For Small Investors, Now Is Not the Time for Bold Moves

By Steven Pearlstein
Saturday, August 18, 2007

Wall Street's rapid mood changes have rattled individual investors this week. Columnist Steven Pearlstein fielded questions from readers yesterday on In these edited excerpts, he tries to sift through some of the issues surrounding stock prices and the ongoing crunch in credit and real estate markets. For the complete text, go to

Rochester, Minn.: It seems that for us small Roth IRA or 403(b) investors, about the only thing to be done is grit our teeth and hold on for the ride. Is that an accurate portrayal of these tumultuous times?

Steven Pearlstein: I think it is fair to say you could have seen this coming in the last couple of weeks and taken some profits by selling some or all of your stocks.

I'd say if you have some good long-term gains, it would not be a bad idea to take some money off the table, put it in a money-market account or bank CD for six months, and let things calm down a bit. There is still a lot of downside risk here.

Charlotte, N.C.: If the $40,000 income earner can't make the negative amortizing payment on his $650,000 loan when it adjusts, he won't be able to make it whether Fannie Mae or Freddie Mac buys the loan or not. The loan is a loss.

When a person's home has become worth less than their loan, it's time to walk and that's it.

Steven Pearlstein: Nobody is suggesting Fan and Fred buy loans that are badly underwritten, unless, of course, they are at a big discount so that they can refinance it on sustainable terms at a lower principal amount.

As I've written several times in the past few months, there needs to be some creative new mechanisms to make it easy for the mortgage holders to do these workouts and refinance the loans according to Fan and Fred standards so they can buy them up.

The problem is that the regulators aren't requesting that Fan and Fred really take the lead here in designing these new products, at least as far as I can tell, because their basic attitude is that Fan and Fred are illegitimate financial entities, political thugs and accounting fraudsters who are a mortal threat to the safety and soundness of the financial system.

Washington: I have CDs with Countrywide Financial that are FDIC insured. Should I be worried about them? Should I be worried about buying additional CDs with them? I don't know what the process would be if they happened to go into bankruptcy. How hard is it to get my money from the FDIC?

Steven Pearlstein: Don't worry. Your CDs are insured and the FDIC is good at making sure you can have access to your money if, God forbid, something should happen to Countrywide.

At this point, things seem to have stabilized, and my sense is that the regulators have been helpful in getting Countrywide the financing it needs temporarily while it reduces its operations and sells off some of its portfolio.

Harrisburg, Pa.: Do you think there are going to be more sudden surprises at closing in the next few weeks in the D.C. area? We're in the process of buying a condo and already had to switch to another lender after a sudden demand for 20 percent down a week before closing. And that's on a relatively modest $300,000 condo . . . not a jumbo.

Steven Pearlstein: You betcha. The mortgage market is in a big state of flux, not only in terms of availability and cost of money but just the terms of loans that will be accepted, and who will deal with whom, and what the fees are, etc. Stuff will get done, but it will just take more time and patience.

Fairfax: So does anyone really know the extent of the mortgage potential loss? How high would it be? A few hundred billion or maybe even trillions?

Steven Pearlstein: Many hundreds of billions of dollars. But you have to understand that it's not that simple, because the losses in the mortgages may be less than the losses in the values of the securities backed by packages of mortgages, at least in the short and medium term. So that hit to the financial system could be large.

Alexandria: Contrarians often do better than everyone else.

What are contrarians saying and doing?

Steven Pearlstein: They're buying, selectively.

Oviedo, Fla.: Take money off the table? I just lost $41,000, about 7 percent of my portfolio. Why would I sell low? I like the Vanguard and T. Rowe Price mutual funds I have and plan to stand pat. I don't plan to touch the money for at least 12 years. . . . I wasn't worried until I read your sell idea.

Steven Pearlstein: You should never look at these decisions in terms of what you just lost. The question is where you think things are going from this point. If they go down another 7 percent, you would have preferred to be sitting on cash paying 4 percent. That's an 11 percent difference.

Now can I tell you stocks will fall another 7 percent. Of course not. And in the long run, they will be back above their recent highs. In general, I don't recommend trying to time the market, but there are times when you know a correction is coming. And in this case, there is no indication that it has played itself out.

Sure, if you are a sophisticated money manager, you can play these markets and make a lot of money. But in general, this is not a market for amateurs. Either stand pat, as you usually do, or stand to the side.

By the way, you should continue to buy stocks each month through this period as money goes into an IRA. The only thing I'm talking about is what to do about the stuff that was already there. Why the difference? Because if things are going down, you are buying on the way down, which is taking advantage of the lower prices.

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