An AP Q-and-A: Stock drop heightens investors' money worries

The panicked selloff in the stock market that sent the Dow Jones industrial average down as much as 800 points Monday before it recovered left investors' jangled nerves further on edge.

It also exacerbated worries about money that have grown as the credit crisis that exploded last month shows signs of worsening.

With the blue-chip indicator sinking below 10,000 for the first time in four years, many are wondering how much lower it could go and how vulnerable are their holdings in stocks, CDs and other investments as the credit crisis continues.

The Associated Press addresses some of the concerns with answers to common questions, based on interviews with experts.

Q: Where's the best place to keep money I may need in the short term?

A: Much like your overall portfolio, you might want to consider diversifying even your cash reserves. Right now, for example, rates on tax-free money-market funds are better than certificates of deposits, or CDs. To mitigate any difference, consider splitting your money between the two.

To find the best rates for CDs and money-market deposit accounts, check Bankrate.com, which includes listings from online banks. The average rate on a 1-year CD was 3.7 percent Monday, according to the site, while the average rate for money-market accounts was 2.44 percent.

If you've got cash to invest for the long-term — at least 10 years or more — putting a little in the market in stages might not be a bad idea, said Lisa Kirchenbauer, a certified financial planner and president of Kirchenbauer Financial Management & Consulting in Arlington, Va.

Q: What's the difference between a money-market mutual fund and a money-market deposit account?

A: Both are generally safe ways to keep money readily available while drawing a modest amount of interest to offset inflation. While a money-market fund generally offers a greater yield than a money-market account, it also carries modestly higher risk.

Unlike other mutual funds that invest in stocks and bonds, money funds are limited to safer short-term debt. The safest typically invest in government debt such as Treasury bills, while funds offering slightly higher returns invest in the short-term corporate debt of firms with high credit ratings.