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Terry Savage: Protecting your investments after the attack



Terry Savage writes a personal finance column for The Chicago Sun-Times and for Barrons Online. She is often featured as a guest expert on CNN and other networks, offering investment advice and financial planning tips. Her 1999 book, "The Savage Truth on Money," was named one of the ten best money books of the year by Amazon.com. Savage joined the CNN.com chat room from Chicago.

CNN: Welcome, Terry Savage, to CNN.com and thank you for being with us today.

TERRY SAVAGE: Hello, and I'm glad to be here, though I wish it were under happier circumstances.

CNN: The New York Stock Exchange got back to business this week. What should people be considering when thinking about their investments right now?

SAVAGE: The first issue is whether our economy has substantially changed. And it has -- in many areas. So that might mean you want to change some investments. But your overall portfolio allocation to stocks vs. bonds or money markets should probably not be greatly affected.

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CHAT PARTICIPANT: Terry, good afternoon. Should Americans buy savings bonds or war bonds?

SAVAGE: Right now, if you have what I call "chicken money" it might be a good time to purchase Series I Savings Bonds. Those are the savings bonds that are indexed to inflation and right now they have a 3 percent floor rate for the life of the bond, plus a 2.88 percent inflation adjustment. That part will change on November 1 and will probably drop. But given the decline in interest rates, the floor of 3 percent makes them very attractive, plus they are tax-deferred. You can buy them at your bank or financial institution, or using your Visa right from the web site www.savingsbonds.gov.

CHAT PARTICIPANT: Terry, Are we heading for a global recession?

SAVAGE: I think we were already on the way to a global recession, before this event, and this increases the likelihood of a global slowdown. But that doesn't mean the "end" of the world economy. And always remember there's a big difference between stock market investing and just looking at current economic events.

CHAT PARTICIPANT: Terry, isn't diversification even more important now compared to before the attack?

SAVAGE: Absolutely. I've always stressed diversification. Those who have appropriately allocated their portfolios between different types of stocks, and between stocks and other investments such as bonds, are able to ride through this a lot more calmly.

CHAT PARTICIPANT: How is a sustained military campaign going to affect both the American economy and the international economy?

SAVAGE: That's a tough one to answer. We really have to look back at history for an answer. I've just looked at the Ibbotson data from periods after great crisis, including Pearl Harbor and the Gulf War. Three years after Pearl Harbor, the economy was booming, and the stock market had gained 81.4 percent cumulatively. And three years after the start of the Gulf War on August 2, 1990, the stock market had gained a total of 57.7 percent. While I hesitate to say that "war" is "good" for an economy, or the stock market, I do like to use these statistics to calm people's fears about the future.

CHAT PARTICIPANT: Hi Terry, I have several Morgan Stanley funds. Are they ok?

SAVAGE: Are you asking just because the name is Morgan Stanley, and some of their operations may have been affected? In that case, there is nothing to worry about. But you haven't told me what types of funds, what exposure to which markets, etc. In the end, that determines your risk exposure.

CNN: What are the signs we should watch for?

SAVAGE: Well, I've just talked with a market technician, Sunny Harris, whose work I've always respected. From a technical point of view, she says the next likely stop on the Dow Jones Industrial Average is 8268 -- and if that doesn't hold, we could dip below 7500. By the way, those are technical chart points, not fundamental forecasts. But we should be prepared for further short-term declines, and then the real consideration is whether this decline, wherever it ends, might offer a major buying opportunity.

CHAT PARTICIPANT: Terry, how will this effect the nation's insurance companies?

SAVAGE: I think that the insurance companies have adequate reserves, more than adequate to handle this type of exposure. It will cost in the earnings side of the ledger but the underlying strength of the industry will easily carry us through this period.

CHAT PARTICIPANT: Terry, do you believe the airline bailout will have any significant effect, long term (3-6 months)? A billion dollar loss per week doesn't add up to many weeks, at the $15 billion proposed.

SAVAGE: That's a great question, and I've been thinking about those numbers myself. I don't think that the government can support the airline industry forever, but I don't think it will be required to do that. I'm pretty confident that the public will resume flying, especially after security measures are put into effect. And then there's always the likelihood that prices of tickets will increase and that might make up for some of the loss.

CHAT PARTICIPANT: How much cash do you suggest an American have on hand?

SAVAGE: Are you asking about currency? Because if that's the question the World Trade Center example showed that cash is no substitute for confidence in the system. If you're asking about "liquid assets" -- money in the bank, not in stocks -- then it all depends on your circumstances and needs for liquidity. But the Federal Reserve made it abundantly clear that it will stand behind the banking system.

CHAT PARTICIPANT: During times of war, gold has historically proven a good investment. What is your experience with this?

SAVAGE: I'm one of the original "gold-bugs," but I think the portability issue of owning gold instead of a currency has outlived its usefulness. We saw that in the brief rise in gold prices. They are certainly not a substitute for a functioning economic system. On the other hand, I've always owned a few dividend-paying gold stocks in my own portfolio.

CNN: Do you have any final thoughts to share with us?

SAVAGE: I wrote several essays in the days after the terrorist attack. You can find them on my web site, www.TerrySavage.com. In those articles, I told people that I would be making a symbolic gesture the day the markets opened -- buying 100 shares of America's largest company, General Electric. The stock opened down, and I made my purchase. Of course, it has dropped since then. But my point was that over the very long run, America has always survived, united, and prospered in the face of extreme adversity. I said I'd look at that purchase in two years, not sooner. And it's in my long-term retirement account. I'm sticking by that stance.

There's no sense in changing your whole portfolio out of patriotism, but there's also no sense in liquidating your stocks or mutual funds out of fear. I hope we'll all keep that in mind, even as the market drops further. We have survived and prospered through past frightening events. And we will do so in the future.

By the way, if you want to e-mail me about these comments, you can reach me via my web site, www.TerrySavage.com, where there is an e-mail button. Again, my thanks for letting me participate in this discussion.

CNN: Thank you for joining us today.

SAVAGE: My thanks to all of you for participating.

Terry Savage joined the CNN.com chat room by telephone and typed for herself. This is an edited transcript of the interview which took place on Wednesday, September 19, 2001.







RELATED SITES:
• TerrySavage.com
• Bureau of the Public Debt Online
• Ibbotson
• Barrons Online
• Helping.org
• American Liberty Partnership

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