What Contributed to Dow Plunge?

News & Notes contributor Julianne Malveaux breaks down the Dow Jones Industrial Average and answers some financial questions from our listeners. Dr. Malveaux is an author, economist, and president of Bennett College.

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FARAI CHIDEYA, host:

From NPR News, this is NEWS & NOTES. I'm Farai Chideya.

The stock market took a wild ride this month. The DOW Jones Industrial Average topped 14,000 for the first time in history then dropped more than four percent, and the Standard & Poor's 500 index dropped to a five-year low. So what does this mean for the majority of Americans, who may own a few stocks, may be even a 401(k), but don't speak the language of Wall Street?

For more, we've got Julianne Malveaux, author, economist and president of Bennett College. Julianne, welcome.

Dr. JULIANNE MALVEAUX (Author; Economist; President, Bennett College): Good to be with you, Farai.

CHIDEYA: So how was it that the DOW can set a record and then, a few days later, drop nearly six months worth of growth?

Dr. MALVEAUX: Well, the DOW Jones Industrial Average is 30 stock. It's not all stock. It's 30. My portfolio happened to go up. Thank you, Lord. And in many ways, it's something of a gamble. Here's the thing, we should not be covering day-to-day fluctuations like they were scores in a football game. At the end of the day, by and large, the DOW, over the course of the year, will average in a tenure period, about six or seven percent growth.

So when you focus on a week or two weeks or a month, you have a tendency to get something of a distorted picture. And for the average worker, who may or may not hold stock, it's immaterial. Half of all Americans don't hold any stock at all. If you have a 401(k), a pension fund, something like that, of course, it's important. But if you look down six months down the road and these are not the stock you're trying to sell tomorrow, it does not matter.

What did that fluctuation mean? It was seedling(ph) a series of weaknesses, housing prices falling, crude prices going up, business investments showing some weaknesses, just any number of things in addition to the whole issue of credit, which has been a concern for a very long time. And so that volatility occurs and unless it continuous to occur - if you tell me a month from now that we've gone from 14,000 back down to 13,000, I'm concerned. If you tell me that we lost four percent in a couple of days, I'm really not.

CHIDEYA: Let me put this in the context of something that happened a few years ago. There was the dot com boom and then the dot bust. A lot of people who didn't know very much about stocks put a lot of money into the market and then had no idea that there was going to be something that falls. Should you invest directly if you really aren't sure what you're doing?

Dr. MALVEAUX: If you don't know what you're doing, make it monopoly money. Mutual fund is a much better way to go. You hear - have how people, who pick up an issue of Fortune or Forbes magazine or they're watching CNBC, and they hear that blank - and I'm not even going to say what blank is because someone will go and do it - is the latest hot thing. And they go put money in it. And would have bust, they're angry. Well, this is not necessarily a sure thing. Certainly, investing lots of money in one stock is a gamble.

That was the problem with Enron, Farai, and when people are in pension funds, they are wholly invested in their parent corporation, they need to be careful about that, and make sure that they know what happens. We all have very busy lives, and people don't have time, really, to follow stock market fluctuations.

And so, when you don't know what you're doing but you want to follow trends, it makes a whole lot of sense to have a mutual fund. It makes a lot of sense to, perhaps, have an index fund. But if you had an index fund, you lost money last week, and maybe you'll gain some next week.

CHIDEYA: I want to move on. We have been asking our listeners to submit money questions for you on our blog. We've been getting some great ones. Kanisha Reingold(ph) is not thinking about buying stocks. She's worrying about how she's going to pay off her student loans. Julianne, she writes, I'm a recent graduate from law school. I have federal loans and private loans, which amount to over $100,000. I don't have any credit card debt. But I'd like to know how to manage the federal loans versus the private loans, which it seems I'll be paying off until I die. So a bit of gallows humor there, what do think she should do or know?

Dr. MALVEAUX: Well first thing, Kanisha gets high props for not having any credit card debt. More than half of all students graduate with some of that as well. She should manage her loans so that she's paying the least average percentage rate possible, which means her private loans should take priority over her federal loans. She also has the opportunity to consolidate her federal loans depending on whether they were Stafford loans or other loans. And she should consolidate them down if she can. The third thing she must aware of is -depending on her income - she can deduct up to $2,500 a year on the interest on her loans - her student loans, as long as they were taken out for educational purposes. It seems very daunting and, certainly, it is. But she has the advantage of not having credit card debt. She should not go into that debt. And she should do any consolidation that she can.

The feds do have some possibilities for advisement and there are websites. I had one and I lost it, unfortunately. I was bringing it with me. But I will be happy to send that to you, Farai, to put on the Web site.

CHIDEYA: We will definitely put it on News and Views and newsandnotes.org. Let me go back to something, thought, when you say consolidate, do you mean consolidate the federal loans with the private loans, or consolidate within federal loans and within private loans?

Dr. MALVEAUX: No. No. She should consolidate within her federal loans. There's a program with - in six months of graduation, you can consolidate your federal loans. There is a provision that you should never have to pay more than 15 percent of your income on loans because, obviously, then what do you live on? So, consolidating her federal loans may bring her payments down a bit. She should look at that. However, make sure that you can consolidate in a way that lowers your APR, not increases it. In other words, if you have a Stafford at five percent, and another loan at 6.8 percent, don't consolidate. But if you can save yourself some money, do that.

