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Chart a Road Map to Weather Rocky Times

By Michelle Singletary
Thursday, October 2, 2008

In the 1950 movie "All About Eve," actress Bette Davis slyly uttered a memorable line: "Fasten your seat belts. It's going to be a bumpy night."

She might as well have been talking to today's investors.

Except in this case, the bumpiness is probably going to last far longer than just a night.

But I have to say I am not at all afraid of this ride -- even after the gargantuan recent drop in the Dow Jones industrial average. I didn't panic when the House of Representatives failed to pass the proposed $700 billion bailout. The president and some leaders from both political parties are essentially saying that we -- the people -- are fools for not seeing the wisdom of sinking our country further into debt to free up the credit markets.

At least for individual consumers, I'm not mourning the reduced access to credit. Good.

People were borrowing too much anyway. For example, an increasing number of automobile buyers have for years been rolling over debt from previous cars into new car loans. How long did we think that could go on? How long did individuals or companies think they could borrow their way to prosperity?

Not forever, it turns out.

So, what now?

Well, in spite of all the predictions of Armageddon, you can still make it through this financial crisis. However, Thomas J. Geraghty Jr., a certified public accountant and financial planner, says having a road map for your finances is the best way to get ready for this bumpy ride.

"If you are prepared and expect the bumps, you can ride this out," said Geraghty, who is a partner at New Jersey-based Stonegate Wealth Management.

Let's start with a road map for people in their 20s. Geraghty, who has three adult children in that age group, said young adults should focus on establishing good money habits during these turbulent times. In fact, he suggests that 20-somethings not worry about investing if they have credit card debt or student loans.

"You've got to get those paid off," he said.

Because the market has dropped so much, the best investment you can make is to get rid of debt, especially if you have high-interest debt.

However, if you are working for a company that matches any part of your retirement contributions, at least invest enough to get the match. For instance, let's say you decide to invest $2,000 this year, and your company matches that with another $1,000. That's a 50 percent return.

If you're in your 20s, now's the time to learn from the mistakes of older investors.

"If you're in your 20s and watching all this, you'll be hearing about diversification. Ask someone what they mean by that," Geraghty said.

And what they mean is you shouldn't invest all your money in one stock, one bond, one company or one sector of the economy.

If you're in your 30s or 40s and you've been putting off developing an overall financial plan that includes your investments, savings, insurance, a will, etc., grow up, Geraghty said.

Rather than fretting about a tanking market, be sure you're not taking unnecessary risks. And diversification is the key to minimizing your losses.

You should be diversified by asset class and also within each asset class. You should have foreign stocks, natural resources, REITs, international bonds and other investments in your portfolio, Geraghty said. Typically his clients are invested in 12 different asset classes, he said.

If you're way off balance in your 401(k), for example, and being hammered in the market because you're not diversified, you need to proceed cautiously before making any changes. Geraghty said he might advise someone to slowly move money out of one asset class and into another, depending on their age, what other investments or money they have and how long they have until retirement. If you're close to retirement or in retirement, you might want to move faster to rebalance. One thing you can definitely do is consider changing how new contributions to your retirement plan are allocated.

If you're in your 50s, having an overall plan is crucial because you have less time to recover from market downturns. Geraghty said a typical portfolio for a 50-something investor might have 60 percent in equities and 40 percent in bonds and cash.

What if you're considering fleeing to municipal bonds for the safety and tax advantage?

Geraghty favors government agency bonds. He also warns about investing in "revenue" bonds that are issued by agencies created by states to fund a single project such as a bridge or stadium. If the revenue from such a project drops, the bond could eventually go into nonpayment status -- meaning that the agency stops making coupon payments. Stick to general obligation bonds issued by government bodies that have the right to raise taxes, if necessary, to meet their obligations, he said.

If you are very close to retiring and not diversified, take a deep breath and get some professional advice.

"People who have a game plan will be able to ride this out," Geraghty said. "People who don't have a game plan, shame on them."

To quote Vivien Leigh in "Gone With the Wind": "As God is my witness, as God is my witness, they're not going to lick me! I'm going to live through this, and when it's all over, I'll never be hungry again."

Take up that charge. Vow that this downturn won't take you out even if the ride is rough.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

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