A major investment bank has collapsed, and the Fed is cutting interest rates to stave off a recession that we may already be in. More and more people seem to be having trouble making their mortgage payments, and credit card delinquencies are up.
Financial advisers say consumers should act thoughtfully. "Small investors always make the worst timing decisions because emotion is involved," one adviser said.
Short of putting our heads in the sand and hoping it all passes, what should we do with our own finances?
According to the experts, the best advice is to not panic.
Consumers who have managed to avoid the excesses of the last few years should sit fast, the experts say.
As for those who ran up credit card debt, exhausted their lines of credit or did not put away much in savings — in other words, acted as millions of other Americans did — they should use these unsettling times as an opportunity to review their finances.
But financial analysts warn that they should take time to consider their options. "Don't do anything rash based on what you see in the news," advises Greg Daugherty, executive editor of Consumer Reports, put out by Consumers Union. "You will inevitably do something wrong."
The first thing to do is take stock of your life. Determine how secure your job is, which, in these uncertain times, may not be easy.
If your job is relatively safe, step back and look at your financial situation.
It may seem overwhelming, but there are a few basic steps everyone can take to achieve some peace of mind. Since most banks are insured by the Federal Deposit Insurance Corporation, your accounts are insured up to $100,000. In addition, most individual retirement accounts and Keogh retirement accounts held by those institutions are insured up to $250,000.
"The F.D.I.C. is about as safe as it gets in this world," Mr. Daugherty said.
Next, take a hard, realistic look at your debt.
It may be somewhat painful, but now is the time to ask some difficult questions. Greg McBride, a senior financial analyst with Bankrate.com, suggests starting with these: Are you having trouble keeping up with your debt payments? Are you relying on debt to keep up with your lifestyle?
Consumers, Mr. McBride said, have been drawing on credit in recent years, but some "are finding that the well has run dry." He suggested that you "ask yourself whether you can honestly afford the lifestyle you're living."
A good indicator that things are going in the wrong direction, he said, is if your credit card balance has been rising in the last year but your savings balance has been falling.
"As interest rates are on the decline, it serves as a real tail wind to debt repayment," Mr. McBride said. "More of each dollar goes to principal rather than to the interest. So each dollar goes further as interest rates fall."
Now, what about investments? First, experts say, consumers should confirm that their investments are covered by the Securities Investor Protection Corporation, an independent organization set up by Congress in 1970.
If a brokerage firm or other insured firm fails, the investor corporation covers $500,000 of a customer's assets, of which $100,000 can be claimed for cash. Keep in mind that money market funds are securities, not cash, said Stephen P. Harbeck, president and chief executive of the S.I.P.C.
The good news is that membership is not voluntary; when a company registers with the Securities and Exchange Commission, it is required to be a member of the investor protection corporation.
Be sure, however, that when you make out a check to your broker, it goes to a member of the S.I.P.C., Mr. Harbeck said. There are cases where corporate entities that are part of the same holding company are not members of the investor corporation.
You should ask brokers whether their firms are members, or you can check out members on the investor corporation's Web site, www.sipc.org. If your investments are in a company not covered, then you are not covered.
But Mr. Harbeck said the S.I.P.C. is a floor, not a ceiling; each investor also receives a prorated distribution of customer assets depending on how individual situations are resolved.
Since 2004, the corporation has stepped in only seven times to cover consumer losses, Mr. Harbeck said. In all but one of those cases, consumers were fully reimbursed.
Brokers can buy additional insurance to cover higher amounts; ask your broker whether that is the case for your investments and request a copy of the agreement in writing.
Although many consumers' first instinct may be to sell their stocks and move into bonds — or perhaps cash under the mattress — financial advisers generally agree that would be the wrong move.
"Don't abandon the stock market," said John C. Bogle, founder and former chief executive of the Vanguard Group.
David B. Tysk, a private wealth adviser with Ameriprise Financial, said the recent financial upheaval might offer some opportunities.
Too many people buy stocks when they are going up and sell when they are going down, he said.
"Small investors always make the worst timing decisions because emotion is involved," Mr. Tysk said. "This is precisely the wrong time to move to safer options. The stock market has dropped dramatically and now is the time to invest — don't close the stable door after the horse has left."
Everyone agrees that diversification is crucial, but that does not mean the same thing for everybody. Are you 24 and just starting to save for retirement? Forty years old and saving for your children's college education? Or a retiree on a fixed income?
Mr. Bogle's rule of thumb is that the allocation of bonds in your portfolio should be about 10 percentage points less than your age. So if you are 60 years old, aim to have 50 percent in bonds.
"As you get older, you want more bonds; bonds produce income and time is less on your side to recoup losses," he said.
He suggests half short-term bonds (one to two years) and half intermediate-term bonds (six to seven years). When interest rates go up, so will the income on the short-term bonds.
"For taxable accounts, municipal bonds are extraordinarily attractive compared to Treasury bonds," Mr. Bogle added.
For retirement accounts, like I.R.A.'s, "inflation is a big, big worry," he said. "Everybody should consider a significant holding of U.S. Treasury inflation bonds."
Treasury Inflation Protected Securities, known as TIPS, are securities whose principal is tied to the Consumer Price Index.
With inflation, the principal increases, while with deflation, it decreases. When the security matures, the United States Treasury pays the original or adjusted principal, whichever is greater.
Many analysts also encourage investors to diversify within the stock market in terms of domestic and overseas companies — Mr. Bogle suggests a split of 80 percent domestic and 20 percent foreign.
"We got fat, dumb and happy," Mr. Bogle said. "We can't control the future returns of the stock market, but think of what we can control. Keep turnover to a minimum for tax efficiency and to reduce cost. Ask tough questions of an adviser."
Hard as it is to believe, there is an up side. Consumers will eventually see lower rates on their credit cards, Mr. McBride said, although — not surprisingly — card issuers tend to pass along rate increases faster than decreases.
He said there is generally a three-month lag after the Fed lowers its federal funds rate. The average rate on a variable-rate credit card six months ago was 14 percent; he said it is now about 12.26 percent.
In terms of home mortgages, the people who will benefit most are those who are resetting their adjustable-rate mortgages, Mr. McBride said, because rates on many of these home loans are tied to the one-year Treasury bill, which tends to move down as the Fed is cutting rates.
But, Mr. McBride warns, those looking to buy a house should focus on fixed-rate mortgages. His advice sounds obvious, but many home buyers ignored it in recent years.
"If they can't afford the payment on a 30-year fixed-rate mortgage, then they cannot afford a house," he said.
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