Now Is Not The Time To Panic

If you read the newspaper, listen to the radio or watch TV, you can’t help but wonder if our financial system, as we know it, is coming to an end.  With record high oil and gas prices, falling real estate markets and bank failures, it’s no wonder that American consumer confidence is at its lowest level in 40 years.  In fact, many people now seem to be in full panic mode.

Now, however, is not the time to panic.  Why?  For a number of reasons.  First, there are protections in place against the failure of your bank or brokerage company, second, the government is being pro-active to try to prevent a full-scale meltdown and finally, the fact that this market will, as have others, rebound at some point.

Government Protections

Banks

In the middle of the Great Depression, in 1933, the Federal Government created the Federal Deposit Insurance Corporation (FDIC) to protect the depositors who kept money in banks.  The FDIC provides insurance of up to $100,000 per depositor, per bank to guard against bank failure.  In 2006, they increased the protection on IRA’s to $250,000, which is in addition to the basic $100,000 coverage.  Also, with the correct use of trusts, you can increase the insured amounts further.

When a member bank fails, the FDIC steps in to run the bank, ensuring that you will have access to the insured amounts.  That means that your checks won’t bounce (assuming you have enough money to cover them!) and that you’ll have access to your cash.  There may be a short period of disruption, but, if you have deposits under the limits, there’s no reason to go down to the bank and pull your money out.

Brokerage Accounts

On the brokerage side, your investments are protected by the Securities Investor Protection Corporation or SIPC.  The SIPC replaces missing cash and securities from failed brokerage firms.  The limits of SIPC coverage are $500,000, with a maximum of $100,000 for cash accounts.

If you’re sold a stock that becomes worthless, the SIPC won’t step in, however, if a broker steals your money, the SIPC will step in.

Not all brokerages are members of SIPC so you need to be sure to ask your advisor if the brokerage firm they used is or isn’t an SIPC member so you’re ensured that you’ve got coverage.

Current Government Action

The Federal Government is doing as much as it can to minimize the damage.  In order to calm the mortgage markets, which are currently still a large part of the current market turmoil, they have pledged to bail out both the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which provide funding for a huge percentage of home loans in the market.

The stimulus checks issued in the earlier part of this year, were intended to pump some more money into the economy, in an attempt to avoid a recession.  There is some evidence that this is in fact working.

Markets Go Up, Markets Go Down – This One Will Eventually Go Back Up

Investing in the stock market is intended for the long term because over short periods, markets go up and markets go down.  By responding to each market gyration, the average investor almost always gets it exactly backwards.  Their emotions tell them to buy more when the market is up and to sell once the market drops.  Many savvy investors know that what the average investor thinks is, in fact, what’s called a ‘contrary indicator’.  Since most investors get it wrong, the logic goes that when the public is incredibly positive on the market, we’re near a top so the professionals sell, and when average investors are at their most pessimistic, we’re at a bottom, presenting a buying opportunity.

One of the key tenets of successful investing is not to let your emotions drive your investments.  Studies have show, time and again that the important thing to long term growth is not TIMING the market but TIME IN the market.

Now is the time to review your portfolio to ensure it’s still allocated the way you want, take some losses to lower your taxes and position yourself to benefit from the next bull market.

The moral of the story here is to not pay attention to the doomsday scenarios presented by the popular press, make sure that you live within your means and that you maintain a long time horizon for your investment portfolio.  If you do all three of those things, you’ll sleep better and ride out our current economic challenges.

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San Diego Aims To Be The First Stupidity and Greed Sanctuary

Reuters news agency today reported that San Diego City Attorney Michael Aguirre had filed suit against Bank of America and it’s Countrywide subsidiary to prevent the mortgage lenders from foreclosing on homes in his city.  He also plans to file similar suits against Washington Mutual, Wachovia and Wells Fargo in the near future.  The state goal is to make San Diego a “foreclosure sanctuary.”

More aptly, Mr. Aguirre should have said that he wants to make San Diego the first “Stupidty and Greed” sanctuary.

For those that aren’t aware San Diego was one of the first markets to experience the run-up in real estate prices and also had some of the highest appreciation rates in the country.  San Diego was also known for the zeal with which it’s residents speculated on the real estate market.  With the credit crisis, San Diego has now lead the market with some of the steepest losses in the country.

As with any speculative bubble, this one was characterized by people taking out aggressive loans, that they probably couldn’t afford, believing that the market would continue to climb at its torrid pace, ultimately allowing them to refinance, take out cash and generally live the good life.  In other words, stupidity and greed took over until the market corrected and those same people were stuck with potentially huge losses.

By suing lenders to prevent them from foreclosing, San Diego has essentially condoned this stupid and greedy behavior and given it its stamp of approval.  While undoubtedly well-intentioned, these lawsuits are encouraging the wrong behavior.  Instead of encouraging people to be accountable for their actions and live within their means, the city of San Diego has essentially told its citizens “It’s OK to take unnecessary financial gambles.  If it doesn’t work out, we’ll bail you out.”

So, if you’re planning on doing something greedy and stupid, move to San Diego so you can find “sanctuary” from your actions.

Media Accountability

The other morning, as I was preparing to go to work, I was watching a local morning news telecast when one of the newscasters, commenting on the IndyMac bank failure, said she thought that our current economic situation was similar to the Great Depression.  I have a bone to pick with non-experts making commentary on a market situation they cleary don’t understand.

First, given the fact that this woman, who shall remain nameless, was under 40 years old, she, like me, has no real idea of what the start of the Great Depression felt like.  Second, with people already nervous about our current economic situation, it’s my opinion that her statement was, to say the least, irresponsible.

The situation at IndyMac bank, after its takeover by the FDIC was chaotic.  Panicked customers lined up at their branches in an effort to get their money out.  News reporters on site made sure to pan through the large crowds and interview those people that were particularly panicked that morning.  Clearly the intent was to throw gas on the proverbial fire, not provide objective analysis.

The local station I was watching reaches hundreds of thousands of viewers (I would presume).  If the actions of these reporters and new anchors resulted in a even a few hundred more people pulling their money out of the bank immediately, ultimately this makes the failure of IndyMac more expensive and that tab, you guessed it, is borne by you, the taxpayers.  Instead of playing up the impending Great Depression crap, these people should have been discussing the exact opposite that, unlike the Depression, we now have have protections in place like the FDIC, that economic theory and governmental oversight skill have improved substantially in the last 75 years and that we haven’t even technically entered recession, let alone Depression.

I’m all for freedom of the press as it’s one of the cornerstones of our society.  What I’m against, however, is irresponsible newscasters, who have no real business making commentary on this situation in the first places, causing additional stress to people and ultimately costing me money.

Oh, by the way, shares of financial companies had their biggest day in 40 years yesterday.