On steps taken to shore up the system:

How are the steps being taken benefitting me?
Given the magnitude of the problems and the complexity of the global financial system, there is no silver bullet, no one single takeover, no single regulation that will immediately cure the system. Nevertheless, we think many of the actions taken have been beneficial for the average American investor.

• Takeover of Freddie and Fannie. This action was intended to keep the mortgage market functioning and bring down the cost of obtaining a mortgage due to the removal of uncertainty over Freddie and Fannie's ability to continue as going concerns. Mortgage rates are down, making it more affordable for people to obtain financing-potentially helping to slow the decline in housing (the root of the problem). The mortgage market continues to function at least as well as it did before the takeover. To further bolster the mortgage market, the Federal Housing Finance Agency has freed the firms from their normal capital requirements. This means the firms can buy up more mortgages than they were able to previously. 
• Fed expanded lending facilities. This refers to the Fed's willingness to accept a broader set of securities than they've ever done in the past in exchange for emergency loans to financial firms. The Fed's action does not address solvency issues, but it attempts to ease short-term liquidity issues that would otherwise impact healthy financial companies. Making sure that otherwise healthy firms are not done in by a short-term cash crunch is beneficial to the system as a whole and anyone who operates within it.
• AIG loan. The Fed was willing to loan money to AIG in order to prevent AIG's problems from having a ripple effect on other financial firms. If AIG was unable to make good on its obligations, then many other insurers and banks who deal with AIG would have been exposed to more losses. By the Fed stepping in, the risk from this scenario is reduced. This is not to say that there aren't other firms out there that could find themselves in similar straits as AIG, but AIG seems to have been the largest and most vulnerable and, thus, the Fed took action to remove that source of risk from the system.
• U.S. Treasury backing of money market funds. The U.S. Treasury announced "the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund—both retail and institutional—that pays a fee to participate in the program." This is a terrific development for money market fund investors whose firms choose to participate. Money market funds are an important cash vehicle, have historically been remarkably safe, secure, and liquid, and this action provides even more reinforcement for keeping them that way for individual investors. 
• FDIC management of failed banks. It is never good to have a bank fail, and that has happened 15 times this year. The good news is that banking authorities have managed to, so far, handle the failures with minimal disruption. Depositors have been protected either through tapping the insurance fund or by forcing a merger with a healthier institution.
• Emergency Economic Stabilization Act. This is the official name for the $700 billion plan approved by Congress and signed by the president on October 3. The heart of the plan is for the Treasury to begin buying from banks various forms of securities tied to mortgage payments and to take direct ownership positions in banks. The thesis of this plan is that by providing a market for these securities, banks will have cleaner balance sheets that will spur intra-bank lending. Once banks regain trust in each other, they'll be more willing to reinstitute lending to qualified borrowers. By taking ownership stakes, the government can directly replenish capital that has been depleted by loan write-offs. With more capital the banks can lend again.
• Coordinated actions by policymakers worldwide. The financial system is global in nature. By cooperating more closely on regulatory actions and interest rate policies, it is hoped that the entire global financial system can be stabilized and not just one piece of it. Given the interconnectedness of the system, a weak link places other components of the system under stress and therefore all components must be strengthened.

How much are these various efforts to stabilize the system going to cost?
It depends on which effort we're talking about. We'll discuss each one individually since the facts and circumstances are different. 

