Unless you've been living under a rock for the last couple of weeks, you know that the stock market in the US has had huge ups and downs in response to news about companies failing, the US government bailout of FANNIE MAE and FREDDIE MAC, as well as insurer AIG. And now President Bush is pushing Congress to quickly pass a bill to bail out US financial markets.

How should you be reacting to this? My response to that question is usually this: "If you panic and sell your investments, you may be selling at the low point. When stocks move up again, you'll probably miss that rally and end up buying back in when prices have already moved up substantially. You're probably better off to just stay put."

BUT -

Do you own stock in the company you work for, either in your 401(k) plan or through an employee purchase plan? Do you have options, stock appreciation rights, or restricted stock units? Then I have one word for you: DIVERSIFICATION.

If you have most of your money invested in the same company you work for, you're in a very vulnerable position. Your livelihood and your net worth are tied to the future of one company. You might be very lucky, like my uncle. Maybe you'll become wealthy from the stock and earn a generous income until you choose to retire and live the good life. But maybe your company's stock will tank, you'll get laid off, and in a couple of months you'll be worried about losing your house or apartment.

You need to diversify. Most mutual funds won't put more than 5% of the fund's money in a single company. Many financial advisers suggest that their clients have no more than 10% of their money invested in any one company, particularly the one the client works for. What percent of your money is invested in your employer's stock? If it's more than 5 or 10%, you may be getting into dangerous territory.

I know, I know. You work for the company, you know how it's doing. My husband tells me the same thing about the company he works for. But that's what the employees of Enron, AIG, and other companies thought, too. They have learned the hard way that employees are often too optimistic about their employer's future.

Here are some ideas about how to reduce the amount of money you have invested in your employer's stock to an acceptable amount.

• Before you sell anything, decide what kinds of investments will give you the diversification you need. That might be a mutual fund that invests in US stocks, bonds, or foreign stocks. Or maybe you need all three. For more on this, check the Choosing Investments section of our website, Plan Well, Retire Well.
• You don't have to sell all your company stock at once. Whenever you move a large amount of money from one investment to another, it's often easiest to stomach if you do it bit by bit. You could sell a set number of shares of your company stock each month (or every two weeks, or every other month, whatever) over a period of time. Maybe it takes you a year, or even two or three, to sell all the shares you need to sell. Each time you sell company stock, invest the proceeds in an investment that gives you the diversification you need.
  • Note: If you owe brokerage fees each time you buy or sell, it will probably be cheaper to sell more shares at a time and do it less frequently. For example, you might sell 300 shares every other month instead of selling 75 shares every two weeks.
• If you are selling shares at a profit, you will owe income tax on that profit - unless the shares in are a retirement plan. If you have shares inside your 401(k) plan and other shares that you bought through an employee purchase plan, stock options, or through a regular brokerage account, you'll need to decide which ones you should sell. If your tax preparer is knowledgable, he or she may be able to recommend the best strategy for your situation.
• If you have an employee stock purchase plan that lets you buy company shares at a discount to the street price, you may want to continue participating in that plan. But you should set up a schedule to also sell shares periodically, so that you don't get too heavilly invested in your company's stock again. If you sell shares at a loss, you will need to schedule the sale of shares to be more than 31 days before or after the purchase date of new shares. Otherwise, you'll be subject to the wash sale rule, which will prevent you from deducting those losses on your income taxes.
• Understand how any profits on the sale of your stock will be taxed. The rules for stock options and employee purchase plans are more complicated than the rules for shares you bought through a broker. Two good sources are IRS Publication 525, and MyStockOptions.com.
• If you leave the company or retire with company stock inside your 401(K) plan and roll that over to an IRA, you may have a one-time opportunity to transfer that stock to a regular brokerage account so that it will qualify for the lower capital gains taxes (maximum 15%) when you finally sell it. If you transfer the stock to the IRA, you'll owe income taxes at the regular income tax rate (as much as 28% or higher) when you sell and take the money out.

This is a very quick and dirty overview of the risks of having much of your net worth tied up in one company, and a rough outline of some of the strategies and issues with selling that stock so you can diversify. Please take the time to read up on these issues, and consult with a qualified financial planner or tax professional before taking action.

Do you have tips, stories, or warnings to add to this? Click on my name below and send them to me. I'll include the best ones in a future post.

