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Submit your question: What do you want to know about this week’s financial news?

Ramit Sethi · September 17th, 2008

I’ve been getting lots of questions about this week’s financial news, with questions like “Why is the government bailing out private companies?” and “Where should I be putting my money now?”

I thought I’d try to answer the most common questions at once, so submit your question as a comment and I’ll answer them tomorrow (Thursday) here.

[Edit]: Here’s my response to the questions.

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58 Comments

 
  1. What are some good, practical ways to protect yourself against hyper-inflation if the government keeps printing money and the dollar plummets in value?

  2. I hear people arguing on the radio about whose fault this is, but I always got the impression that it is nobodies fault and that the president has less influence than people assume. I don’t really know enough to feel comfortable making that assumption though.

    Speaking of presidents, I was wondering what you would think about this. http://dilbert.com/blog/entry/dilbert_survey_of_economists/ It’s interesting to attempt to take a serious look at each candidates economic policies. I know these are vague bigger picture questions and don’t really have to do with this week specifically but these are the kinds of things I have been wondering about recently.

  3. Are treasury bills a good investment compared to a high interest savings account?

  4. Some of my friends are really worried about their retirement accounts losing value. Is this something I should be concerned about? We are all in our 40s and 50s, so there isn’t a great deal of time for recovery. Are there any changes we should make to our holdings, or are we just losing money by selling certain stocks and funds, and purchasing something else? Should we just hunker down and wait it out, or are there certain changes that are worth the short-term loss to incur? I was considering taking a closer look at our holdings to consolidate some accounts, but now I’m not sure it this is the best time to do that. For example, rolling a 401(k) from a previous employer into an existing IRA we have.
    Would appreciate any advice you can give about retirement funds.

  5. How does/will all the recent financial news affect the average American? Why did AIG, an insurance company, need to get bailed out by the government?

  6. Will you address the money market issues? Would you consider this is a signal of market distress or do you think it was merely an issue with Reserve Primary Fund?

  7. How can one tap into these market anomolies to profit ? Is XLF a good investment ?

  8. Will financial analysts ever use the word “depression” if that’s what this turns into, or are they too scared of associating this crisis with the Great Depression? I know “recession” seems to be an acceptable word, even if no one ever agrees whether or not we could call this a recession. What is the difference between the two?

  9. What happens to those people who own stock in the companies that have gone belly-up? Have they basically lost everything they put in to those companies? Or since Lehman’s just got bought out by Barclay’s, are Lehman’s shareholders “okay” in terms of their investments being worth something?

    And i have auto-adjust index funds with Vanguard (Roth) and Fidelity (403b). I keep thinking that if I buy now, I can buy more shares on the cheap and reap the benefits later… but is it wrong to think that if companies and stock markets keep on taking week after week? (or am I just being sucked into the doomsday talk du jour?)

  10. Can you elaborate on HTE and ERF ? What are the financial companies that we should start investing ?

  11. How is Egypt’s market doing in all of this?

  12. How different would things really be if we were still on the gold standard? I’ve heard that offered up for years as a way to improve economic stability and now that things are choppy I hear it more. But the country had recessions and depressions including the Great Depression during the gold standard years, so how would things be different?

  13. Padmanabhan

    Why did Lehman go bankrupt. Can you explain in layman’s terms? My understanding is that, they were not able to get cash in hand to pay their debts in time, even though may be they owned more than what they owed. So, basically, they didnt hold enough cash in hand to pay for their urgent needs. Is that correct?

  14. Is this really all a result of subprime lending? That “reason” just doesn’t seem to hold up with the entire financial market falling apart. Has anyone investigated these lenders to see what the real problems are?

  15. I don’t really see the government’s involvement in AIG a bailout or a favor for the company. Yes, it keeps them afloat when they may have otherwise collapsed, but it seems to be more of an investment banking approach. The rate of Libor plus 8.50 percent combined with 79% ownership in the company should eventually return a considerable amount of profit – my question is where will that money go?

  16. I’ve been reading about all the scary things happening with Wamu. i’ve been a customer there for years and have been pretty happy. Some people are suggesting that I move all my money out of Wamu. Should I? It’s my main checking/savings account, although I do have an emergency fund in ING as well and an account/IRA at a credit union.

  17. We are hearing a lot about financial institutions who have been “doing it wrong”. I want to know who did it right? Who turned away from the housing market greed for the well-being of itself and the nation? I want to put my money with those people… if they exist.

  18. Is this a good time to buy stocks of AIG, Merrill Lynch etc.? Should one?

  19. Second Megan’s question about Wamu and other commercial banks. On a broader level, what do you think about the rumors that the FDIC may not actually be able to cover its insured accounts in the event the crisis keeps worsening?

  20. What is stopping this current situation from sliding into a full-scale Great Depression?

  21. what the hell should i do with my fidelity 401k account?

    i don’t know whether to just leave it, reallocate, roll it over to a better ira. i don’t want to sell low, but i’m worried.

  22. We are currently renting out our primary residence, since we recently moved out of state and needed the income (no one had looked at the house in months, despite steady and substantial drops in the price).

