Monday, September 15, 2008

In a Financial Storm, What's Safe?

In a declining investment market facing further turmoil, the article posted on Bankaholic by J. Wu entitled "6 Safe Places to Invest Your Money" seemed quite appropriate. This article was posted on September 11, 2008 -- before Lehman Brothers filed for bankruptcy (PDF, 2 pages), and before Merrill Lynch submitted to purchase by Bank of America, both announced on September 15th in press releases.

I reproduce this brief article with permission granted in an email message from Helen Anderson. Of course, the article below provides a generic overview, and does not offer financial advice, either by them, the author, or me.

With the stock market in such a volatile state these days, it’s tempting to dig a hole in your backyard and bury your savings. This way you’d at least know where your money is at all times and how it’s performing for you.
Luckily, there are still some secure places you can invest your money and you won’t have to be afraid of your financial future.

Here’s a list of some places you should consider investing your money with very minimal risk:

1. Open money market / high interest savings accounts.

Money market accounts are great ways to invest money for the short-term. If you need a quick turnaround these are stable ways to secure a return on your investment. The current average yield ranges from 0.50% to high as 4.00%. The bank will reinvest your money into short-term securities with that solid interest rate as further incentive. These accounts are liquid and usually FDIC insured. The only drawback is that some money market accounts may require a minimum balance.

2. Treasuries are safe.

T-bills are issued by the U.S. government and are considered very low-risk investments. They are fully backed by the government. You can choose the maturity date when you’re investment will be fully realized. Short-term T-bills are the safest investments with maturity dates of 13 or 26 weeks.

3.Certificates of Deposit.

CDs are available through your bank or broker and are also very safe investments. They have set maturity dates and you’re locked into your interest rate at the time of your investment. If you withdraw your funds early then you incur a penalty that can be costly.

4. 401k Plans.

If your employer offers a 401k plan then you’d be wise to invest in it. This is your money that you put in on a pre-tax basis. Within your plan you can choose what funds you want to invest in. Whether you’re willing to assume risk or need stable funds you’ll find them in your overall plan.

5. Mutual funds. There are many mutual funds that are tailored for those who have little appetite for risk. The mutual fund is monitored by a fund manager that invests your money in a number of stocks or other mutual funds. One drawback is that you need to pay administrative fees for the management of your fund.

6. Savings bonds. These bonds will offer a low return but also are virtually risk-free, which is a nice thought in this financial climate.
For another viewpoint, see "Four Really Safe Investments" (09/12/08) by Marc Courtenay posted by iStockAnalyst, which recommends treasury securities, collectibles, postage stamps, and "personal happiness."

One of the comments to Mr. Wu's article raised an important limitation on the safety of bank deposits, however: "The six ideas are good. Just watch your FDIC top limits…. I’m a former IndyMac customer who didn’t and have 28K not insured…."

That comment is relevant when you review the list of
failed banks since 2000, including eleven in 2008.

Consider the article "
Trick to Getting FDIC Insured Over $100K" (07/12/08) also by J. Wu, posted on Bankaholic, and explore the issue of FDIC coverage at the website of the Federal Deposit Insurance Corporation, including its posted advisories "Your Insured Deposits" and "Is My Account Fully Insured?"

Update: 09/17/08:

Since Monday, the financial news this week only got worse.

National Public Radio broadcast and posted many stories, including "Are Your Investments Safe" (09/17/08) by Wendy Kaufman:
Nervous investors had a lot to worry about this week, with financial services companies declaring bankruptcy, hoisting for-sale signs and calling for federal assistance. The stock market fell steeply in response.

How can investors protect their nest eggs? [See:
Q&A: Shielding Your Nest Egg From Financial Woes (09/17/08), by Joshua Brockman posted by NPR]
Other analysis, accompanied by good general advice, was offered in NPR's posted article "History's Advice During A Panic? Don't Panic" (09/17/08) by Linton Weeks:
With the collapse of Lehman Brothers, the sale of Merrill Lynch and the bailout of insurance giant AIG, long-standing financial fortresses of America are imperiled and the stock market is like a Six Flags roller coaster.

In the midst of such upheaval, are there lessons to be learned from history? * * *

"This financial crisis is a serious one, the most serious since the 1930s," says Richard Sylla, who teaches the history of financial institutions and markets at New York University.

"But in many respects it fits the typical pattern of financial crises going back three or four centuries. Such crises seem disconcerting, even terrible to many people when they are going on, but they do come to an end and life goes on as before." * * *
At the end of his analysis, considering history, psychology, politics, and economics, what is his conclusion about weathering financial storms?
History teaches us to remain calm, Gordon says.

"Speculators can be badly burned" by dramatic up-and-down days, he says. "But investors — those in the market for the long term — won't be if they hang tight."

In a panic, he adds, don't panic.
Update: 09/18/08:

The Wall Street Journal posted
"Your Cash: How Safe Is Safe?" by Jane J. Kim, who addressed FDIC, PODs, CDARS, and CDs in the search by investors for safe havens during a financial crisis.
As the financial system reels from one disaster after another, financial planners, estate planners and bank officials say they've been receiving calls from panicked savers concerned about the safety of their deposits. * * *