Be brave: Don't cash out now

Wondering what turmoil on Wall Street means for your portfolio? Who isn't?

By KARA McGUIRE, Star Tribune

Last update: September 16, 2008 - 3:33 PM

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Blame it on "credit crisis fatigue" or the human instinct to flee from uncertain and potentially explosive situations. First Bear Stearns. Then Fannie and Freddie. After watching the unraveling of Lehman Brothers, and the hasty merger of Merrill Lynch with Bank of America on Monday, how many more months of this uncertainty can we take? With the Dow Jones industrial average dropping more than 504 points yesterday, even this stock-owning, stay-the-course columnist felt the desire for a mattress cash stash. My guess is I'm not alone. Here are my questions. Share yours on my blog: www.startribune.com/kablog.

Q So should I sell my stocks or move my 401(k) holdings to cash?

A Not unless you want to commit the common investor sin of selling low only to buy high when the stock market rebounds. Studies have shown investors can't time the market and the returns of those who try suffer mightily. If you are well-diversified with a time horizon that extends a few years, resist the temptation to do something, and do nothing instead. If anything, you should buy low.

Q Should I get rid of my financial stocks?

A That would be tough, given that the Standard & Poor's 500 and many mutual funds own financial stocks. Don't sell your financial stocks or your value-oriented mutual funds prone to holding financial stocks just because they have exposure to that beleaguered sector. Some stocks, such as local names Ameriprise and U.S. Bancorp. have avoided the tar pits that are causing some peers to go extinct. Should you sell a stock such as insurer AIG? It's already lost a lot of value (60 percent on Monday alone), but at $4.76, it's worth a few bucks and that's more than nothing. Ask yourself: Would you kick yourself harder if the stock becomes worthless and you didn't get out or if you missed a big rebound?

Q What happens to Lehman Brothers and Neuberger Berman clients?

A The broker-dealer subsidiaries weren't included in the bankruptcy filing; customer accounts will eventually be transferred to another broker-dealer. Customers can even continue to trade.

Q If my brokerage firm goes belly up, will my portfolio be wiped out?

A No. Customer assets must be kept separate from the brokerage's assets and the Securities Investor Protection Corp. provides added protection of up to $500,000 per account. Visit FINRA.org for more details.

Q Will I ever get a mortgage?

A Mortgage rates for 30-year-fixed-rate loans have actually dropped to around 5.625 percent, 0.75 percentage points lower than they were two weeks ago. Some watchers expect them to decline even further. As for whether there will be money available to borrow when you need it depends on several factors, including the quality of your credit score and the type of loan you're seeking. Some experts are predicting the latest troubles will tighten the credit supply, but it's too early to say.

Sources: Financial advisers Joan Rossi, Keith Tufte and Nate Wenner; strategists Michael Swanson and James Paulsen, and mortgage banker Alex Stenback.

Kara McGuire's personal finance column appears every Sunday. 612-673-7293

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