I turned on the radio for the 12:00 news, and heard that a money market fund had closed and there was fear that other money funds would "break the buck." I figured it was time to review some basics about money market funds and money market accounts.

If you have a money market account at the bank, that's not the same thing as a money market fund. Your money market account is a deposit account and is insured by the FDIC just like your checking or savings account, up to $100,000 - maybe more, depending on how the account is titled. (See the FDIC website for more details on that.)

Money market funds are investments offered by mutual fund companies. They are investments, not deposit accounts. While they are considered to be very safe, they are not insured. There is no guarantee that your money market fund will always be worth $1 per share. But as far as I could determine, there have only been 2 instances in the history of money market funds where investors may have lost any of their investment in a money market fund. That's known as "breaking the buck." If you invest $1 in a money market fund, you expect that $1 value to be stable and to earn interest on that $1. Each dollar you invest is technically buying one share of the fund. The expectation is that the shares will always be worth $1. That's known as "preservation of capital." But it is possible that the value could drop and your shares would only be worth, say, $0.95.

You also expect to be able to take your money out of the fund at any time. That is "liquidity."

Even if the value of the investments in your money market fund drop below $1, your shares might still be worth $1. No, that's not a riddle. No mutual fund wants to taint its reputation as being one of the only 2 or 3 investment companies that ever "broke the buck." So even if the investments are worth less than $1 per share, the investment company may put its own money into the fund to shore up the value and make its investors whole.

Money market funds invest mostly in short term, high quality investments. What does that mean?

1. Short term: Money market funds generally loan money, or buy debt, that matures in perhaps 365 days or less. The weighted average maturity could be much less - perhaps just 90 days. The idea is that there you can better estimate the risk of a company or government agency defaulting on a loan that they have to pay back in the very near future, compared to a loan that doesn't come due for several years. The financial position of a company shouldn't change much over the course of a few months, while it might change dramatically over a period of years.
2. High quality: The money market fund should be buying the debt or obligations or companies, banks, or government entities that have a very good credit rating according to rating organizations such as Moody's or Standard & Poor's. That should mean that there is a very small risk that the company or entity will be unable to pay the interest or repay the debt. Some funds invest almost exclusively in government securities that are backed by the full faith and credit of the US government. Others invest most of their money in securities of well-rated companies.

Read the prospectus of your money market fund to see what it's investment policies are - for example, what percentage of its money should be invested in government securites. The annual report should give the average credit rating of the fund's investments and the proportion of the fund's assets that receive each credit rating. For example, 45% of the assets might have a rating of Aaa (the top rating), 52% a rating of Aa and the remainder a rating of A.

Each organization that rates the creditworthiness of companies uses a slightly different nomenclature. AAA is Standard and Poor's top rating; A++ is the highest rating of A.M. Best, and and Aaa is the top rating from Moody's. Click on those links to see the nice explanations or each company's rating system at Wikipedia.

Should you be worried about your investment in a money market fund? Based on past history, it is very unlikely that you'll lose any money in a money market fund. Is there any guarantee? No. You might consider whether your fund has been paying a significantly higher interest rate than other funds, which could indicate they were investing in somewhat riskier securities. Or look at the credit ratings of its investments compared to those of other money market funds. If you are planning to use those funds to pay for something in the near future, such as college tuition for this fall or home remodelling that's underway, you might want to be extra cautious and move just that amount into an insured account at a bank.

I personally plan to leave my money market fund investment where it is. I am not counting on it to pay bills or other planned expenses in the near future. The company has a reputation of serving its customers well and being ethical. There's always a chance that I could be wrong, but I think it's very unlikely that I will lose any money.

Do you have additional questions about money market funds, credit ratings, or other financial issues in the new? Email and let me know. Click on my name below. I'll post some of your questions and comments for others to view.

If you are like me you are saving for long-term financial security and retirement in your employer sponsored 401(k) or 403(b). While I keep an eye on how my funds perform on a quarterly basis, I generally examine the overall performance and allocation of my investment assets once a year. The purpose of this yearly allocation analysis is to simply make sure that the way my retirement plan investments are allocated actually matches up with my stated investment goals, time horizon and preferences regarding the amount of financial risk in my portfolio. To perform the analysis I meet with a representative of my investment company (TIAA-CREF is my company) and I utilize their software to check the portfolio allocation. Then I can rebalance the allocation of my investment assets, since over time differential growth (or reduction – ugh!) rates across the investments and changes in my time horizon imply the need to reallocate investments.

