Michelle Singletary

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The Sept. 11 attacks on the World Trade Center and Pentagon are being called the single worst act of terrorism on U.S. soil. The Bush administration has declared war on terrorism as the country considers new measures for homeland security. In light of the recent terrorist attacks, you might have a lot of questions on protecting your personal finance.

Welcome to The Color of Money with Post Business columnist Michelle Singletary. Read her latest article "Beware of Con Artists Exploiting Tragedy" (Post, Sept. 23, 2001).

Join the discussion with Guy M. Cumbie, CFP, volunteer president for the Financial Planning Association (FPA), to talk about how the effects of the disaster will affect your personal investment choices and financial planning and the economy. What should you be doing with your money right now?

FPA is the membership organization for the financial planning community. Cumbie has earned and maintains both the Certified Financial Planner (CFP) license and the Certified Investment Management Consultant (CIMC) professional designation. He is qualified by training specified under Title 7, Chapter 154, Texas Civil Practice and Remedies Code for court appointment as a court-appointed Mediator.

Cumbie is a registered investment adviser and holds the Series 65 Uniform Investment Adviser Law license. He also holds a Series 24 General Securities Principal registration, a Series 7 General Securities Representative registration, a Series 63 Texas State Securities law registration, a Texas Group I Life and Health insurance license, and a Variable Contracts license.

The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Michelle Singletary: Good afternoon. I wish the circumstances were better but today we are discussing what to do with your money during these troubled times in light of the terrorist attacks on America. Even as we all grieve, the business of running our personal financial lives go on. So, what are your concerns?

Centreville, Va.: My mom will be retiring in December. Her 401K investments have lost a lot of value this year already and with all that's happened I'm sure have lost a lot more. My question is if there is a way for her to keep the investments in the market after she retires? If so, what should she do with the money? Thanks!

Guy M. Cumbie: Dear Centreville,

Your mother's situation needs to be looked at very closely by someone who is experienced in retirement income planning and portfolio construction. As to whether or not she can or should reseaonable keep money in the investment markets after she's retired, the answer is probably "yes" to at least some of the money. We suggest you and/or your mother get with a qualified personal financial planner as soon as possible for support in this complex area. For referral to a qualified planner in your area, log on to the Financial Planning Association's web site at www.fpanet.org and click on the PlannerSearch function.

Thank you for your great question and I hope your mother gets the needed help soon. This is definetly an area that requires specific professional support.

Washington, D.C.: My wife and I are planning to retire abroad in about 10 years to my home country. Our retirement fund is our house here in the U.S., as we own the home we plan to retire to free and clear.

My question is, our house here will not be completely paid off in 10 years unless we add a large amount each month to our mortgage payment. I currently put $10,500 a year in my 401k, but was considering putting that money instead toward paying off my mortgage. My thought on this was that while my 401K will grow tax free, so will my investment in my house, as we will get the $500,000 tax free capital gains upon selling. Also, as I'm a partner in my firm, any matching funds for my 401k come directly out of my own pocket, anyway.

What do you think of this strategy?

Guy M. Cumbie: Dear Washington, D.C.:

A couple of questions for you to look at when considering this strategy are:

1) What type of mortgage do you have and what is the rate?
2) What is your general since of relative rates of return for residential realty versus equity based securities accounts?
3) What is your specific sense of appreciation prospects over the next several years for your home in the D.C. area?

Also, consider that to the extent you have partners, any K match is not strictly coming out of your pocket -- it's also being shared pro-rata by your partners.

Hope this helps.

For more specific analysis contact a financial planner by logging on to www.fpanet.org and clicking on PlannerSearch.

Thanks.

Dunmore, Pa: I currently have my thrift savings in the C-plan (stocks). I have an independent Roth IRA in bonds. Should I be switching my money around? I put in 5% of my annual salary into the C-plan (have $300/mo student loan and $340/mo car payment). I don't intend on retiring for about 25-30 years, so I'm figuring that I can ride out this stock market dip, but what should I, as a thirty-something person, be planning on doing during this time financially (besides paying off any credit card debt...only $2,000)?

Guy M. Cumbie: Dear Dunmore:

You're in a fortunate position. Your long time horizon between now and retirement definetly works in your favor.

Suggest you 1) pay down (non-deductible consumer interest) credit card debt, 2) build cash reserves equal to at least 3 to 6 months living expenses (more depending on the variability of your income and/or other needs for cash), and 3) continue systematic investing in an equity (stock) tilted, balanced (this means to include some bonds)account manner.

Over time focus on your vision and goals and objectives and when the time is right get with a professional financial planner to help you optimize your situation.

Right now, you are making equity purchases with you systmatic investments that are prices we haven't see since 1998. That is generally good thing.

Fairfax, VA: A follow up to my last question. Do you think it would be a good idea to stop making automatic purchases of mutual funds shares now and shift it to the purchase of real estate? I know my investment advisor will give me the 'dollar cost averaging' speach, but I hate to keep putting money in and seeing the value decrease.