• Freddie and Fannie. The government intervention with Fannie and Freddie is widely referred to as a “bailout”, but we take issue with that characterization. Both common and preferred shareholders (i.e. the owners of the companies), have been largely wiped out as a result of government intervention. The institutions themselves, their counterparties and their bondholders may have been bailed out, but the stockholders were not. As for the cost, we don't know. Here's why. In exchange for capital infusions of up to $200 billion, the government essentially will own 80% of each company. Also, the government received $1 billion of preferred stock with a 10% coupon—senior to all other preferred issues. At this point, we don't know how much capital the government will need to put in and we don't know how much the government will receive in the event it ultimately unwinds its position. Should the housing and mortgage markets stabilize, and value returns to Freddie and Fannie, the government could end up making a profit on the deal. If the companies and the housing market remain crippled, the government puts in the full $200 billion and is unable to extricate itself, then it could wind up with a total loss. We think this latter scenario is highly unlikely. 
• AIG. In this deal the government received 80% ownership in exchange for an interest-bearing loan of $85 billion. The loan is to be paid back through the sale of AIG assets and carries a relatively high interest rate. Much like the Fannie and Freddie situation described above, the total cost of this action is not known. We do know that existing shareholders have seen their holdings drop to a few dollars per share and so, again, we're sure they don't feel bailed out. On the other hand, counterparties to AIG's derivatives transactions and their bondholders are probably breathing a sigh of relief. Taxpayers interested in their tally should watch as AIG decides what assets to sell and what price it obtains when it goes to sell to pay back the loan. 
• Emergency Economic Stabilization Act. By this we mean the estimated $700 billion government intervention into the financial markets. Once again, it is difficult to estimate the final price tag for many reasons. First, the details of the program are still being worked out, but let's assume the government is going to buy impaired mortgage assets from financial institutions who need to get them off their books. What price will be paid for these mortgage assets? What additional provisions will be included in the transactions? Will the government take an ownership stake like it did with Freddie, Fannie and AIG? The potential cost to the taxpayer varies widely—from a possible loss of $700 billion (or more if both the financial system and housing market completely fall apart), to a potential gain if they purchase assets at a severely discounted price, hold them until maturity or stabilization occurs, and then sell them back at a profit.

On retirement investing:

I was about to retire, but my portfolio keeps losing money. How do I determine if I'm still on track?
A good place to start is by using our retirement assessment tool. By entering an updated estimate of your portfolio value, living expenses in retirement, other sources of income, age, etc., you can get an estimate as to the probability of being able to sustain that spending throughout your retired years.

If you’re not quite there, then you have a number of options to consider. For example, how accurate are your expense numbers? Trimming expenses is highly effective for making your retirement portfolio last longer. Break down your expenses into two buckets: discretionary (nice to have) and nondiscretionary (must have). Review the discretionary items and ask yourself how important those items are to your future happiness.

Another tack is to make sure your portfolio size is correct. What we mean is that we're amazed at how many accounts people accumulate over time and how many tend to fall by the wayside and get forgotten. Did you include all of your accounts in your analysis? Did you deliberately exclude some because you were earmarking that account for a different purpose (e.g., a gift to someone down the road). That may still make sense, but you should revisit that decision and still make sure it works given your present circumstances.

Finally, there's the question of the retirement date itself? Delaying retirement a year can have a powerful impact on your odds of success. One more year of income and one more year of savings can be a real boon to your prospects. Are you in a dual-earner household where both are planning to retire simultaneously? Perhaps one can retire now and the other can stick with the status quo for a longer period of time. Another approach is to not stop working all at once, but cut back on your hours gradually.

There's no one right answer for everyone because the retirement decision is ultimately about what you want and what your situation is able to accommodate. The best approach is to reanalyze the situation and adjust as needed. As a general rule, we think that small adjustments now work out better than being forced to make big adjustments later.

To get to the retirement assessment tool if you're not a Schwab client, go to Schwab.com. Click on the Advice & Retirement tab. Then click on the Retirement Planning tab. You should see a link to the Retirement Savings Calculator.

To get to the retirement assessment tool if you are a Schwab client, go to Schwab.com and log in. Click on the Planning & Advice tab. Then click on the Retirement tab. You should see a link to the Retirement Assessment Calculator.

I live off my portfolio and am concerned that I'm spending too much from it given the economic situation. How much can I withdraw?
A good starting point is to use the 4% rule. The idea behind this rule is that you look at the size of your portfolio and spend 4% this year and then increase that dollar amount over time by the rate of inflation. If you follow this approach we estimate that your portfolio has a 90% chance of lasting for 30 years.

Let's assume your portfolio is $500,000 right now. Multiply $500,000 x 0.04 and you get an amount that you can withdraw in the first year. In this case, it’s $20,000. That’s the amount you can take from your portfolio this year. If your portfolio generates $10,000 in the form of dividends and interest, that amount comes out of the $20,000. You can withdraw another $10,000 in the form of selling off some of your securities. For next year, you can withdraw $20,000 plus a bit more to account for inflation.

There are a lot of assumptions behind this rule, so please consider this as an estimate only.

Many people look at the 4% and think that it looks low. It is low for a reason. The intent was to get a number that can be reasonably sustained during long periods of time and to take into account ongoing inflation—a huge risk for any retiree. As we've seen during the past 15 months, the stock market can drop, and so we need a withdrawal rate that isn't so high during poor periods that it guts the portfolio and doesn’t allow for growth over time.

The 4% is just a starting point. We encourage you to take a look at our retirement assessment tool and enter data that more reflects your current situation.

