Pain isn't restricted to struggling homeowners
— -- Investing: Stocks could fall into bear market's clutches
Investors have already seen some of the financial market fallout caused by indebted homeowners defaulting on their mortgages and banks losing billions of dollars from bad bets on securities tied to risky mortgages. Shares of banks, mortgage lenders and retailers have suffered their own private bear-market pain.
Neither has produced a broad stock market "correction" of 10%. A 20% decline, which is a bear market, hasn't happened in almost five years. But that's the risk. While this worst-case scenario may not pan out, it can't be ruled out, either.
"Bear markets occur during recessions," says Ed Yardeni, president of Yardeni Research. "Usually, the stock market anticipates a recession and stocks continue to decline as the economy first sinks into recession. Investors need to be prepared to absorb a 20%-plus loss."
The risk is if the broader economy takes a big hit. If that happens, it would shift the pain in the stock market from the sectors that have felt most of the pain to date — namely, financial and retail stocks — to the rest of the sectors of the economy.
Predicting tough times ahead, Michael Panzner, author of Financial Armageddon, recommends that investors buy shares of companies that sell stuff that people need to buy no matter what's going on with the economy. Companies that sell soft drinks, tobacco, prescription drugs and toilet paper, for example.
Investors, he says, should play it safe, loading up on defensive stocks, socking away more cash and moving toward the safety of U.S. Treasury notes and bonds.
Despite all the potential negatives, a recession is still a long shot, as are most of the worst-case scenarios, says Jeremy Siegel, finance professor at the Wharton School of Business. He says major banks like Citigroup and Merrill Lynch are unlikely to suffer 80% drops like tech stocks did in the late '90s.
More important, he stresses: Even if a bear market does occur, these steep market drops ultimately lead to "big buying opportunities."
As for retirement-plan investors, they should be investing for the long term, says Nicholas Nicolette, president of the Financial Planning Association. He is telling clients that if an investment is underperforming its peers, they should consider replacing it. But they shouldn't abandon a market sector altogether because of a market correction alone.
When prices are low, it's actually a good time to buy an investment, planners say, as long as the company — and the sector — have favorable prospects. The recent market downturn should also remind investors of the value of diversification, says Judith Ward, a financial planner at T. Rowe Price.
Think about how much of your company's stock you own. T. Rowe suggests holding no more than 10% in company stock in your retirement portfolio.
By Adam Shell and Kathy Chu, USA TODAY
Credit cards: Terms could change even for best customers
Turmoil in the mortgage market means that "it's a matter of when, not if" banks will change your credit card terms, says Jose Garcia, a senior research associate at Demos, a think tank in New York.
Banks' massive write-downs for their exposure to troubled mortgage securities — coupled with broader economic turmoil — mean they're more aggressively trying to boost profits, says Garcia. Traditionally, credit card operations have been a cash cow for banks.
