In response to my recent story on the market meltdown, several readers posted questions about what they should do with their investments. Here are my answers:
I would like to invest in General Motors stock at $4.89 a share. Am I completely crazy?
The last thing I'm going to do is recommend you buy a volatile stock like GM. Just because it's trading close to its lowest price since the 1950s doesn't mean it's a steal. The share prices have already recovered somewhat from last week's plunge but not by much. As I write this in the middle of the day on Tuesday, shares are trading around $6.60. So, while it's not too late to purchase what some would consider extremely cheap shares, the key thing you need to know is that you'd have to be willing to take on a lot of risk to buy in just as most investors are running for the exits. As analyst Daniel Silver told Barron's, reports that GM could merge with Chrysler have helped out GM's share prices, but the company is still in dire straits.
I put $5,200 in the stock market over five years ago. It turned into $6,400 and now it's $4,900. I have 60 percent in bonds and 40 percent in stock. Should I pull it out if I need to have it in the next five years?
—Eileen of Ohio
No one can predict what will happen to the markets over the next five years. But you're correct to make decisions based on your time horizon. While young workers in their 20s and 30s should be invested primarily in stocks since they have decades until retirement, investors in their 50s and 60s—or those who want to use their money in the next five to 10 years—need to be safer. Generally, financial advisers tell investors with shorter time horizons, such as yourself, to put about 80 percent in bonds or cash and 20 percent in stocks, but those exact percentages depend on how risk averse you are.
How quickly will the market recover? How much will I lose in the meanwhile? What do you think you should do if you have money in the stock market right now?
—Tincup, New York
If I knew the answers to your first two questions, I would not be a journalist; I'd be a very rich and successful money manager. However, I'll tell you what I've done with my retirement investments in response to the market swings: Absolutely nothing. As long as you have a diversified portfolio that makes sense for your age and time horizons, most financial advisers recommend waiting out this wild ride.
- For more information on how the Treasury Department's announcement that it will put money directly into banks in exchange for equity stakes, please see my article explaining how the move affects consumers.