the fund with the year that is closest to your retirement date, and the fund company handles everything from there. Your money is invested in this one fund, but it in fact owns pieces of a number of different funds offered by the company. With this you’ll be invested in a mix of stocks and bonds that are appropriate for your current age. Another way to go if you do not want to watch over your money is to look for a U.S. index fund in the 401(k) and an international fund. A solid long-term strategy is to put 80%-90% in the U.S. fund and the remainder in the international fund.

But with all that said, if this situation is causing you to lose sleep, maybe you are the type that does not belong in the market at all. It is better to have a little something and peace of mind than to have a lot of money and lose your health. Some people really just cannot bear times like this—you may just be one of them. However, at this point I think it would be a mistake to become so conservative for we have already taken quite a beating. Besides, you can also make changes in your portfolio that might make you feel more secure.

Here is what I would like you to think about: buy stocks or ETFs that have a great and secure dividend. 

There are great stocks now that are paying you 4%-6% in interest. So, as long as you are receiving income from these stocks, it should be easier for you to take the news on days like this. Just know that when you do this, do it with the intention of leaving your money there for a long time.

I hope this has helped. At least now you know the scoop.  

Stay safe and go to MYFDICINSURANCE.GOV and make sure your money is insured.  

Remember: just continue to breathe!

Suze 

* The FDIC insurance increase to $250,000 is temporary at this point—only valid through DECEMBER 31, 2009.