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Q&A: Shielding Your Nest Egg From Financial Woes

Money Market Trouble?

With financial services companies facing bankruptcy and bailouts, nervous investors had more to worry about this week when a money market fund with billions in assets said that its net asset value fell below the industry benchmark of $1 per share. Read more about it here.

Nervous investors saw their fears realized this week as the stock market tumbled to a low point not seen since right after the Sept. 11 attacks.

The reason for the steep fall? Investors were worried that Lehman Brothers' filing for bankruptcy, Merrill Lynch's selling itself to Bank of America, and American International Group's troubled status were signs that more chaos loomed on the horizon.

Here, a look at some of the challenges investors face in trying to protect their nest egg.

How worried should I be about my investments?

"This is the kind of marketplace that separates investors from everybody else, because an investor says, 'I've got a long-term time horizon,' and they view this as one of those bumps in the road that gives them an opportunity," says Dan Wiener, CEO of Adviser Investment Management in Newton, Mass.

While Monday's correction was unique in that it was financial services stocks that spiraled lower, it did resemble previous declines where "a particular industry has overdone it in one way or another and has caused disruption in their part of the market," Wiener explains.

How does the Sept. 15 drop resemble previous stock market corrections that occurred in 1987 or in 2000 during the height of the tech bust?

When the Dow Jones industrial average dropped 504 points Monday, the market slipped 4.4 percent. On Oct. 19, 1987, the Dow also had a Monday decline, dropping 508 points or 22.6 percent, according to investment research firm Morningstar. This "massive difference" in the percentage of the correction puts the Sept. 15 correction into perspective, says Wiener, who also writes a newsletter called The Independent Adviser, which provides investment advice about Vanguard's mutual funds.

Shortly after the Sept. 11 terrorist attacks, on Sept. 17, the Dow fell by nearly 685 points, registering a decline of 7.1 percent. And in 2000, at the height of the technology bust, the Dow was also down by nearly 618 points, registering a loss of 5.7 percent.

Should I make changes to my portfolio now that the market has fallen?

That depends on your investment goals, the stage of life you're in and your fear factor.

Vanguard, the Valley Forge, Pa.-based mutual fund company with 9 million clients and $1.25 trillion in assets, advises its clients to "invest for the long term with the knowledge that there will be volatility," says Gus Sauter, the company's chief investment officer. They encourage clients to review their time horizon and their objective for investments. "Most customers maintain their longer-term strategy," he says. "Some at the margin do seek safety of less volatile investments such as bonds or money market."

Right now, bond yields are low, which means bond prices are quite high, says Wiener. Rebalancing — where investors typically shift the type and the percentage of allocations they're making — is usually something investors engage in on an ongoing basis. Wiener says a significant correction normally provides such an opportunity, however, rebalancing now may not do a lot for the individual investor unless they're willing to move some money out of bonds and into stocks. But most people, he says, remain "too frightened" to do that.

Are investors who are saving for special needs such as a college fund or for retirement especially vulnerable now?

Sauter says if you are 10 years away from retirement, Monday's market correction should pretty much be a "non-event." Even if you're close to retirement, he says you should be anticipating investing for the next 30 years, so you should still maintain a long-time horizon. That means keeping equities part of the mix. Bonds and cash help to moderate volatility and should be for diversification, but "not for long-term return," he says.

Timing has a lot to do with it. And Wiener, who doesn't advocate completely retooling your portfolio on the day that you retire, says a prudent approach is to be more conservative with funds the closer to the time that you will need to use the money — whether that's for college or retirement purposes. If you're taking "outsize risks" with money for either of these purposes, then you've made a mistake that precedes any of the volatility that occurred in the markets this week.

Ultimately, Wiener says investors must do a "gut check" to decide whether they want to keep their money in the stock market. He says it's helpful to remember that people don't sign any contract that obliges them to continue investing. But if they decide to keep funds in the stock market, then they have to do so with a long-term view and with an understanding that markets rise and fall.

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