CHIDEYA: Hundred thousand dollars, that is a lot of money. Is that unusual for people who've gone to graduate school? Or is this just par for the course these days?

Dr. MALVEAUX: These days, it's par for the course. Farai, the average undergraduate student graduates with about $20,000 in student loan debt. And the average undergraduate African American, with about a 50 percent premium, that's so may be 30 percent, $30,000 rather. We know what the story is. A wonderful piece of legislation that we talked about last week was passed and we're all applauding it. But it really only gives students another $300,000 -$300 - oh, wish it was 300,000.

CHIDEYA: Yeah, I remember $300.

Dr. MALVEAUX: Three hundred dollars a year in Pell and that is income-dependent. So we've switched from a policy perspective, from a time when we felt that an educated workforce was a public good, to a time we felt that if you want to be educated, do your own thing. I would suggest that those who are listening and concerned about this, first of all, work on their personal situation. But secondly, and importantly, work with those of us who are concerned about the public policy around how we finance higher education.

But, you know, if, indeed, you start out with the third - let's say $30,000 in undergraduate debt, when you go to graduate school, people believe that you're going to be a lawyer, if you're going to be a doctor, you're going to be making a lot of money. So there's not a lot of loan money or grant money available for you. And if there's not grant money, you've got to take the loan out.

CHIDEYA: Well, I want to move…

Dr. MALVEAUX: What students - who are listening, this - one quick second.

CHIDEYA: Sure.

Dr. MALVEAUX: What student who are listening should hear is that the better your grades, the more opportunities you have to get subsidies. So a lot of folks say, oh, I don't care whether I get a B or C. Well, your pocketbook said you care in five years.

CHIDEYA: That's good to know. And we have another letter from listener, Ken Haywood(ph). He writes, and this a lot of questions, we can tick them off one by one as we go. I need life insurance. I refuse to pay for life insurance once retired, so I'll only settle for whole life annuity, which after 15 years must be able to pay its own premium and provide cash to me in case of emergency for the rest of my life. I figure I can get a $100,0000 policy at age 42 for around $210 monthly. Any advise here?

So first of all, explain what a whole life annuity is and how it would pay its own premium.

Dr. MALVEAUX: Well, you would invest essentially in an annuity fund. You're putting money in and you're going to get the interest out is what the whole life annuity would do.

But this listener had a whole lot of questions that I would have a lot of questions for him. First, what's his status? Is he married? Is he single? How many children does he have? Why does he feel a need for life insurance as opposed with another form of investment? If he isn't - if he has no encumbrances, it's not sure that that annuity is the best thing for him to do.

Secondly, what does his job offer in the way of insurance? Most - if he works for a corporation, most corporations - colleges, universities, you know, fortune 500 companies, and even smaller companies offer some form of life insurance. So he needs to be looking into that. It seems to me - and he set a bigger - bigger set of questions that he does need to deal with some issues of financial planning, and to look at where he is financially.

Because this is a brother who said, I don't have any money, essentially, and he's looking at life insurance - that is not the answer to his challenge. Life insurance certainly makes a lot of sense for certain people. And I always say to people, if you have neither chick nor child, you don't need life insurance. You know, you need to…

CHIDEYA: What about the whole idea of life insurance versus disability insurance? Because one thing I've heard from some people in finances that life insurance is great if you die. But if you continue to live, and you've hit disability, that actually is something that you should be more aware of and provide against in the future.

Dr. MALVEAUX: Well, his whole notion of the whole life annuity makes sense if he is looking to get a stream of income back. Disability insurance is very important if you don't have yourself covered. The question everyone asks himself is what would you do if you could work? What if tomorrow you woke up and you could not work? How do you support yourself? Who would support you? What kind of programs are there for you? You know, there would be some social security, but it will be minimal - under $1000 a month, depending on what your income was, but it would be minimal.

There might be some things that your employer would provide. But if you are concerned about that, disability insurance makes a lot of sense. Long-term care insurances makes sense for some older people who are looking at what would happen to me if I were disabled and I don't have any children. Who's going to take care of me? How would I pay for, you know, a nursing home or some kind of managed care?

People have to look at that in total, and some of the better financial services companies, Wachovia, HSBC in particular, have great Web sites that can walk you through some of these kind of things. I would encourage him…

CHIDEYA: We will be looking for that.

Dr. MALVEAUX: Yeah, I see those links, but I encourage people to start with those, but then if you really have a dilemma, and again, I think that Ken really needs to sit down with a financial planner, someone that he pays a couple of hundred dollars an hour for a limited amount of time to look at his entire situation because it is complex.

CHIDEYA: Julianne, well thank you so much. And Julianne Malveaux is an author, economist and president of Bennett College. She was at WFDD in Greensborough, North Carolina. You can always go to our blog, nprnewsandnotes or - that's the Web site - blognprnewsandviews.org. Ask our economist a question. And just ahead, making an interfaith marriage work and the magic behind the perfect church sermon.

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