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.
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.
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.