Long-Term Investment Goals: Answers to The Top 3 Investing Questions Right Now
by Louis Basenese, Advisory Panelist, Investment U
Thursday, October 16, 2008: Issue #872
With Investment U having over 360,000 members, Alex Green and I always get a steady stream of questions. But in recent weeks, as the market has accelerated its descent, they’ve become increasingly alarmist.
As I’ve learned, when we give into panic, we act hastily. And often undermine our long-term investment goals.
So today, let’s put to rest some of your pressing concerns. And make sure that doesn’t happen.
Long Term Investment Goals: Is My Cash Safe?
When my grandfather died, my grandmother found $17,000 lying around the house. He was Italian. So yes, some was stashed under mattresses. Some was in coffee cans behind the refrigerator in the basement. And more still was found in his sock drawer.
Forget the terrible investment implication of earning no interest on this money. My father almost burnt the house down when he was 12. And my great uncle was convicted of arson. So an “accidental” fire, not inflation, was a bigger threat to his savings.
My point: There’s a lot of fear in the market. Banks continue to go under. Many people are trying to predict the next collapse, and move their assets in advance. (I can empathize because I bank with Washington Mutual, now JP Morgan.) But whatever you do, be smarter than us Italians. The mattress is not a safe or smart place for cash.
In all seriousness, if we take a few simple steps, we can keep all our cash in the bank, and make sure every penny is insured.
The rescue package increased the FDIC limits up $250,000 per qualified account. This increase alone brings almost 75% of deposits in the United States under coverage. The expanded coverage remains in effect until December 31, 2009.
If you have more than $250,000 in cash, you don’t have to move it to another bank to get an additional $250,000 in coverage. Simply set up another account under a different ownership category (single, joint, IRA, revocable trust, corporation, etc.). For most banks, this can even be done online.
For those interested in insuring large deposits, up to $50 million, you might want to consider EverBank’s Insured Advantage Certificates of Deposit (CDARS)*.
Long Term Investment Goals: Should I Worry About Mutual Fund Companies Going Bankrupt?
No. We’re protected here, too. The Investment Act of 1940 requires each fund to be set up as an individual corporate entity, with a board of directors. That entity then hires the mutual fund company to manage its assets. So if the mutual fund company goes belly-up, its creditors can’t touch the fund’s assets. And the board of directors simply hires a new manager, after getting shareholder approval.
The only way your mutual fund can go bankrupt is if the actual value of all the stocks or bonds in the portfolio drop to zero.
Long Term Investment Goals: What if My Broker Goes Out of Business?
Again, we’re covered. Brokerage firms are restricted from co-mingling funds by SEC Rule 15c3-3 – the Customer Protection Rule. Or as they used to tell us at summer camp – boys are blue, girls are red. And we don’t want any purple running around here.
As the Financial Industry Regulatory Authority (FINRA) explains, “In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm.”
But we all know that Wall Street doesn’t always abide by the rules. That’s where SIPC insurance comes in. Created in 1970 as a non-profit, non-government membership corporation, funded by member broker-dealers, the SIPC’s primary role is to return funds and securities to investors if the broker-dealer holding these assets becomes insolvent.
SIPC coverage is limited to $500,000 per customer, including up to $100,000 for cash. But again, we can easily increase coverage by establishing multiple accounts under different ownership structures.
Good investing,
Louis
* Disclaimer: The publisher of Investment U maintains a marketing relationship with EverBank, but it’s important to note that we’d recommend their products and services anyway.
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In addition to being the foremost expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