To get to the retirement assessment tool if you're not a Schwab client, go to Schwab.com. Click on the Advice & Retirement tab. Then click on the Retirement Planning tab. You should see a link to the Retirement Savings Calculator.

To get to the retirement assessment tool if you are a Schwab client, go to Schwab.com and log in. Click on the Planning & Advice tab. Then click on the Retirement tab. You should see a link to the Retirement Assessment Calculator.

On WaMu:

What implications does the failure of Washington Mutual have for the FDIC insurance fund?
None. While the Office of Thrift Supervision closed Washington Mutual on the evening of September 25, the FDIC facilitated the sale of the banking operation to JPMorgan Chase. According to the FDIC in a statement, this means, "All depositors are fully protected and there will be no cost to the Deposit Insurance Fund."

What if I own Washington Mutual stock?
This is our current understanding of the chain events that have  been reported:

1. The Office of Thrift Supervision closed Washington Mutual and the FDIC was named receiver. 
2. The FDIC, in turn, sold the banking assets to JPMorgan Chase for $1.9 billion and it agreed to assume "qualified financial contracts."

Since nearly all the assets of the firm are gone, it is not clear yet what value, if any, shares in Washington Mutual will have.

How will Washington Mutual bonds and preferred stock fare?
Bonds (senior unsecured and subordinated) and the preferred stock of Washington Mutual (WaMu) were excluded from the deal with JPMorgan Chase. On September 30, the company filed an 8-K report with the Securities and Exchange Commission and estimated that the WaMu holding company has about $5 billion. Regulators (e.g., FDIC or OTS) have the authority to send this cash downstream to the bank subsidiary. Since there is no longer a bank subsidiary (it was bought by JPMorgan Chase), there is some level of uncertainty over what will actually happen to bondholders of the bank.

The bank subsidiary would receive $1.9 billion from JPMorgan Chase as payment for assumption of the depositors and loans. If these turn out to be the sole assets of the bank subsidiary, then senior, unsecured bonds issued by the subsidiary might return 32 cents on the dollar, according to CreditSights.

If the $5 billion in holding company cash is sent to the bank subsidiary, that is obviously good news for those who hold debt issued by the bank subsidiary. Their recovery rates would be much, much larger.

If the $5 billion stays with the holding company, then senior, unsecured bonds of the holding company may receive their full principal back and subordinated bonds may receive 50 cents on the dollar, according to published reports.

This is a very fluid situation right now, reflecting new news and the large amount of uncertainty. If you hold bonds issued by Washington Mutual, what you first need to do is to understand whether the bonds you owned were issued by the holding company or the bank. That will go a long way to determining what money, if any, you eventually recover.

If we take a step back from the specifics of WaMu, it’s important to rethink the rest of your fixed income holdings. If you hold individual bonds in other firms, we suggest you take the following steps.

1. Know what you own. It is vital that you understand the terms and conditions of your bonds, their credit rating, and any recent changes in that credit rating.
2. Diversify. Diversification is not just an equity concept. How many issuers do you have in your portfolio? Is your financial health overly dependent on any one of them? Do you have too many issuers from the same or related industries? If so, they are more likely to suffer together.

On money funds:

What is Rule 2a-7?
Money market funds are regulated by the Securities and Exchange Commission (SEC) under the provisions of the 1940 Investment Company Act.

SEC Rule 2a-7 is within the 1940 Investment Company Act. Its key provisions govern the maturity, quality and diversification of money market funds. Enhanced cash funds are not beholden to Rule 2a-7.

With respect to maturity, Rule 2a-7 mandates that money funds limit their investments to securities with maturities of 397 days or fewer, and that they maintain a dollar-weighted portfolio average of 90 days or fewer.

In addition, money funds may only invest in high quality securities and may invest up to 5% of assets in Tier 2 securities (securities rated F2 by Fitch, Prime-2 or MIG-2 by Moody’s, or A-2 or SP-2 by S&P).

The funds are also subject to strict diversification requirements that limit the exposure to any one given security and limit concentrations within an industry, etc.

On AIG:

What to do if I own common and/or preferred shares of AIG stock?
Schwab Equity Ratings® currently rates the common shares of American International Group (AIG) NR meaning "not rated." This is the standard Schwab Equity Rating for the shares of companies facing extraordinary circumstances that we consider outside the boundaries of our normal rating process.

