Over the past month or so we have been hearing about big banks failing under the credit crisis (you can’t really call it a mortgage crisis anymore). Merill Lynch, Lehman Brothers, Washington Mutual all have suffered headlining losses. Now there are rumors that Morgan Stanley and Wachovia are next (and possibly Goldman Sachs). We know more bank failures are on the horizon:Bankruptcy guru Wilbur Ross predicted on CNBC that 1,000 regional banks could fail. Other economists pegged the looming failures at 50 to 300 regional banks. (source)
Many economists are predicting bad things but I am trying to stay optimistic (finding global data on what is really going on is actually *really* hard to do!). However, history has shown that even in down times there are still good stocks to buy and a bear market can mean opportunity for those who are willing to stick their neck out and take advantage of it. So what does this mean for you? Should you be worried?
To figure that out I went through most of the things on people’s minds and tried to address each one:
- Savings Accounts. Make sure that you don’t have more money in any one institution beyond the amount that is FDIC insured ($100,000 generally).
- Financial Stocks. If you own stock in any of these troubled banks it will be unlikely you will likely be unable to recoup your shares if they go bankrupt (the stock price decreases until it is less than $1 then after 30 days at that threshold it will be moved off the NYSE, etc–and regular common shareholders end are the last ones to be paid out). If I owned shares in these places I would consider selling them now–my guess it buying them will still be a bargain towards the end of the year as most investors will be gun shy about putting there money back into these big banks. A lot of mutual funds had stock in many financial institutions so it is likely your funds may be suffering. If that is the case, just hold tight I have no doubt the fund managers are scrambling to adjust the funds (and if you have an index fund, well at least you know you won’t do worse than the market!).
- Stocks. If you have stocks you might be best to just hold tight. We are entering unknown territory and while it is likely index stocks will trend downwards, buying a good company is always a smart move. This could be a great time for great deals. But it is not necessarily the best time to sell–things are too volatile so if you don’t need the money within the year you are probably best to hold tight and ride out the storm.
- Your home. Keep paying your mortgage. Even if your lender fails there is a good chance your debt will be sold to another institution. As far as home prices, just hold tight–it looks like there might not be much appreciation in home prices, but the lower mortgage rates will probably even out the housing market some. I still don’t think real estate is a great investment yet, but for the most part shelter is always a worthwhile investment so as long as you can afford your mortgage you should just hold tight.
- Retirement accounts. If you are not close to retirement age, and are properly diversified (I should write a post on how to do this–but if you don’t know how you should do some research or ask for help) then you should resist the urge to look at your account. It is protected even if your institution fails and looking at it everyday is only going to stress you out. Ride it out and remember that even severe decreases seem insignificant over time.
- Credit cards. Even if you bank goes under you should still keep paying. The debt will likely be transferred to another institution. This should be obvious, but I figured I would point it out just in case.
- Insurance. Even though AIG failed, the consumer arm was never in trouble. For the most part you are probably okay here, since even if your provider fails there are some fail safes and it will go to a state regulator. I don’t know much about these insurance policies though so you should really check with your carrier.
- Budget. Spend less, save more. You should be doing this anyway, but as the economy moves into troubled times trying to save money and be frugal is always a good move. This is probably the biggest concern for most people since recessions can mean less jobs and having a good safety cushion is important to handle anything that is unexpected.
Did I miss anything? Feel free to leave it in the comments!