Stock market: What do do now?

When you have stock in a major company that is filing bankrupcy soon, what happens to the stocks that we have money in. Do we lose ower money or should we just sell out. We were told that we would basically lose ower money?
SAVAGE SAYS: When a company files bankruptcy the common stock value is wiped out. You can take a capital loss against any other gains. Or you can write off $3,000 a year against ordinary income -- and carry forward the balance of the loss indefinitely. If the stock is trading at pennies a share now, you can sell out to establish your loss officially, and use the writeoff this year. Or you can wait until the bankruptcy is official. (Buyers at pennies per share are hoping that a list-minute deal will save the stock. But that rarely happens!)

hello: i never buy tock front company. i like to buy stock marking and not do sell it. my age is 50. please let me know what to buy. i saw you on a dvd. and i like the well you talke. to person. each of them. thank you.
SAVAGE SAYS: Thank you for your note. If you go to my website, youll see the column I posted today about buying stocks. I think to get started you would do better in a mutual fund. On the home page of my website, you'll find the toll-free number of the All-American fund, which lets you start investing with as little as $100 a month, if you add $30 a month automatically every month - You could even make it an Individual Retirement Account. Call them at 800-US-FUNDS, and they'll explain.

Terry,some thoughts on rolling over some IRA funds into some General Motors stock...at a low price....I do not need the money, it would be purely speculative. Thank you
SAVAGE SAYS: First, your 40lk is not the place to speculate. If you lose, you cant write off your losses against ordinary income. And GM at this point is pure speculation. It's entirely possible that the shareholders equity will be completely wiped out in a re-organization -- something that leaves GM in a slimmer operating position, without labor contracts, etc --and which creates new shares given to those who hold GM debt, for example.

Good morning Terry,

Your column this morning upset me in on so many levels. Primarily because individual investors can insure their holdings by using conservative option strategies. But it goes beyond that.

1) "Why are 401(k)s NOT insured?" "I'm just so darn mad that our personal funds are not protected."

a) It disturbs me that people can be so ignorant. She wants all the gains but wants someone else to take the losses. Amazing.

b) It upsets me that people can go through school with no understanding of money matters. None.

c) It upsets me that people can work and save/spend money for decades and still have no idea about the power of compounding or that constantly paying interest dooms their financial futures. Or that investments are not guaranteed.

d) It upsets me that people do not understand that to earn rewards, risk must be taken. The greater the reward, the greater the risk. Each person must invest so that his/her personal risk tolerance is not exceeded. No one gives you profits for free.

e) Doesn't this writer understand that stock market investments are never insured? Silly question. Of course she doesn't.

f) If such insurance existed, who would pay for that insurance? Who would provide the insurance?

g) Does she want this insurance for free - similar to FDIC? Obviously yes.

h) Would she be willing to pay the high premiums necessary for insurance? Not likley.

i) Should that costly insuance be required or voluntary?

j) And then there's my bottom line. Yes, these portfolios can be insured by using conservative option strategies.

2) "not only will that well-diversified portfolio come back, but will one day be higher...next 20 years, then there won't be much America left to enjoy in retirement..."

a) It's not a question of enjoying retirement, althought that's the goal. It's avoiding poverty. That's the priority.

b) The market has 'come back' - and quickly - the last few times. That's why people expect it to happen again. It does not work that way.

c) In the 70s and 30s it took 'forever' to recover. Fine for youngsters; a disaster for older folks.

d) I don't think it's right to tell people that all will be well, when no one knows that for sure.

e) Everone offers the same old advice: diversify, allocate assets, don't panic, buy gold, trust financial planners and profession money managers. Not one of those ideas helped this time.
How about new advice? Protect your assets with conservative option strategies.

Just venting, but I am upset about so many people being hurt and how many feel helpless. At least some people understand the risk of holding stock market investments. But your e-mailer clearly does not. And there are too many people like her in the world. I know options cannot help her because understanding how they work is beyond her. But, there ought to be professionals who adopt options strategies, but sadly, I doubt there are any who ever bothered to understand how they work.

Heavy sigh.

Best regards,
Mark

--
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options

SAVAGE SAYS: Thanks,Mark, for your post! I'd advise everyone who wants to know how to "protect" against stock market losses by using options to read your books, available at all bookstores.

Just read your column "Market Madness Continues." At the end of the article a lady lamented the effect the market on her 401k -- and the need for portfolio protection.

Well, I agree with the lady. I am someone with a LOT of investing experience (at the amateur level). However, I can tell you that the American working population got sold a "bill of goods," regarding 401k's. Needless to say, those bill of goods are worth a lot less now. WHY -- G R E E D -- that's why.

It is unfortunate that people on the verge of retirement (boomers) are facing -- no retirement - because of short sellers, fixed boards of directors, politicians, lobbyists, incompetent greedy CEO's, CFO's...and the rest of their ilk.

Let's face it; the regular guy / gal doesn't have a chance anymore. With the speed of transactions -- getting "screwed" is a 24/7 game. I have a couple of financial degrees and I got "hammered." Some my fault, most the "manipulators" fault. You can conclude only one thing -- if you ain't a player -- you're an "easy pickins" dope.

People got pushed into these 401k's that greatly benefited the "moneychangers." The acumen to invest is lost to most of the 401k participants. Heck, I've since found out I was "lost" all along too.