Certainly, AIG deserves such a rating with the September 16 announcement that the federal government has become, in effect, the controlling shareholder of the firm (with a 79.9% stake) by providing AIG with a two-year, $85 billion loan with an interest rate of three-month LIBOR plus 8.5%. As of October 9, AIG had borrowed $70.3 billion from the Fed.

This action takes a Chapter 11 filing off the table, but for common equity holders the dilution in their stake is severe. We explicitly call out common shareholders here because our understanding is that the Fed’s stake will be in the form of common shares and thus not dilute preferred holders.

However, preferred holders need to be mindful that the  Fed in its announcement made a point of noting that it "has the right to veto the payment of dividends to common and preferred shareholders." Given that the Fed felt it had no choice but to pursue this unprecedented action because of the AIG parent company’s precarious finances, it does not seem likely to us that any dividend payments will be forthcoming anytime soon. In fact, the company announced on September 23 that it was suspending its $0.23-per-share dividend to common shareholders.

As for the future share price of AIG, that is more difficult to determine. We believe common shareholders need to come to grips with the fact that AIG is controlled by an entity (the Fed) that is not terribly concerned with the interests of its fellow shareholders. As the Fed made plain in its announcement, it acted out of concern for the economy, not company shareholders. In its statement, the Fed said it believed "that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance."

The Fed also wants its money back. Quoting again from the Fed’s statement: "The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy … The loan is expected to be repaid from the proceeds of the sale of the firm’s assets."

Some of those assets have already been pledged to the Treasury. On October 8, the Federal Reserve Bank of New York reportedly provided AIG with an additional loan for $37.8 billion in exchange for receiving an equivalent amount of investment-grade bonds held in AIG’s investment portfolio. These are the types of assets that could have been sold to repay the original $85 billion loan, but now can’t be sold because they’re pledged against the new loan.

It seems to us there are two key questions for shareholders. First, what, if anything, will be left after the assets are sold to pay the loan and satisfy all the firm's other creditors? We don't know how that process will play out, but we can say that AIG shares are a highly, highly speculative investment, and encourage current shareholders to evaluate their options with that in mind as they consider how such an investment fits within their own specific situation.

Second, what will the post-asset sale AIG look like and is that an attractive firm? One scenario to consider is that the Fed sells off AIG's most desirable assets, leaving behind perhaps a viable entity, but not necessarily an attractive stock to hold.

What's the status of AIG bonds?
As of September 29, American International Group's senior unsecured debt is trading at approximately 50 cents on the dollar, given the uncertainty on the company's ability to navigate its way thorough this crisis. The Fed agreed to loan AIG as much as $85 billion and wants to receive payment back with interest within two years. In the event that AIG is unable to pay back the loan, the government then has claim to the assets of AIG ahead of any current bondholders. In other words, the bailout has effectively subordinated existing debt owners.

There are three key questions for current bondholders.

1. How much will AIG actually borrow from the Fed? As of October 9, it had reportedly borrowed $70.3 billion. We believe the more money AIG borrows from the Fed, the more difficult it is for current AIG bondholders to get paid. For example, on October 8, the Federal Reserve Bank of New York provided AIG with an additional loan for $37.8 billion in exchange for receiving an equivalent amount of investment-grade bonds held in AIG’s investment portfolio. These are the types of assets that could have been sold to repay the original $85 billion loan, but now can’t be sold because they’re pledged against the new loan.
2. How well will AIG's process of selling off operating units go? AIG is looking to sell off assets in order to raise cash to pay back the Fed loan. The sale of some of its operating units seems to be the direction they are looking, according to news reports. The more dollars raised, the better it will be for bondholders.
3. How healthy will the new AIG be? We suspect AIG will be a substantially different company after these asset sales take place. Does that new entity have sufficient cash flow and earning power to sustain the debt load it's inheriting from the old AIG? Impossible to say at this point without knowing more about the company's plans.

On Lehmen Brothers and Neuberger Berman:

Should I own Lehman bonds?
Lehman Brothers had about $150 billion in corporate bonds outstanding, as of May 31. If you hold some of those bonds, the first thing to do is to understand the type of bond that you hold. The price at which your bond will trade, as well as any proceeds you receive post-bankruptcy will depend on two things: first, the seniority of the bonds and second, whether your bond is secured or unsecured.

If a bond is secured, that means it has the highest claim on certain company assets that back the bond. In a Chapter 11 filing, bondholders have a claim on those assets to help pay back the bondholders. If you’re an individual investor, it is unlikely that you own a secured bond. Typically, banks that loan to companies are those who own the secured debt.

