What should investors do following Lehman, Merrill meltdowns

I was prepared for some defining moment for Lehman Bros. over the weekend. And there were enough whispers involving Merrill Lynch so I wasn’t shocked that it sought comfort in the arms of another.

But American International Group’s $40 billion distress call threw me for a loop.

Three huge names in the financial-services business cried uncle the same weekend. How would U.S. investors react to this latest crisis?

When I checked with Vanguard Group late in the day to see how much investor trauma the mutual fund giant experienced, spokeswoman Rebecca Cohen said that call volume was only 10 percent above a normal Monday.

She pointed out that the stock market, as measured by the Standard & Poor’s 500 index, has had 33 trading days this year where it had closed up or down by more than 2 percent. That puts yesterday’s 4.7 percent drop in some context.

Could it be that investors were keeping the longer view in mind? Or is it that people just don’t understand how intertwined the global financial system is with all of these exotic credit default swaps, collaterized mortgage obligations, and other derivatives?

The fear in New York financial circles right now is plain on the faces of those Lehman employees who left their offices carrying boxes and duffel bags full of belongings.

But what does the bankruptcy of Lehman, the acquisition of Merrill and the turmoil at AIG mean for the rest of us? What should we do with our money?

Here are some things to keep in mind:

If you have a Merrill Lynch or Lehman Bros. brokerage account, you should be fine. The Securities Investor Protection Corp. notes that the bankruptcy filing involving Lehman Bros. Holdings Inc. does not directly affect the broker-dealer called Lehman Bros. Inc.

The SIPC provides $500,000 of insurance per person, and that covers stocks, bonds, money-market funds, certificates of deposit as well as things such as a company’s 401(k) plan.

As for Merrill Lynch, Bank of America has agreed to buy it, so little will change until it completes that transaction.

People keep wondering, “Has the stock market bottomed? Is this the end of the credit crisis?” The fact that people keep asking this every few weeks should be a clear sign that no one really knows.

Michael Church, a portfolio manager with Church Capital Management LLC, said yesterday this is “not the time to be a hero” with unnecessary risks.

The Yardley investment advisor has been “pretty defensive” on the stock market for quite some time, he said. With about $2 billion under management, Church Capital has been stashing assets into cash over the last year and a half.

Those who stick with their investment plans will be fine in the long run, Church said.

But he had a warning for those looking to time the market, piling into stocks in the belief that we’ve hit bottom. It’s a dangerous environment for pros, amateurs and everyone in between.

Talk with your financial advisor, if you have one. If you don’t, review what you now own. Are you comfortable with how your money is invested?

If not, think about what changes you’d make in order to sleep better. And then gradually make those changes. Don’t sell or buy everything in one fell swoop. That’s to guard against buying high and selling low - the reverse of that Wall Street money-making maxim.

Conditions may be improving for those who prefer cash investments. Lenders that need to raise capital are starting to raise those paltry interest rates on certificates of deposit.

In its Sept. 10 national survey of banks and savings and loans, Bankrate.com reported the average yield on a 1-year CD climbed to 2.46 percent while the yield on a 5-year CD remained at 3.56 percent.

You won’t get rich on the interest paid by CDs, but that money will be safe in an FDIC-insured account as long as you stay under the $100,000 deposit insurance limit.

If you’re borrowing, what’s the outlook? Well, all of this financial-sector destruction is the result of a credit crisis, so no one’s talking about loosening the availability of credit.

However, the government bailouts of Fannie Mae and Freddie Mac did appear to be the catalyst for a drop in mortgage rates last week, according to Bankrate. The average 30-year fixed-rate mortgage fell to 6.15 percent from 6.65 percent from the previous week.

Watching the credit crunch bite three big-names like Lehman, Merrill and AIG is shocking. But U.S. investors, either numb from the year’s other bailouts or adept at digesting “event risks” like these, haven’t pushed the panic button.