The recent market gyrations and historic bank and investment bank failures have been the catalyst for quite a few phone calls between myself and clients with some simple yet very important questions being asked. I thought I'd share some of the topics discussed because they are salient to all of us.
While today's explosive stock market rally upwards provides some psychological relief from the constant drone of bad news I think it's important to prepare for possible future negative events.
If it can happen once, it can happen again. I speak of banks failing and money market funds 'breaking the buck' and writing down the value of your money market holdings. While the probability is low of it happening to you, the downside could be quite painful. Here are a few simple chores you can do to prevent losing access to your money.
Banks and FDIC Insurance:
The Federal Deposit Insurance program is backed by the Federal government. Here's a link to a description of what is and is not insured.
While there are some techniques to increase the amount insured, all deposits at a single bank are FDIC insured up to $100,000. For techniques on how to increase your coverage above $100,000, here's a recent Wall Street Journal Article. (link is good for 7 days) To keep it simple, I suggest you keep at maximum $100,000 at any one banking institution.
Is all your cash in one bank? If it does fail and you are under the $100,000 limit it may take some time to recover your money. I suggest you have an account at another bank so at least some of your cash is accessible if your primary bank fails. Personally I utilize 3 separate banks; one for the business, one for personal expenses, and one for 'house' expenses. Having separate accounts clearly delineates the fund's roles as well as prevents all my money from being inaccessible in case of a bank failure.
Money Market Funds:
The Reserve Primary Fund, one of the largest and oldest money market funds recently 'broke the buck' and wrote down the value of their money market fund by 3%. Money market funds are supposed to be exceedingly safe and secure. The Wall Street Journal has an article on this as well (link is good for 7 days). I recently moved all my client's money market funds into those that invest in government securities only. The yield is lower but the probability of loss drops dramatically. Until the current credit crisis ends (which in my opinion will take at least a year) I'll keep the money in government securities only. Only after the storm passes will I transfer it back to money market funds that invest in other short term debt securities.
I'd like to reiterate, the possibility of the above events happing to you are low. But the amount of effort required to mitigate and possibly eliminate the downside risk is so small it is prudent to take the measures I suggest above.
If you have any questions or concerns regarding these topics please feel free to contact me.