Video: Advice after stock plummet: Don’t panic

  1. Transcript of: Advice after stock plummet: Don’t panic

    MATT LAUER, co-host: We're back now at 7:43. This morning on TODAY'S MONEY , surviving the stock plunge. Given the chaos on Wall Street , fueled by Monday's nearly 635 point drop, how do you keep your money safe? Jean Chatzky is TODAY's financial editor. Jean , good morning. Nice to see you.

    Ms. JEAN CHATZKY (Today Financial Editor): Good morning. You too.

    LAUER: You say this all the time, you don't want people to panic after a day or a week or a month like this. But when you look at what's being said about these markets and about the fundamentals of the economy, why isn't a little panic a good thing?

    Ms. CHATZKY: I just want people to think before they move. And by the way, I would be saying the same thing if the stock market was running up. Because when we just pull the trigger without even stopping to think about it for a few minutes, we make really bad decisions.

    LAUER: This may sound superficial, but if you're an average investor and you've got your money in the stock market right now, for the long-term, should you turn off the TV and should you stop reading the papers about what's happening on a daily basis?

    Ms. CHATZKY: Absolutely. You do not want to micromanage this. You don't want a stock Web site coming up every time you power on your computer. Because, again, that leads to emotions, it leads to panic, and then we make bad decisions.

    LAUER: At the same time, though, there are some questions you should be asking yourself. For example, are you too heavily invested in this market, especially if you need money in the short-term?

    Ms. CHATZKY: Right. And we're talking about money that you need to pay next year's college tuition payment, that down payment you want to put on a home. For retirees, this is a bigger issue because, if you're spending down your 401(k), you've got to keep a certain amount of money in cash so that you don't have to sell into a down market.

    LAUER: So when you suggest that people maintain enough liquidity, they're going to translate that into selling.

    Ms. CHATZKY: And for some people, that's the right thing to do because we could go down more. And you have to ask yourself, 'If we fall another thousand or 2,000 points and I need the money right now, am I going to be sorry?'

    LAUER: Another tip you have is increase your diversity, which is smart. The question is, you can stay up at night, panic, and you're thinking about where do you put it? I mean, how do you diversify?

    Ms. CHATZKY: I'm saying that, in addition to stocks and bonds, what's become very clear is that we need to own alternative asset classes with a small slice of your portfolio. That means gold, it means other precious metals , oil because those things don't move with the markets in general. And so, 10 to 15 percent, you want to put in a mutual fund that owns those things and then you can sleep.

    LAUER: And if a year or two or three ago you had done that and invested in gold, you'd be doing pretty well right now.

    Ms. CHATZKY: Right. I'm not saying sell everything and buy precious metals , and neither is Jim or Maria . It's just, you've got to be broad.

    LAUER: And make sure that you're saving enough. What's the rule of thumb? What do we all need based on our salary levels?

    Ms. CHATZKY: A hundred percent, when you come out of retirement, if not more, of what you're earning today. And if you can put away 10 to 15 percent of your salary every year, on a consistent basis, you should be doing pretty well.

    LAUER: All right. But, again, the main message you are delivering, and Jim and Maria both delivered it as well, do not panic.

    Ms. CHATZKY: Yep.

    LAUER: All right, Jean Chatzy . Jean , thank you very much .

By contributor
updated 8/9/2011 10:05:23 AM ET 2011-08-09T14:05:23

The unprecedented downgrade of U.S. government securities puts the country in uncharted waters, and individual investors are likely to be feeling adrift as well. Investors have been fleeing the stock market in droves, sending the Dow Jones industrial average down 13 percent since July 21.

Major Market Indices

But for ordinary investors, selling indiscriminately in times of crisis is a bad idea, financial planners say. Here are some of the tips offered by professionals:

Don't pull out of stocks now. Financial planners are unanimous on one thing: Don't exit the stock market in a panic. "You need to be right twice," points out Dana Levit, owner of Paragon Financial Advisors in Newton, Mass. "You need to know when to get out and then when to get back in."

Vanguard Group founder Jack Bogle reiterated that sentiment. "These are terrible times to make decisions" based on panic, he told CNBC. Bogle urged investors to wait out the market downturn or at least keep any changes small and incremental.

Don't write off U.S. government securities. No less a respected financial mind than Warren Buffett weighed in, saying much of his own personal, as well as Berkshire Hathaway's, cash holdings are in the form of Treasury securities. Mitchell Goldberg, president of ClientFirst Strategy in Woodbury, N.Y., also says investors shouldn't be too quick to write off U.S. government bonds. Although it's counterintuitive, he says a global double-dip recession actually would make U.S. debt more attractive.

No matter what the ratings agencies say, the market tends to grade risk on a bell curve. Downgrade or not, U.S. Treasuries are still among the safest investments out there. If we're heading towards another global downturn — or are already there, as some believe — our debt is likely to look better by comparison. And in this market, if there's one attribute investors crave, it's safety.

Avoid so-called "safe haven" assets. Traditional safe havens such as gold and Swiss francs, are skyrocketing as equities tank. But that doesn't mean individual investors should pile in, cautions Goldberg. These investments can get sharply overpriced as panicked buyers flood in and then drop in value just as rapidly when the perception of risk fades. "Only the nimblest of people or the earliest investors will get out with something to show for it," he says.

Don't worry about your money-market account. S&P downgraded long-term Treasury bonds, but short-term T-bills are still AAA-rated. This means that vehicles like money market funds, which hold mostly T-bills of 90 days or less, are still a prudent choice for risk-averse investors.

There's a slight chance that this security could come with a price. If investors leave long-term U.S. bonds and are looking for an ultra-safe alternative, they could pile into T-bills. Theoretically that could force money market funds to pay more to roll over their investments, lowering the value of investor principal.

Story: Obama: US will always be AAA-rated, despite downgrade

Remember that savings accounts are protected. Nervous investors always have FDIC-insured deposits as a haven of last resort. Generally bank accounts are fully insured up to $250,000 per depositor, per institution.

  1. More on the financial crisis
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      Fed, with few cards, makes unusual pledge

      The Federal Reserve's highly unusual promise — to keep interest rates low for "at least" two more  years — comes as the central bank is running out of options to reassure panicky markets.

    2. Economic uncertainty feels like normal now
    3. Tough decisions ahead to get AAA rating back
    4. Economy is a bigger problem than any downgrade
    5. As market melts down, some are saying 'Buy!'
    6. EU bank chief: Markets 'in worst crisis since WWII'
    7. As markets tank, financial planners advise calm

While savings accounts and CDs obviously aren't investment vehicles, they are a good place to park your cash if you anticipate a big expense such as a car, down payment or college tuition in the next couple of years, says Debra A. Neiman, principal and founder of Neiman & Associates Financial Services, LLC. "A market cycle is generally five years, so they should have cash set aside not subject to market fluctuations," she says. One silver lining to a downgrade-prompted rise in interest rates is that consumers should be able to earn a bit more on their savings accounts and CDs.

Prepare to pay more on home loans. The flip side of the market gyrations is that consumers will pay more to borrow money. Borrowers with variable home equity lines of credit (HELOCs) are likely to be among the first to feel the impact if America's creditors demand higher rates for holding our debt. Homeowners with adjustable-rate mortgages can also expect to see their payments increase when their rates adjust. "In the long term, you're going to see rate increases," says Levit. "It reinforces the fact that people really need to have an emergency fund."

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