By Quentin Fottrell
“With the fall of Silicon Valley Bank, I need to diversify my funds”
April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their financial health and offer advice on how to save, invest and spend their money wisely. .
I’m lucky to have a decent amount of “cash” in the bank, and I’ve had it all in a bank for many years.
With the fall of Silicon Valley Bank, I need to diversify my funds. I understand that $250,000 is insured by the Federal Deposit Insurance Corporation, so I was going to transfer money to different banks and take advantage of some high-yield, short-term CDs. The idea of managing multiple CDs in multiple banks every 6-9 months is not an ideal situation.
I spoke with the banker that I had for over 30 years, and of course he wants me to keep everything in his bank. He proposes that I invest a large amount in US Treasury bonds, which he says are fully backed by the US government (not the FDIC). He also mentioned something called “liquid insured,” which he says is FDIC insured up to $2.5 million. How can this be?
What do you recommend for people who don’t want to lose all their savings if their bank fails? How to diversify intelligently?
Turn your fear into a goal.
I agree with you: it’s not good to have all your money tied up in one place. The only thing that protects your money against stock market turbulence, banking crises, real estate crashes and Ponzi schemes (not to worry more) is diversification. Uncertain times provide a timely reminder to park your wealth in different places.
“It’s not ideal to have millions of dollars just in cash in the bank,” says Cary Carbonaro, senior vice president and director of women and wealth at Advisors Capital Management. “As a financial planner, you’re not keeping pace with inflation. I don’t know what returns you’re currently receiving. Your banker would never want you to withdraw your money.”
As you note, the Federal Deposit Insurance Corporation covers deposits up to $250,000. Some companies work with financial advisors and a network of banks to maximize deposit insurance coverage as well as interest rates on cash balances. Some of the companies that help you spread your money include StoneCastle Cash Management, MaxMyInterest, and IntraFi Network.
You can learn more about I-bonds via this site. These are US savings bonds issued by the government. You can purchase up to $10,000 worth of I-bonds per individual each calendar year, so the new calendar year resets on January 1, opening purchases again.
“Please be patient as this is a government run website that looks dated,” says Larry Pon, a financial planner based in Redwood City, Calif. “Last year the system crashed when too many people tried to buy when the interest rate was 9.62%. You can also get up to $5,000 in I-bonds through to your tax refund. Learn more about how to do this here.
Savings accounts are good safe havens in a high interest rate environment. The annual percentage yield or APY for an online savings account now averages 3.76%, according to rates-tracking DepositAccounts.com, from less than 0.5% a year ago. The yield of a one-year CD from an online bank can reach 5.20%, compared to 0.5% a year ago.
A brokerage account would let you buy CDs from multiple banks at the same time, Carbonaro said. “If you had a fee-only fiduciary financial planner, they can also do this for you so you don’t have to deal with the CDs due date.”
You can read more about insured liquid deposits here. They are offered by investment professionals and brokers and insured in total up to $2.5 million. You are right about US Treasuries. (For maturities up to 12 months, they are known as US Treasuries, or Treasuries. For 2 years to 10 years, these are US Treasuries, and for 20 or 30 years, these are treasury bills.)
In its forecast for 2023, Vanguard expected US bond yields to fall from 4.1% to 5.1% annualized. When interest rates rise, bond prices fall.
However, Larry Pon is not a big fan of Treasuries. “They were paying virtually no interest until recently,” he says. Also, as you saw with the collapse of the SVB, they bought long-term treasuries when rates were low and when rates rose, treasuries lost value, adds he. This is true of all bonds, not just Treasury bills.
If you buy CDs from a bank, you are limited to $250,000 of FDIC insurance. Buying through a brokerage will allow you to spread the FDIC insurance across different banks. “It’s definitely easier than filling out applications with multiple banks,” Pon says. “Depending on how much money you have, you can spread the CDs out so that there is at least one CD maturing each month.”
“Let’s say you have $240,000 to put into CDs,” Pon says. “I would buy a certificate of deposit for $10,000 each month for the next 24 months. If I didn’t need the money at maturity, I would buy another CD within 24 months. This helps me lock in higher CD rates, but also allows me liquidity if I need cash.”
“For the same reason, I am not a supporter of directly holding municipal or corporate bonds,” he adds. “As retail investors, we are at a disadvantage compared to institutional investors. We don’t get the best prices etc. or ETFs (Exchange Traded Funds).”
My colleague, MarketWatch columnist Philip van Doorn, says everyone should have a brokerage account even if they don’t buy stocks and bonds. “With Charles Schwab (SCHW), for example, you can do this without fees or commissions, for the most part. You don’t need to have a “consulting” relationship with Schwab if you make your own decisions. an advisor an annual fee if you select your own investments. This may include traded CDs. You may need to call the broker with a question from time to time, but they will only charge if they do a special telephone exchange, this that many investors won’t need it.”
You don’t want to take money out of your stock portfolio in a depressed market. It is usually a mistake to try to time the market or to panic in a bear market. Just make sure you have enough money for an emergency fund, including job loss or medical emergencies, and for major purchases like a house. Good luck diversifying your cash flow. It is absolute luxury.
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More from Quentin Fottrell:
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