Guy M. Cumbie: Dear Fairfax:

You are raising the classic asset allocation question. The general answer to that is that this strategic approach is to discern the percentage of your portfolio that belongs to any given asset class (stocks, bonds, cash, real estate, etc.) in a less emotion and market driven mode.

While dollar cost averaging in is a legitimate mode for investing, your real question is about asset mix, i.e.,"How much real estate belongs in the portfolio?" The answer to that question needs to be made at least somewhat independently of where we are at any given time in investment cycles. That question also needs to be answered prior to discerning how you'll go about doing it, such as with dollar cost averaging periodic lump sums.

Bottom line, suggest you focus on long-term asset mix first.
To do this, research the relative rates of return between the various asset classes carefully. Also consider the relative marketability/liquidity of the various investment alternatives. Finally, consider relative tax characteristics as well.

Austin, Texas: I'd like to know why 401K fund managers of aggressive funds have not been selling short? It would seem to me that those whose 401K funds are in aggressive pools should be making big profits in this down market, not losing virtually all their value.

Guy M. Cumbie: Dear Austin:

Great question. It's probably important here that "aggressive" is a relative concept. There is aggressive investing and there is blatant speculation. Retirement accounts and retirement account investment options are generally set up and overseeing by investment professionals or by committees that delegate oversight to professionals. These professionals are generally constrained by a concept generally known in the retirement investment community as "procedural prudence". Adhering to procedural prudence tends to limit how aggressive the options or the strategy is. Hedge, short, or other proactive bear market strategies are just generally not considered to be procedurally prudent. There are situations, especially in self-directed IRA accounts, where individuals can at there own risk depart from procedural prudence. The primary dictate of procedural prudence is diversify, diversify, diversify.

Hope this helps. Thank you.

Arlington, Va.: Hi there. this is probably not a simple question, so it will probably not be a simple answer, but I'll try anyway. My husband and I just became completely debt free! Worked hard to pay off credit cards, student and car loans and are very pleased that we were able to. and we both have established retirement funds. we plan to start a family in 2 years and would love it if I didn't have to work for at least the first few years after our first child. so, now that you have the background, here's the question - we won't have a lot to invest, but can you tell me what you think might be a good place to put any extra money we have so that we can use it in a few years? or should we put it in something long term so we have money later on? We're novices at all and don't want to make a costly mistake.

thanks, so much for any advice!

Guy M. Cumbie: Dear Arlington:

Another classic personal financial planning question. The resource (discretionary cash flow) allocation question.

First of all, congratulations for paying off your debt -- that generally needs to be a high priority. We are all faced with competing demands for scarce resources. We suggest you consider your goals in terms of their relative importance and time sensitivity. In a general sense think of this order: First, pay off debts (good job!). Next, get liquid, i.e., work towards having and maintaing a liquid reserve of living expenses. Finally, fund investment accounts dedicated towards attainment of your longer term goals and objectives. Also, make sure from the beginning that your managing risks properly by having all appropriate insurances in place and structured properly -- this is foundational.

Washington DC: I am a 22 year old recent college graduate making 30,000 per year. I was wondering if I should start now investing into 401K account and a Roth IRA. My company does not match 401K, so, what would be a good percentage of my income to invest?

Guy M. Cumbie: Dear 22 year old:

You're are getting an early start and that's the best thing you could possibly do. Roth and K accounts may indeed make since for you. As far as the amount you should be investing, you can back into that by first discerning how much money is "uninvestable". Univestable amounts are monies you need to live on, pay taxes with, obtain prudent insurance coverages with, leave in liquid reserves accounts etc.

Suggest at your early age you think carefully about how much of your total income you are going to allow lifestyle to absorb. The answer to that question will, more than anything else, give you the answer to how much of your income you can invest.

Hope this helps. Thanks.

Shepherd Park: OK, so now that the market seems to be stabilizing at least a little, what equities do you see as the safest investment? the investment most likely to appreciate greatly in the mid- to long term?

Would you buy airline stocks today?

Guy M. Cumbie: Dear Shepherd Park:

In a most general sense, value stocks and income oriented stocks are the least volatile. Right now with prices relatively compressed versus recent history, yields on these types of securities are pretty attractive. From a portfolio perspective this might mean a tilt or over-weight position, but not concentration.

The airline stock question has more to do with sector and company betting, a form of speculation that it has to do with investing. The fact that these securities have been hit hard brings the question to light in the eyes of many individuals. You have to reach your own conclusions about the wisdom of speculating in your own situation. The government bail out package is certainly relevant. Also, two other important questions are, when will the public start flying again and how quickly can the airlines scale back excess capacity. Also if you're inclined to speculate in this area, you may want to look at earnings histories of the various commercial carriers.

Please don't speculate with money you really can't afford to lose.

wiredog: Most of my savings go into a bank account, saving up for the down on a house. Since I'm in my 30's the current market drop is, in the long run, good for me. My 401k money buys more shares, so when the market goes back up, I'll be better off. If the market doesn't recover appreciably in the next 10 years or so then I reckon my 401k will be the least of my worries.

I'm not worried about my job, since I work for a DoD contractor. My friend the airline pilot, with his $500,000 mortgage, however...