The seniority of a bond refers to the pecking order that determines who gets paid as company assets are unwound. CreditSights estimated on September 22 that senior, unsecured debt of Lehman Brothers may receive 45 cents on the dollar now that the firm has entered Chapter 11 proceedings. Note that this is an estimate of what the bondholders may eventually receive. The bonds may trade at substantially different values and, as of September 29, were trading much lower at 14 cents.

Last in line are the holders of subordinated debt.

Once you understand where your bonds reside in the pecking order, it is time to think through your situation and the future of Lehman. We now know that Lehman has filed for Chapter 11 protection. What we'll probably see is some sort of court-administered liquidation of Lehman's assets. In fact, this process has already started. Some of the announcements are as follows.

• Barclays Bank agreed to purchase various investment banking assets as well as the Lehman index business.
• Nomura Holdings announced that it plans to purchase Lehman's operations in Asia, Europe and the Middle East.
• Two private equity firms have announced plans to purchase various divisions within Lehman's asset management unit including Neuberger Berman.

Banks and secured creditors will come out the best under this scenario. Those who hold senior, unsecured debt will fare next best, and those who hold subordinated debt will probably end up with little. 

The silver lining for bondholders is that the healthier Wall Street firms are considering setting up a special fund to help finance the orderly liquidation of Lehman's assets. If this comes to pass, it should help bondholders by providing a form of price support to those assets. The more Lehman can get for those assets as it winds down its operation, the bigger the pie for creditors to divide up among themselves. The proposal to establish a $700 billion fund for the U.S. Treasury to purchase from financial firms various securities may also help to stabilize the market.

The question facing bondholders is whether to sell now or simply hold on and see how the situation unfolds. We believe selling right now is a difficult proposition as the market is thin and thus subject to an exceptionally wide bid-offer spread.

If you believe you need the money immediately, then selling now may be a reasonable course of action. If that is not your situation, then consider waiting to let events calm a bit in order to plan your next move. Thinking about waiting to let it all wash out in bankruptcy court? Keep in mind that bankruptcy courts can move slowly. If you choose this path, be prepared to wait perhaps 18 months to see any principle returned to bondholders.

What should I do if I own Lehman preferred stock?
When a company files for bankruptcy protection, it is important for holders of securities issued by that company to understand where their securities lie in the pecking order of stakeholders. Preferred stockholders are after bondholders in the queue, but before common stockholders.

One way of gauging the outlook for Lehman preferred shares is to consider where securities are trading that are higher in the pecking order.

Prices for Lehman bonds are volatile and subject to wide bid-offer spreads, so please don't consider these to be quotes. However, Lehman senior unsecured bonds were trading at 14 cents on September 29. Some firms have marked their Lehman debt down to zero.

Given these prices, it isn't surprising that Lehman Brothers preferred stocks are trading at levels which are indicative of market perceptions that the securities are worthless. It is important to check the trading level of each particular issue, but given that preferred stocks are behind all debt in the capital structure, it is the market's perception that there is little chance of any residual value in Lehman preferred shares.

What will happen to Lehman exchange-traded funds (ETFs)?
This is an interesting question in that it illustrates some confusion about ETFs. As far as we know, Lehman does not manage any ETFs. However, there are ETFs which track various Lehman indexes. What this means is that some other firms (other than Lehman) have created ETFs that track some of Lehman indexes.

Barclays Capital has announced that they have purchased Lehman's indexes and will continue to publish them.

What will happen to Lehman indexes?
Barclays announced that they had completed their acquisition “of Lehman Brothers' North American Investment Banking and Capital Markets businesses. As part of the transaction, Lehman Brothers' indexes have become part of Barclays Capital. Recognizing the industry significance of these indexes, Barclays has announced its commitment to maintaining the family of Lehman Brothers indexes and the associated index calculation, publication and analytical infrastructure and tools …”

What is happening with Neuberger Berman?
Private equity firms Bain Capital Partners, LLC and Hellman & Friedman, LCC announced that they intend to acquire Neuberger Berman from its parent company, Lehman Brothers Holdings, Inc. (LEH). According to this announcement, Neuberger Berman, Lehman Brothers fixed income, and some of the private equity asset management businesses from LEH's Investment Management Division (IMD) will form a new company named Neuberger Investment Management (NIM).