A second part of my yearly assessment is to run a retirement income projection. For this I have a simple spreadsheet model in Excel and I can also use a web-based tool on the TIAA-CREF website. The retirement income model takes my investment portfolio and then uses assumptions that I feed into it regarding the inflation rate and the rate of return on my retirement portfolio to provide an estimate of the income stream and retirement assets that I will have access to in my later years. This also gives me a check on my current level of savings and lets me ascertain whether I should increase my automatic savings contributions to my 403(b) or other retirement savings.

Consumer finance researchers have noted the fact that many personal investors never appear to adjust their asset allocation or change their retirement plan choices. It seems that many people launch their financial boat from the shore of their initial investment plan enrollment and never take steps to find out where they are heading once they are out to sea. These two steps give you simple actions that you can take to help steer your financial boat. Along with many financial advisors, I recommend that you assess on a yearly basis the allocation of your retirement investments and the overall savings rate that you are employing. What steps do you take to monitor and reallocate your investments? How do you assess whether you are likely to be saving at a sufficient level to meet your retirement goals? I would love to hear what actions you take to monitor and track your savings and investments. Please email me at mcnamar1@illinois.edu if you would like to share your strategies.

Lots in the news lately about the economy. Depending on whom you ask the economy is basically just fine OR we need to make big changes to improve our economy. How do you feel? What is your state of financial wellness?

And, just what is financial wellness? The financial experts have different opinions on financial wellness. According to a review by Sohyun Joo, "Personal Financial Wellness" in the Handbook of Consumer Finance Research, some people think it's a matter of how much income you make or how much debt you carry. When asked to describe financial wellness, their descriptions included:

• "having a sufficient income and assets to live the life you desire without having a significant debt ratio," and
• "sufficient income and assets to support financial goals."

Other financial professionals think how people feel about their finances is an important part of financial wellness. Their descriptions of financial wellness included:

• "overall satisfaction with one's financial situation and behavior," and
• "freedom from stress."

Dr. Joo concludes that personal financial well-being includes four components. First, objective measures of financial wellness such as income and debt-level are a part of financial wellness. She also believes that a person's satisfaction with their finances is an important component of wellness. The last two components are a person's financial behavior (what they do) as well as a person's financial attitudes and knowledge.

Are all these components necessary for positive financial wellness?

If you're rich but always want more money – is this financial wellness?

What if you live on a very limited income, but you owe no debt and your bills are paid on time – is this financial wellness?

What if you always worry about money?

What if you make a good income, but it makes you nauseous to think about retiring so you don't open your investment statements or set financial goals?

What if talking about money causes fights with your significant other ... so you don't talk?

How do you define financial wellness? Let me know your thoughts about this – just click on my name below to send a response. I think we all have a lot to add to this discussion.

All kinds of people are victims of investment fraud. A person's income or education does not protect them from fraud. Con artists are good at fooling people – that's how they make money!

But you can take a few simple steps to protect yourself. Before you invest, take time to check that both the investment and the person selling the investment are legitimate.

1. Check that the investment option you're interested in is registered with your state's securities regulator. If it is not registered, then this is likely a fake investment. Back away!

You can find contact information for your state's securities regulator at www.nasaa.org under Contact Your Regulator."

2. Who is selling you the investment? Check the financial professional's background and references.

In Illinois, a simple way to check a person's licenses and disciplinary records is to call the Illinois Securities Department, toll-free 1-800-628-7937.

In other states, contact your state's securities regulator. Your state securities regulator will also tell you if the financial professional has any disciplinary history.

Investment advisor firms need to register with the SEC (Security Exchange Commission) by filing Form ADV. You can check to see if this registration is on file at the SEC's Investment Adviser Public Disclosure website. Be sure the firm you are working with is registered.

You can also check if a broker is registered and the disciplinary history of a broker or a firm selling stock at FINRA's BrokerCheck.

If you can't find the salesperson in these two databases, then don't deal with them.

A few clicks on the Internet or a couple of phone calls can make a big difference in avoiding investment fraud. You worked hard for your money – take the time to research investments before you invest.

Now, that you know the basic steps to protect yourself from investment fraud, check out SaveAndInvest.org's Risk Meter to see if you are a high-risk candidate for fraud. This is a fun, quick quiz that gives you a good idea of what makes a person especially at risk for fraud.