Fannie and Freddie who?

Q. What are “Fannie Mae” and “Freddie Mac”? — S.D., Wilkes-Barre, Pennsylvania

A. Those nicknames represent the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., organizations created by Congress in 1938 and 1970, respectively. Both are designed to help ensure that the U.S. has a stable supply of affordable mortgages.

They provide funding to lenders and then buy many mortgages from lenders, with the proceeds from those sales allowing lenders to issue more mortgages. This keeps mortgages available for homebuyers.

The Federal Housing Finance Agency explains: “By packaging mortgages into [mortgage-backed securities] and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing. That makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners and other mortgage borrowers.”

Q. How much of my income should I be saving and investing for retirement? — H.L., Lexington, Kentucky

A.

An old rule of thumb has been to sock away 10% of your pretax income, but that doesn’t serve everyone equally well. For example, if you haven’t been saving as much as you should have for retirement, you might need to start saving 15%, or even 20% or more.

A financial planner can help you draft a solid retirement plan. (Find a fee-only one near you at NAPFA.org.) Online calculators such as those at Calculator.net and Fool.com/calculators can provide some guidance, too. It’s also smart to learn what you can expect from Social Security — do so by setting up a “My Social Security” account at SSA.gov.

Time to panic?

As of May 20, the S&P 500 Index, comprising 500 of America’s biggest companies, was down a sizable 18% year to date. The Nasdaq stock market was down much more — 27%. Large drops make many investors panicky. If you approach your investing in a rational way, though, you needn’t panic.

Understand that the stock market is a terrific long-term wealth builder, but it doesn’t go up in a straight line. Volatility is to be expected.

Stock market corrections (drops of between 10% and 20%) or bear markets (drops of 20% or more) happen about every other year, on average. While some may last years, they usually last around six months.

To avoid reasons to worry, don’t invest in stocks with money you expect to need within five years — or, to be more conservative, perhaps 10 years. You don’t want to amass a bundle for a down payment on a home only to have the market drop right before you planned to sell many stocks. Park short-term money in less volatile investments, such as certificates of deposit (CDs) or money market accounts.

It’s also smart to focus on percentages, not points. The media like sensational headlines, such as “Dow Plunges 300 Points!”

But in context, when the Dow Jones Industrial Average is around 32,000, a 300-point drop is less than 1%. Even large percentages aren’t portents of doom — the S&P 500 plunged by about 38% in 2008, for instance, but that was followed by double-digit gains in five of the next six years.

It’s often best to just hang on through downturns, but there can be some cases when selling is the right thing to do.

For example, if you have little idea exactly what a company you’ve invested in does or how it makes its money, it would be best to learn more about it — or sell. Having studied a company and knowing it well will help during a downturn: You’ll know whether the company is facing long-term problems, or if it has just retreated temporarily along with many other stocks.