    We bought 10 years ago, so we are in no way out of equity in the house – we just couldn’t seem to be able to get the price low enough to bring in potential buyers. The rental income currently pays most of the monthly costs associated with the house, but no more (i.e. nothing for irregular repairs, etc.). We don’t really want to be landlords (currently, we are renting to someone we know – and know to be responsible).

    Are we technically still building equity, even as the housing market continues to slide? Should we unload the house at any price?

  23. BNY Mellon (Bank of New York Mellon) seems to have avoided avoided investing in subprime. Same with Northwestern Trust. And since these are not investment banks trying to sell you their products to reap fees, they are good places to park your money (in my opinion).

  24. Elke Sisco

    Who’s going to pay for all the bailouts? And how? Don’t we have a huge, and I mean ginormous, deficit already? Where’s the money going to come from?

  25. Ramit – how do mortgages become commodified to begin with? How is someones debt bought and sold?

  26. I am a fully employed 23 year old planning on heading back to grad school in the next year or two. I’ve done everything you’ve suggested and will be maxing out my Roth this year, automatically get 5% in a 401k from my employer, am saving an additional 5% or so for the near future, and I already have a 6 month emergency fun. Out of that additional savings, I have several thousand dollars sitting in a high interest online bank (~$3,000) that I want to invest. Now seems like a great time to buy. Given that this is my “fun investing money” and is in no ways central to my financial survival, how do you suggest I could best invest that to take advantage of the current dour financial situation? It seems like now–when prices are incredibly low–would be a great time to “get in.” I’m just not entirely sure what “getting in” would entail.

    Thanks!

  27. Oh, and I have no debt and no dependents (although I will be accumulating school debt once I start grad school next year).

  28. How early has this problem been brooding and how come the government or any other institution didn’t see this ahead of time and try to prevent it or at least ease the problem?

  29. As we all know, when someone loses money, someone else makes money. Who is making money and/or getting rich from all these bankruptcies and mergers?

  30. I saw somewhere that Enron wiped out $60 billion in shareholder value. AIG apparently has wiped out $180 billion with it’s plunge in stock price, but they get a government loan. AIG didn’t exactly just accidently stumble upon their troubles. They got greedy and wrote risky insurance for the quick premiums and it almost destroyed them. Once things settle down, do you think AIG (among all these other greedy ass firms – a couple years ago they were posting record profits and record bonuses – wonder why) is going to get investigated and someone’s going to jail?

  31. Gerard Pais

    I’ve heard a lot about ethical considerations regarding the bail-out. i.e. destroys the concept of free market and allows the management of these companies to effectively take on as much risk without facing the consequences. I’d love to hear your take on this.

    From a non-US perspective, I am also wondering what the impact will be outside the US. So far, other than a hit to the stock market, I don’t really think there will be a large impact. Of course the US dollar value is falling and the stability of the US economy, in general, is in question so the flow through effects will need to be addressed.

  32. discuss some of the economic concepts like Moral-Hazard, and counterparty risk…. these apply both in “joe gets a mortgage” scenarios as well as “bank of america bought lehman credit default swaps” situations…. with all of the “what exactly is the balance sheet worth” conversation going on it would be a great chance to discuss the value of earnest accounting…

  33. This probably borders on the dirtbag side, but if the worst that can happen does happen, how could people take advantage?

    For example, I have some pretty serious credit card and student loan debt. Would my creditors be willing to renegotiate the terms of my loans or offer good settlement deals. I mean, if AIG fails who would be around to insure loan defaults. This has to offer some leverage.

  34. Ali Charania

    What does all this financial news mean about the economy and the direction our country is going into? How long do you expect it will take us to get out of this mess? What is the best way to ride through these problems? Continue saving and being wise with our money and hope for the best? How screwed are we as a nation?

  35. Does the traditional asset allocation of 20 international stocks need to be reconsidered for long-term growth? The US economy seems more service oriented, less production based, decreasing exports, and more devaluing of the dollar. I begin to wonder if a better long-term play is in more emerging markets like China, India, South America.

  36. I fairly diversified portfolio that consists mainly of mutual funds and index funds. Do I need to do anything? Should I worry about this financial crisis?

  37. Grammatically correction to my comment above:

    “I have a fairly diversified…”

  38. How is Asia, specifically India going to be affected by these financial crisis? Already the stock markets are off the previsous highs by 30-40%. What is your suggestion regarding the holding period (I have already held the stocks for more than one year now) for the stocks in India during these extremely tough times?

    thanks!

  39. Kumar Pappu

    Hello Nimit –

    I read your posts and a follower of some of the basic fundamental principles of savings.

    I have a 3 year old kid and have a life insurance policy for my wife, kid and myself. I have a home in VA and invested in little gold. Both my wife and kid are enrolled in 401K.

    Is stocks an investment now thinking from a long term perspective as they are cheap now.
    How do i allocate my assets and what are my other options of investment?