Joe Amato, head of Neuberger Berman, said that NIM ownership will be split such that Bain and Hellman each own 40%. The portfolio managers and other employees of the acquired groups will own 20%. The employee stake will vest over a number of years and can increase in the future, as well. The employee stake is linked to noncompete agreements. This ownership structure is meant to assist in the retention of portfolio managers and other investment professionals, according to Amato.

Amato also said that he expects the transaction to be complete in early 2009. The transaction is subject to the processes of client consent, mutual fund board approval, and LEH's bankruptcy court approval, Amato explained.

On investing in stocks now:

Why should I have any money in the U.S. stock market?
In a general communication like this we can't make specific recommendations because each person's situation is different. What we can do is offer some things to think about in the hopes that by considering these items, you can come to your own conclusion.

On the question of the stock market, the angst behind the question is understandable and genuine. Each morning we're faced with headlines about one company or another being in trouble. Particularly when these are big-name firms and the news is mostly negative it is understandable to question, "Why be in the stock market at all?"

There are many reasons we think exposure to the stock market makes sense for the right type of person, but for those who are considering a dramatic reduction in their stock market exposure, we believe three issues seem particularly appropriate at the moment.

1. Cash doesn't cut it long term. A money market fund might yield 2% right now. If you hold that money market fund in a taxable account and you're in the 25% marginal bracket, you'll get to keep 1.5% as an after-tax yield. The CPI is currently running at about 4.5%. This means your real, after-tax yield on a money market fund could be as low as –3%. This low of a return on cash is something of an anomaly owing to high inflation that we expect to subside and the fact that the Fed has been keeping interest rates low as an economic stimulus measure. Nevertheless, history has shown that cash simply doesn't do very well in comparison to other asset classes. 
2. Markets are tough to call. We've said it many times and in many ways so forgive us if we sound repetitive. With the benefit of hindsight, all market moves are obvious. If we could magically switch the perfect hindsight into perfect foresight, that would be a wonderful technique for trading strategy. But we can't and what's more, we're not aware of anyone else who can. 
3. Whatever news is out there tends to be priced in. In the face of weak economic reports, shaky economic statistics and the rest, the immediate reaction many of us have is to immediately want to sell. Bad news means get out of town. In the real world, things aren't so simple. Keep in mind that at any given time most, if not all of the news that is out there is embedded in the prices of stocks. In other words, the bad news is already reflected to a large extent in stock prices. The question is whether you think the news that affects stocks will be better or worse in the future than what is already anticipated by the market. Our reading of history suggests that one of the primary reasons why many investors underperform market averages over the long-term is that they sell after prices have declined due to a string of bad news, and they buy after a rise in prices caused by a string of positive news. Rather than thinking forward they look backward, and while it’s a cliché, we believe that investing while looking through a rearview mirror has little chance of success.

What should I be doing with my stock portfolio right now?
The stock market is a turbulent place right now, but just because there's a lot of turbulence doesn't mean you approach the process of analyzing your portfolio any differently. Consider the following approach as a way of analyzing your portfolio from the standpoint of discipline and not emotion.

The first thing is to understand your holdings. One place to start is by considering how your equity portfolio stacks up from the standpoint of individual sectors. The present crisis has had a disproportionate impact on certain sectors of the economy like financials. What is your exposure to that area? If it is higher than 15%, we consider that an outsized position and we suggest bringing it in line with market weights.

As for your other sector holdings, please consult Schwab Sector Views on Schwab.com for our latest thinking on the other sectors in the economy and their outlook during the next few months.

It's also a good idea to understand your portfolio from the standpoint of its individual holdings. What are the current Schwab Equity Ratings on your individual positions? As a general rule, we don't believe there's ever a good reason to hold on to D- and F-rated stocks. If you are currently holding them, we suggest you revisit your original rationale for holding them and consider selling.

If you have stocks rated NR, that means something extraordinary has happened with that company—an event that renders the Schwab Equity Rating not meaningful and so we decline to rate it. If you hold NR stocks, then it is a good idea to review the current news on that company and ask yourself whether those shares still fit within your investing plan.

This is also a good time to consider your overall exposure to stocks. Reacquaint yourself with the target asset allocation for your portfolio. The target asset allocation is intended to match up with your long-term needs, circumstances and risk tolerance. If those circumstances have not changed and your portfolio has roughly the same percentage in stocks as indicated by your asset allocation, then you're probably in good shape. Be sure, however, to assess whether your stock holdings are well-diversified and of high quality.