Companies "dumped" pension responsibility to "free up" pension surpluses. These jerk corporate executives look to jacking up EPS so their stock options are worth more -- NO OTHER REASON. Cut some heads, ship some jobs to India, close a plant and reopen in Mexico - all for the benefit of the "shareholders."

IT'S ALL COME HOME TO ROOST. Heck you propose "chicken money;" well mine flew the coop after 9 months of unemployment. Now that 401k of mine has a double wammy --- no place to put it to get a semi-reliable return, along with a draw down to pay the bills. Time is running out for me and my family.

GREED DID THIS -- THE WORST OF THE 7 DEADLY SINS

What's that saying about camels and the "eye of the needle" and "rich men entering the Kingdom of Heaven." There are too many camels out there now, and the eye of the needle just became very small.

Someone should pay the price for this -- other than the innocents. College educations went up in smoke. Retirements went up in smoke. Inheritances went up in smoke. Homes went up in smoke. Businesses went up in smoke.

SOMEONE SHOULD PAY -- YOU TELL ME WHO !!

SAVAGE SAYS: That's easy. The taxpayers, of course!

Terry Savage,

Hello, I’ve enjoyed your newspaper articles and I have recently signed up for your email newsletters. I have a question with regards to the bailouts. I’ve email my question to Senator Dick Durbin but have not received a response back.

My question is why the government hasn’t thought about bailing out the taxpayers rather than the banking companies, etc. The banking industry is hurting because the consumer can’t pay their mortgage bills, credit cards, loans, etc... So why not give the 600 billion (and counting) to the taxpayer and the taxpayer will use that money to pay off their debt (mortgage, credit card bills, loans) which entail will give the money right back to the banking industry. If this happens the consumers/taxpayers will then have money to spend in stores, etc which will help the economy grow and get out of the crisis.

I think by giving the money to the big wigs won’t help at all and the money will be lost and everyone will be in the same position and deeper in debt.

Can you answer this question for me and let me know if this suggestion makes sense and/or why won’t it work.

SAVAGE SAYS:
Remember the concept of the neutron bomb -- it destroyed the people but left the buldings standing? Well your idea would be like a neutron bomb in reverse: You would leave the people "standing" (with some cash), but destroy the institutions that facilitate commerce, investment, business growth, and jobs. We'd all be running around with fists full of dollars -- and no place to deposit them, invest them, or even transfer them (as we now do via credit/checking in our financial system). We need the institutions -- though I agree, we don't need them to throw our tax dollars down the drain of bonuses, acquisitions, or more bad loans to failing corporations.

I am sorry to ask this of you but my wife and I need some advice and who doesn’t right now.

In February we decided to move our IRA’s to a brokerage firm. My wife’s IRA’s were previously with Ameriprise and I had a Profit Sharing account that I had left at my previous employer. We moved to this firm because in both cases we were not even achieving market rates of return. Ameriprise was steady but 3-5% below the market. My old profit sharing was about the same. We had hoped for a better return. Now, we have lost $77,001.96 which represents a 30.96% loss of market valve from our beginning balance. We also pay ¾ of a percent for expenses which total YTD is $1,765.36. We each have 401k’s active at our respective employers and of course those have lost money as well however not as much as we have lost from the brokerage accounts percentage wise.

To say we are horrified is an understatement. I am 50. My wife is 54. The only feeling that I have is helpless and that we will never be able to retire. I am at a loss as to what to do. I could have lost this money all by myself and I am thinking about moving what we have left to TD Ameritrade in order to begin managing the money on my own. Neither my wife nor I have been especially proficient at finance however the time may have come to get into action. Our broker has us 90% in mutual Funds and I cannot see how using mutual funds can ever get us back to where we started. Do you have a book that we might read in order to help us along and do you think what I am proposing is a good idea?

I want to lash out at our advisor who is a social clique friend as well. What I want to ask him is why did he not pull us out of mutual funds when it became obvious that everyone else was pulling out in order to at least minimize the damage? I simply do not know what to think or what the appropriate questions are.

On the upside, my wife and I have no debt other than our home. We do not believe in credit card debt. If we need a car then perhaps. If you have any questions of us please pose them and I will answer those. Perhaps our situation could be the basis of a discussion on the blog if appropriate as a model for going forward?

SAVAGE SAYS:
Wow, I'm glad you wrote to me before you "lashed out" at your advisor. Look, you would probably have lost the same amount on your own. You invested in America. That's the appropraiate thing to do with retirement savings. No one "knew" how deep (or for that matter, no one knows how long-lasting) this decline would be. In fact, the major averages have been down more than 40%, so if that helps put things in perspective, you could be in worse shape!
I've never known anyone who consistently can "time" the market -- pick bottoms and tops. And there has never been a 20-year period where you would have lost money in a diversified portfolio of large company stocks with dividends reinvested, even adjusting for inflation. So it may be small consolation, but if America survives, it is very likely that you will recoup this loss in the future. And that the contributions you make now, at current prices, will show gains.
You didn't wonder how money just "arrived" in your account while stocks were climbing. Now you're facing the reverse situation. Stock market investments are never guaranteed. And only a few people will be correct enough or lucky enough to pick the bottom. So keep investing -- because if you don't come out ahead, we'll have far more problems to worry about in the long run. Terry