    Thanks,
    KP

  40. I’m planning on fully funding my 2008 Roth contribution in about two weeks. Suze says that you should not invest as a lump sum, but I was planning on doing this. I’m only 24 years old, so I’m not too worried if the markets would continue to drop after I invest.

    What do you recommend? Do you think it’s fine for me to contribute all at once, or should I spread it out over a few months?

  41. Francis Valencheck

    What is your portfolio doing right now?

  42. I’m a 33 year old guy who started investing about 4 years ago. I have a pretty boring strategy that I hope/hoped would serve me over the long-haul. Buy and hold index funds — SPY, MDY, IWM, EFA — and, over time, expect that they’ll go up around 9-11%. I’ve never been affected by the ups and downs before as far as being afraid and putting all my money into gold or something. However, with Alan Greenspan saying that this is the worst he’s seen it in his life (and he’s older than McCain) and my normally calm guy on NPR’s money show sounding spooked, I’m wondering if I’m a chump keeping my money in the market. Any calming words, or do I need to cash out NOW.

  43. Should I suspend my “automatic monthly index fund reinforcements” and wait about a year or so to use all the money I’ll be accumulating for this purpose?

    Or should I keep my plan running (ignoring the current world financial chaos) and keep pouring money on what seems to be a “short-term” bad investment?

  44. ademola ade-serrano

    Good day,
    If one runs a personal business from home, what are the est ways to separate business from personal finance?
    Seems like a simple, common sense question, ut elieve me, the practice is HARD!

  45. Is there a point in any civillized nation where a free market and capitalism no longer sustain the level of production output and it once saw when it was “up and coming (if you will).”
    That is, I believe America is in a transitional period, something that the world has never seen before due to our capacity and consumption rate. We may see the law of diminishing returns take an effect here, as capitalism is put to the test.
    Nationalizing a private insurance company?

  46. How does these issues impact small business owners like us who owns a couple of small franchised fast food restaurants?

  47. Ananta Purekar

    What will the impact of Lehman Bros. going bankrupt, the situation with AIG on the global market? How and when one expect all this to hit Indian markets?

  48. Gerry Oborn

    I liked your video alot! Just wanted to suggest one thing, if I may. Credit Union’s are insured by the Federal Government to $100,000 as well. That fund is called the NCUSIF. Depending on how the accounts are structured a “member’s” money can be isured for usually as much as they have on deposit… depending on the number of beneficiaries. Also, IRA’s in Banks and Credit Unions have an additional, higher insurance of $250,000 by the Federal Insurance funds too. Might be worth mentioning… People are scared!

  49. I think its impossible to lay off such changes in the stock market.. It is alwyas wise to invest it in mutual funds, fixed deposit accounts.. Only a small percentag of my money make it to the stock markets with clear guidance from big financial institution who i pay some money to keep me updated.
    Investments in the real estate markets are again a big risk i think. As for the site only thing i can say is i’ll keep coming back to read more tips. Ramit u r good.
    Thanks for all the articles.

    Kunal

  50. When you say that savings accounts are insured by the FDIC so don’t worry, what happens if there is a bank run? How long until you receive a check from the FDIC? How much does the FDIC have to send out to for insurance claims? It seems unlikely they have enough on hand to settle all claims if there is a serious run on multiple large banks. Please explain how this works and whether you should have hard cash at home as part of your emergency savings. If so, how much?

  51. Dear Ramit;

    My mind agrees, ‘wholeheartedly’, while my spleen is ready to vent against the interminable costs of bailing-out the foolishness of others.

    Clear purpose first: Namely, short-term savings, gold, and Suisse Francs. Agree?

    Ubiquitous craving second; ever hear of the Boston Tea Party?

    One can do both and keep a sound mind.

    Best Regards,
    Pierre

  52. With the financial chaos this past week, I’m wondering if now is a good time to buy some corporate bonds. Any thoughts on that?

  53. If investment-based banking is done, how will Fortune 500 companies be affected?

  54. i am going to school for real estate and i’m so confused! the maket in all reality isn’t too far from crashing and yet i need to make money. am i just wasting my time with real estate?

  55. Ramit Sethi

    Yes

  56. I am getting more and more fed up with Wall Street: The financial markets at Wall Street in combination with the global marketplaces have become such an interwoven, giant, monolithic, extremely complex and as recent history shows, extremely fragile marketplace. Often even financial experts lack insight and comprehensive understanding of all the interdependencies, so it is no surprise that a increasing number of private investors are getting more and more at unease with the lack of transparency. I am proposing to go back to basics: Move the money from this macroscopic, behemoth and abusive market back into small businesses on main street. Brick and mortar usinesses with nuts and bolts, that are in expansion mode. It is transparent, easy to understand, you see your money at work, and often, your investment will be secured by the assets of the business.

    I’d characterize this philosophy as Micro Economic Investing.
    http://invest4real.biz/financialmarket.html

  57. Why don´t you answer?

  58. Aparna

    Hi Ramit,

    I do have 401k. I am confused whether to open Roth IRA as we are going back to India. Does it make sense to open long term investments here? If we don’t we will be wasting 4-5 years of investments.

    Thanks.