On dividend investing:

Are the typically high dividends of financial stocks safe?
Many firms in the financial services industry have cut or eliminated dividends during the past year. AIG, Bank of America, Lehman, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia and Citigroup are just some examples of firms eliminating or reducing their dividends. This points to the difficult environment in which many of these firms are operating.

Capital is vital to the health of these firms. It supports lending to others, provides a cushion against loan defaults and is closely watched by regulators to assess a firm’s financial strength. Cutting dividends to common shareholders is one of the better ways to preserve capital when times are tough.

How about nonfinancial stocks?
According to Standard and Poor's, 138 companies decreased their dividends in the third quarter of 2008. Financial stocks, though, accounted for two-thirds of the cuts, indicating to us that nonfinancials are in better shape. Is this sustainable? We believe it all depends on how corporate earnings hold up in the wake of a slowing economy. Firms loathe to cut dividends, but if earnings suffer too much, then management may not have any choice.

How can I be a smarter dividend investor?
If you rely on common dividends to generate income, we suggest you review each of your holdings and ask, "How stable is that dividend?" and, "Is the company going to be able to pay that dividend going forward?"

Even if the answers to those questions are yes, it behooves you to not be too reliant for portfolio income on any single stock. Don’t make the mistake of thinking you’re adequately diversified just because your dividend income comes from several stocks. If the stocks are all in the same sector, then you may not be as diversified as you think.

A few years ago, auto stocks were an example of an industry whose companies tended to pay high dividends. They all were subject to the same economic forces, however, and many have cut their dividends as a result. Financials are, of course, a more recent example of the same phenomenon.

On the banking system and CD investing:
What’s a good way to invest in CDs?
There are lots of advantages to certificates of deposit (CDs). There is a lot of flexibility on the maturities that you can choose from, and, as long as you’re within FDIC limits, your investment is insured.

One caution is to watch out for banks paying above-market rates on CDs. Banks issue CDs because they need to attract deposits. They then take those deposits and reinvest the money. Sometimes that investment takes the form of loans and other times they invest in higher-yielding securities.

If a bank is offering well-above market rates, this could mean any of three things.

1. The bank is in good shape and is simply trying to attract business. 
2. The bank has lower operating costs, which allows it to pass some of its efficiencies on to depositors in the form of better rates. 
3. It could be a sign of desperation (i.e., the bank needs new depositors to provide cash flow to the bank).

Our advice is that the higher the rate of the CD relative to those offered by other banks, the more you need to pay attention to the rules around FDIC insurance and structure your accounts in a manner that allows you to maximize your insurance protection.

How is the banking system holding up?
Banks are the financial equivalent of canaries in the coal mine, and failing banks indicate an underlying weakness in the economy. Investors need to realize that we are in a situation where we have substantial financial turmoil and much of the policy actions are motivated by a desire to prevent financial turmoil from infecting the underlying economy. Bank failures indicate that policymakers are not being 100% successful in that regard.

Steering depositors away from panic and instilling public confidence in the banking system were reasons why Congress created the Federal Deposit Insurance Corporation (FDIC) in 1933 as an independent agency of the United States government. The FDIC insures deposits at 8,451 banks and savings associations and is backed by the full faith and credit of the U.S. government. When a bank fails, depositors can take some comfort in knowing federal law requires the FDIC to make payments as soon as possible.

Bank failures this year have placed pressure on FDIC reserves. The FDIC reserve fund totaled $45.2 billion at the end of June 2008 and its "reserve ratio" was 1.01%. Both the reserve ratio and the dollars in the reserve fund need shoring up. The FDIC plans to fix both problems by roughly doubling the insurance premiums it charges the banks that fund the system. The increases would be phased in starting in the first quarter of 2009. It is also planning to alter its premium assessment to charge higher premiums to banks deemed riskier. It already does this, but the proposal would increase the differential premium charged.

In the event that the premium income doesn't roll in fast enough, the Emergency Economic Stabilization Act of 2008 temporarily granted the FDIC an unlimited line of credit at the U.S. Treasury. Considering the importance that policymakers place on having a stable and secure banking system, we expect that the Treasury will be forthcoming with the funds necessary should the FDIC request assistance.

To date, the system seems to be working well. Fifteen banks and savings & loans have failed this year, including the largest ever (Washington Mutual). When these banks failed, depositors were protected and shareholders weren't. That's how the system is designed and we believe the system remains effective. The FDIC has been proactive at getting to troubled banks before they become insolvent and finding buyers for them. Wells Fargo's purchase of Wachovia is the prime example of that.

