Net Gains: Investing in a Post-Bear Stearns World

March 18, 2008 — -- I'm not smart enough to know what happens next with the world's markets after the swift downfall of investment bank Bear Stearns.

Are we in for prolonged financial crisis? Or will we put the current turmoil behind us quickly?

I don't know, and I'm not sure the smartest minds in finance know either.

But I do know the folks on Main Street are worried about what's happening on Wall Street these days. They know trouble when they see it, and they see it in smaller 401(k) balances, foreclosure notices and a falling dollar.

They wonder about what they should they do in response?

"Should I yank everything out of stocks?"

"Should I dump my bond fund that might contain bad mortgage debt?"

"Should I buy euros? Or just stuff cash into a safe-deposit box?

My first advice, of course, is to avoid panic and do nothing extreme like moving all your stock holdings to cash. Very likely that would mean you'd be selling low, buying high when markets recover and in the meantime earning a dismal return on cash as the Federal Reserve continues its rate-cutting campaign.

But worry about the current state of the financial markets is quite understandable. "Do nothing" is tough advice to follow in times like these.

So if you're worried about what the pennies-on-the-dollar sale of Bear Stearns will mean for you and you feel a need to act let me suggest some modest measures.

Pay down debt: Few things will allow you to withstand tough economic times like a low debt load. A strong personal balance sheet with assets well in excess of liabilities can help you weather the worst financial storm. The lower your loan balance, the less pressure you will feel from monthly interest payments.

In addition, paying down a fixed-rate loan provides a guaranteed rate of return that can be quite comforting during times of market turmoil. Your auto loan might only carry a 5-percent interest rate, but that looks pretty good right compared to the 3.5 percent you might get on a bank CD or to current stock market uncertainty.