How to Weather a Rocky Economy

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Listeners' questions on personal investments during struggling economic climate are addressed. Carolyn McClanahan, personal financial adviser and founder of Life Planning Partners, talks with Melissa Block.

MELISSA BLOCK, host:

With the slide in the housing market, the turbulence on Wall Street, and a lot of economic uncertainty, these are anxious times. And when we ask you for your questions on the economy, many of you wrote with questions about personal finance. So we're going to try to answer some of those today.

And to do that we're joined by financial planner Carolyn McClanahan. She's the founder of Life Planning Partners in Jacksonville, Florida.

Thanks for being with us.

Ms. CAROLYN McCLANAHAN (Founder, Life Planning Partners): Thank you for having me.

BLOCK: And, Carol, let's start with a pretty fundamental question. This one's from listener Michelle Oishi(ph) in Belmont, Massachusetts. And she wants to know, in this market, what is an appropriate and safe way to save your money and protect your investments? Pretty basic advice.

Ms. McCLANAHAN: Well, the safest thing, especially for short-term money, is to put into CDs - and I would just use short-term CDs right now interest rates being so low - you could use money market funds, money market mutual funds. But the long-term - if this is money is for long-term that is not a good thing to do. The safest thing is to create a diversified portfolio taking advantage of market downturn. So if she wants to protect your money, it needs to all stay in cash. If she needs it to grow for her future, it needs to be diversified.

BLOCK: And the downside of CDs or savings right now is that interest rates are very low.

Ms. McCLANAHAN: Right. Right. And so if a person is investing for the short term, then they would not want to put them those in long-term CDs, because interest rates will eventually have to go back up. Because as interest rates are lowered, inflation will start setting in. And the Fed will start to increase interest rate eventually.

BLOCK: Here's another question. This one's from Bill Caesar(ph) in Durham, North Carolina and he's asking, given the current financial crisis, is it still safe to keep savings in a money market mutual fund that is not federally insured? Should people keep their emergency funds in a bank savings account or CD instead? What do you think?

Ms. McCLANAHAN: Well, money market mutual funds are run by very large companies. You can get them from anything from Vanguard to Fidelity. And when you have a money market mutual fund, it is not FDIC insured, but the companies will do whatever they can to protect the value of their money market mutual fund shares. If you want to be absolutely, 100 percent safe, and you want to not make quite as much as you would make in a money market mutual fund, you would put in, like, in a bank savings account. Banks have money markets that are FDIC insured, but they're not mutual funds.

BLOCK: And we did have some listeners wondering, you know, given what happened to Bear Stearns, is my bank safe?

Ms. McCLANAHAN: Yeah, people do wonder that. But the good news is, if your bank is FDIC insured, your deposits are insured up to $100,000 per client. So $100,000 total, if you have a joint account with your spouse then those two accounts will be protected for $200,000. But that's the most you can get out of any one institution. If you have more than that, sitting in cash, you'd want to spread it around in different institutions.

BLOCK: Here's another e-mail. This one is from Georgia Hennicoff(ph) in Seattle. She says, she and her husband are both 62 years old, very conservative investors. They had invested in mutual funds, took a bath there. Now, they're in bonds and CDs, wondering whether that's such a good idea. And she's asking where can conservative investors like us who are nearing retirement put our savings?

Ms. McCLANAHAN: Gosh, you know, when we came up with the concept of retirement that time was, like, in the 1930s and Social Security was formed, and retirement was age 65. You know back then, people lived to age 64. So not many people got to retire and use their money. Now, we're living into our 90s, so it's very important for somebody who's 62, especially if they have a good long lifespan ahead of them, to invest in a diversified portfolio that's not just geared towards income, it's also geared towards some growth.

BLOCK: When you look at all the turmoil going on right now, a lot of people are looking at it and saying, there's an opportunity here. And one of those who people who (unintelligible) is Stephanie Johnson(ph) of Washington, Connecticut. She says she's under 30. She has some disposable income. She wants to invest for the long-term. She says, if investing now is the way to go, is it a better opportunity to put money into the stock market or in real estate, or should she hold onto her money?

Ms. McCLANAHAN: I would say, put it into both. With real estate, it's a little tricky. I don't know how much money she has, if you do your own direct real estate investment that can be a lot more daunting than buying real estate through a good real estate mutual fund. And real estate commodities and stock should be a part of everybody's portfolio. So I would suggest to her, definitely, put it in both.

BLOCK: But maybe not buy that vacation home quite yet?

Ms. McCLANAHAN: No. Don't buy the vacation home yet. That's a money sucker. It'll eat up everything she makes.

BLOCK: Well, Carolyn McClanahan, thanks so much for helping us out.

Ms. McCLANAHAN: Thank you.

BLOCK: Carolyn McClanahan is with Life Planning Partners in Jacksonville, Florida.

And tomorrow on the program, we'll answer some of your broader questions about the credit crisis and the country's overall economic outlook.

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