What Bear Stearns' Meltdown Means to You

March 17, 2008— -- Think the Bear Stearns meltdown isn't affecting you? You might want to check your investments before you answer.

Large mutual funds commonly found in 401(k) plans have invested hundreds of millions in the battered bank, which is being purchased by JPMorgan Chase for $2 a share — a fraction of its price last week.

As Bear Stearns stock plunged and the financial market shuddered, these funds also saw declines.

"I'm sure there are people who don't realize how badly they're impacted indirectly," said James J. Holtzman, a financial planner with Legend Financial Advisors in Pittsburgh.

"Everybody's taking a hit today," he said. "It's not going to be a pretty day."

The good news for many investors is that most mutual funds that do hold Bear Stearns count the company's shares as only a miniscule portion of their total holdings.

The Putnam Voyager Fund, for instance, held more than 960,000 shares of Bear Stearns as of October. That's less than 1 percent of Putnam Voyager's total investments.

The Vanguard 500 Index fund held about 1.1 million Bear Stearns shares as of September. That too accounted for less than 1 percent of the fund's holdings.

Both Putnam Voyager and the Vanguard 500 are among the 10 mutual funds that have the most invested in Bear Stearns.

"With your general growth-oriented fund, I don't really think the situation with Bear Stearns is going to affect you that much," said Bruce Tucker, a principal at Sterling Financial Planning in Sparta, N.J.

'Buckle Your Seat Belt'

"Obviously, clients are looking at their portfolios going down right now no matter what you're doing," he said. But Tucker said he's still recommending that most of his clients continue to stick to their current investment plans.

"It's pretty much sit back, buckle your seat belt, hold on for the ride," said Willis Ashby, the president of Integra Financial in Greenwood Village, Colo. In two years, Ashby said, "you'll come out in the other end worn out, but you'll survive."

Things become murkier if your mutual funds contain large holdings in Bear Stearns and other financial sector stocks, which are also seeing declines linked in part to concerns that what happened to Bear Stearns could happen to other banks.

Holtzman said investors should be careful with funds with more than 5 to 10 percent of their holdings in the financial sector. You can find out a fund's allocations by calling its customer service number or reviewing its prospectus.

"If you're in a fund that has too much exposure to these stocks right now, it might not come back," he said.

Hotlzman said that people nearing retirement, in particular, should consider selling funds with too much exposure and diversifying their portfolios to secure their retirement investments.

But that doesn't mean younger people needn't worry.

"If you're on a sinking ship, I don't think it ever makes sense to stay on a sinking ship no matter what your age is," he said.

Not everyone agrees. Ashby said that if investors sell their stakes in financial stocks now, they might miss a rebound.

"It can be argued now that we're close to the bottom and you might be better off riding it out," he said.

There's even a bright side to the Vanguard Windsor II fund — which, as of October, had 7 percent of its holdings in Bear Stearns, the most of any mutual fund — according to Sterling's Tucker.

"Vanguard Windsor has been an outstanding mutual fund for a long time and I expect I it to continue to be so," Tucker said.

Time to Sell?

If you are intent on selling, what are your options?

Holtzman said investors should consider commodities — agriculture, he said, is doing very well — and companies linked to gold (which has seen soaring prices), such as mining firms.

Investing in foreign currencies is another option, but Holtzman said it's important to look beyond just the euro.

"Europe in general right now — they're also having some problems with the subprime crisis, so while they might be better off relative to the dollar, they still have their own issues," he said.

He said it is wise to invest in a variety of currencies including those of Australia and New Zealand. Both countries, he noted, have high interest rates.

John Austin, the principal of Austin Wealth Management in Brookeville, Md., said that exchange-traded funds — mutual funds that are traded like stocks — that follow major index funds are the way to go.

"I'm very bullish on index funds because it's very hard to pick managers that consistently beat the market," Austin said.

He said that he believes the stock market will recover and those investing in index funds will benefit.

"There's a lot of doom and gloom out in the market place, but I have to remind people that all bull markets climb a wall of worry," he said. "Most bull markets start at the moment of maximum pessimism, when it seems like the world is ending."