Buy, Sell, or Stay Put? Advice from the Pros

By Amy Feldman

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If you're feeling pummeled by market mayhem, you're not alone. With Lehman Brothers (LEH) filing for bankruptcy, Merrill Lynch (MER) selling out, and AIG getting a government bailout, investors have been knocked for a loop. Financial advisers have been fielding phone calls from panicked clients, but the smarter ones called their clients first to put things in perspective. "My issue with my clients is: Are they getting to a place where they cannot sleep?" says David Diesslin, a financial planner in Fort Worth. BusinessWeek spoke with more than 15 of the country's top financial advisers to find out what's keeping their clients awake at night. Here's what they're telling them to do about it.

Should I pull my money out of the market?
In short, no. With the Dow Jones industrial average down 4.4% on Sept. 15, and off 22.9% from its peak last October, investors are undoubtedly watching portfolios shrink. Right now, it's hard to see beyond the bad news. But the market has survived major upheavals in the past—the savings and loan crisis, for example.

In fact, a number of advisers see a positive sign in the government's decision to allow Lehman to fail. "In the short term, there will be volatility and uncertainty, but the world didn't come to an end," says Coral Gables (Fla.) financial planner Harold Evensky, who was rebalancing clients' portfolios to make sure equities kept their weighting after the sell-off. "Investors who are properly invested own little pieces of companies around the world, and, for the most part, those companies are still fine and making money."

The smart strategy remains the tried-and-true one: Set your asset allocation and stick with it. Panic selling is more likely to harm your portfolio than doing nothing. "Selling at the bottom is not a good strategy, but I'm not a soothsayer," says Laurence Kotlikoff, an economics professor at Boston University and president of ESPLanner. "All I can say is, I'm staying in the market. The U.S. economy can get along quite nicely with fewer Wall Street investment companies, none of which seems able or willing to tell shareholders precisely what they are holding."

I have a life insurance policy or annuity with AIG. What will the Federal Reserve bailout mean for me?
It means you can take a deep breath. Even when there was a risk of bankruptcy, American International Group's insurance subsidiaries appeared healthy and policyholders weren't really at risk. There are numerous safeguards in place for policyholders. Now, with the government injecting $85 billion into the parent and the risk of bankruptcy gone, policyholders should be able to stop worrying.

What about my money market fund? Could it be affected by the market turmoil?
Sadly, yes. On Sept. 16, The Reserve Fund announced that hundreds of millions of dollars of debt securities issued by Lehman (LEH) and owned by its Primary Fund were worthless. That means The Primary Fund "broke the buck"—net asset value fell from $1.00 per share to $0.97. At Evergreen Investments (ERC), however, parent Wachovia (WB) announced it would support the value of three money funds so they would not reflect the decline in value of Lehman debt. Several other money funds have followed suit.