The situation would be far more worrisome if regulators had been forced to close WaMu and Wachovia without lining up a buyer. They didn't have to, and that means it's good news. We see the willingness of JPMorgan Chase and Wells Fargo to step in means there’s ample capital in the system to accommodate quality assets that come up for sale.

Is the FDIC fund large enough to absorb more bank failures?
We believe so. According to reports, the most recent estimate (June 2008) of the insurance fund's size is $45 billion. If additional banks fail and the FDIC is not able to orchestrate the complete sale of assets to another institution, it must draw upon assets in the fund in order to make insured depositors whole (at least up to the level of insurance). Keep in mind, however, that the insurance fund gets replenished as it collects fees from other banks.

In the event that the fees are not able to keep pace with draw downs against the fund, the FDIC can tap a credit line it has from the U.S. Treasury. Only once since the fund was formed in 1933 has the fund required federal assistance (in the early 1990s). The FDIC borrowed money from the Treasury and repaid that money, with interest, within two years.

Are my assets safe at a traditional bank?
Although bank failures are relatively rare events, it's prudent to evaluate the steps you can take in order to protect the assets you have in the banking system. Here are a few things to keep in mind.

First, when a bank fails (which has happened 15 times this year), depositors can take some comfort in knowing federal law requires the FDIC to make payments as soon as possible. Based on its previous track record, the FDIC has generallymade insured deposits available within a few days after a bank closing.

Second, some important advice for bank depositors is to maximize the amount of their balances that fall under the FDIC insurance safety blanket. With a little bit of planning beforehand, depositors can greatly increase their insured amounts and significantly reduce their exposure to loss should their banks fail. Consider the following:

• Make deposits at FDIC-insured banks. The FDIC logo should be plainly displayed on their Web sites and in their branches. 
• Make sure you understand the rules of insurance coverage. The FDIC aggregates each customer's deposits, such as checking accounts, savings accounts and CDs, into several "ownership categories" that receive separate FDIC insurance coverage. Understanding and taking advantage of these ownership categories is the primary way for depositors to maximize their FDIC-insured balances. To learn more about the ownership categories, read Protecting Your Cash Assets.

The simplest way to make sure you're covered is to keep no more than $250,000 at any single FDIC insured institution.

Important Disclosures

Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. The current and future portfolio holdings contained in a mutual fund is subject to risk you should be aware of prior to making an investment decision.  An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in this type of fund. Exchange-traded funds are subject to risks similar to those of stocks. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Investments in foreign investments may incur greater risks than domestic investments. Past performance is no guarantee of future results.

On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. IRAs and certain other retirement accounts for which the deposit insurance limit already was $250,000 prior to October 3, 2008 will continue to be insured up to $250,000. Certificates of deposit offer a fixed rate of return and are FDIC-insured up to $250,000 per person per institution through December 31, 2009 ($250,000 for certain retirement accounts too). There may be costs associated with early redemption and possible market value adjustment. A CD with a maturity date after December 31, 2009 is scheduled to revert back to $100,000 for non-retirement accounts and remain $250,000 for retirement accounts.The U.S. Treasury Temporary Guarantee Program provides a guarantee to participating money market mutual fund shareholders based on the number of shares invested in the fund at the close of business on September 19, 2008. Any increase in shares in the account after the close of business on September 19, 2008, will not be guaranteed. If the value of these shares fluctuate over the period, investors will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less. The Program expires on December 18, 2008, unless extended by the U.S. Treasury.

Charles Schwab & Co., Inc. receives remuneration from fund companies in the Mutual Fund OneSource® program for recordkeeping and shareholder services, and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services.Fixed-income investments are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, corporate events, tax ramifications, and other factors.Schwab Equity Ratings® are assigned to approximately 3,000 of the largest (by market capitalization) U.S.-headquartered stocks using a scale of A, B, C, D and F. Schwab's outlook is that A-rated stocks, on average, will strongly outperform and F-rated stocks, on average, will strongly underperform the equities market over the next 12 months. Schwab Equity Ratings are not personal recommendations for any particular investor. Before buying, investors should consider whether the investment is suitable for themselves and their portfolio.This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security, or follow any particular investment strategy. The types of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation and determine how volatile fluctuating market conditions may affect those investment decisions.

All views on prevailing market analysis and expressions of opinions are subject to change without notice in response to changing market conditions. Certain information regarding market conditions contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed.

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