Michelle Singletary: Wiredog don't be too smug. Remember wasn't too long ago that there were many job cuts in the defense industry. It's why what you are doing--saving and keeping debt down--is a good practice all the time. What is up now could easily be down tomorrow. All of us should remember that our jobs are never as secure as we think they are.

Guy M. Cumbie: Dear Wiredog:

You seem to generally be on a good thinking track with respect to the long-term nature of things. I would suggest to you if you haven't already done it to dedicate roughly 6 months of cash stash to your savings, in addition to your savings that are dedicated to a down on a house. Otherwise, a few years out, when you make the down payment, you'll be totally cash strapped.

By the way, a ten year flat market would not be anything new. The Dow Jones industrial average moved essentially sideways from the mid 60s to the early 80s. That was not that long ago and it was more like a 15 year flat period than a ten year one. Importantly, the world did not cease to exist. Thanks.

Bethesda, MD: as a young person - 33. I still have 25 to 30 years till retirement. I feel like I am doing most things right (no credit cards, maxing 401K, saving and watching expenses, have cash reserves for expenses, own my house, and don't really transact - buy and holder not a frequent trader). My problem is as an action oriented person it is very difficult to sit back and wait for time to pass (i.e. take advantage of componding) and not react to news and make changes. Even though I follow what is happening and keep up with the financial plan - most of it is your on track - just keep doing what your doing. What do you tell your clients to help them be active in monitoring, planning, but passive in reacting and letting the plan work.

Guy M. Cumbie: Dear Bethesda:

Another super question! Please keep doing what you are doing. To assist you in you're de-emotionalization of investing, suggest you pick up a copy of my friend Bruce Tempkin's book "The Terrible Truth About Investing".

Also, for some of our clients who have a irrepressible urge for doing, we suggest carving out a small piece of expendable assets (only when they are available) to create an intentionally more active and more hands on account.

Another good way to channel some of this excess positive energy is to work on "higher" planning. Here is what we mean: Some words that describe "lower"(baseline) planning are organize, formalize, and prioritize. Words that describe "higher"(what we call "thinking beyond solutions") planning are optimize, customize, actualize, aggrandize, and fantasize. The latter terms describe the really creative aspects of strategic thinking and planning.

Great question, hope this helps!

Alexandria, VA: My 401 (k) took a dive just like everyone else's. I'm fairly close to retirement and have it allocated 80% bonds and 20% stock. My new allocations are going 100% into stock though, figuring that I'm buying cheap right now. In addition, I have several mutual funds outside of the 401(k), mostly in equities but also one balanced fund. Fortunately I also have enough cash for at least 6 mos. living expenses. Am I best off just taking a deep breath and leaving everything as is, or are there certain moves I can make before the end of the year to at least put some of these paper losses to a good tax use?

Guy M. Cumbie: Dear Alexandria:

For taxable accounts, it's always prudent to review positions for year end tax planning purposes. Take note of changes that are indicated from investment purposes and recognize that the case, or the strength of the indication increases if a tax indication accompanies the investment one. In other words, while you don't want to get into the classic trap of allowing the tax tail to wag the investment dog, you also don't want to overlook obvious tax beneficial changes in your portfolio. Speaking of dogs, suggest you "bone up" on the IRS's wash sales rules. Also, for decision support, check with your tax advisor or financial planner if you have one.

Hope this helps.

Cheverly, Md.: With the economy on the downturn as it is, do you believe that this is a good time to open a 529 for my 2 children. Is the educational IRA better than a 529? Which 529's would you suggest enrolling in?

Guy M. Cumbie: Dear Cheverly:

General answers to the questions you are asking here could be very misleading. A decision making matrix for college funding is exceedingly complex. Suggest you surf out college funding websites (look for Joe Hurley's execellent site)and ultimately consult with a pro in person on this one.

Please do it.

Rockville, Md.: I have to say that the past year and a half has been pretty discouraging from an investment standpoint. My 401K keeps getting money pumped into it but, with the market's continuing decline, it stays at almost the same level. My kids' 529 plans are probably underwater at this point. Any advice on what to do with the 401K (I don't think there's much I can do with the 529 plans)?

Guy M. Cumbie: Dear Rockville:

The main thing to do with the K plan is to evaluate carefully (with professional support if needed) and discern whether or not the investment "policy" or asset allocation approach you have been employing is indeed the right one. In other words, are you positioned portfolio-wise in such a way that you can bear up psychologically under the "stress test" of bear market conditions. Most people are experiencing serious bear market conditions now for the first time in their investment lives. If, when you see it and feel it first hand, it just doesn't work for you, then you may need to back off to some extent on the amount of stocks in your retirement account mix. We suggest that you make those decisions with in the context of knowing there affects on long-term anticipated returns and therefore your ultimate retirement lifestyle.

Michelle Singletary: Thank you for joining me today. And, many thanks to Guy Cumbie for some great and thoughtful answers. Clearly, many of us are concerned about what to do in these trying times. But remember, patient investing and savings always pays off. Good luck and join me soon for another discusion about money.

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