Did you know that over half of the companies in the S&P 500 are at or near junk bond status? That statistic includes a lot of major U.S. banks. Do you wonder where your bank lies in the mix? See below.
Editor’s Note: BBB is the lowest rung of investment grade. With BBB companies, according to the S&P Global ratings definitions, “Adverse conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments.” BB, B, CCC, CC, C = Significant speculative characteristics. BB = least degree of speculation, with C being the highest.
Redemption Gates and Liquidity Fees
Why should this matter to you? Banks and other financial services companies now have redemption gates and liquidity fees on their money market funds. Many of their staff encourage investors to move from FDIC-insured cash accounts into money market funds. Why? The money market funds are the bank’s “bail-in” plan. That is in fact why these rules were approved and enacted in 2017 – to prevent a run on the bank. The new clauses could limit your ability to withdraw your money, and/or a fee could be imposed.
Recently, I got a notice from a couple who wrote that they felt their money was secure because, even though it was in a bank money market fund, it was FDIC-insured. Sometimes the fine print, though enforceable, is seen as something that won’t happen. Bank and financial services representatives might even tell you not to worry about it. However, as you can see from the chart below, redemption suspensions have already begun in some mutual funds in Europe.
Fitch Ratings just gave the U.S. a negative outlook on its AAA rating. Canada was downgraded to AA+ on June 24, 2020 by Fitch.
We are in unprecedented times. Conditions that are authorized in the fine print are occurring. In addition to making sure that your FDIC-insured cash is safe (i.e. not subject to redemption gates, liquidity fees and potentially even loss of principal), it’s a good idea to read the fine print on your mutual funds as well.
Money Market Funds Can Lose Value
Another issue with money market funds is that the fund itself can lose value. In fact, the time when the financial services company is most likely to impose a redemption gate or liquidity fee is if the fund “breaks the buck” (loses too much money).
Cash might lose buying power if the dollar weakens, as is currently happening. The dollar is projected to continue weakening against other currencies. However, cash in a money market fund could lose some of your investment, in addition to losing buying power.
Financial Services Companies
Financial services companies also offer money market funds. If you have a 401k, chances are high that your “safe” money is either in a bond, a money market fund or a Treasury bills fund. Since there is so much leverage in the financial services industry, it’s a good idea to know how healthy the fund company that underwrites your future is, and to read the fine print on the products. Financial products are not FDIC-insured. Not all bank products are FDIC-insured either, including insurance products that the bank offers and some high-yielding CDs and products.
Which S&P 500 Companies are Below Investment Grade?
11.6% of the S&P 500, 58 companies, are below investment grade. American Airlines has the lowest rating, at B-. You’re probably not surprised to find that United and Delta are in the bunch, alongside Royal Caribbean, Ford Motor Company, Live Nations Entertainment, Wynn, MGM Resorts International and some retail brands. However, there are even some technology companies hanging out below investment grade – including Netflix, Advanced Micro Devices and Twitter.
The Bottom Line
The world is highly leveraged with a lot of paper money floating around. There is substantial more risk on the safe side of your nest egg then you might be aware of. In addition, you’re not getting paid to take on that risk. What will pay off is to be informed and stay a step ahead of any bad news that appears on the horizon. Once bad news hits a headline, it’s too late to protect your assets.
During an unprecedented recession, such as we are in today, it’s imperative to read and understand the fine print. Don’t reach for yield. As Roy Rogers once said, “I’m more concerned with the return of my money than the return on my money.”
Learn more about the risk in bonds, annuities, money market funds, REITs and more in the blogs below. (Search by name and click on the blue highlights.)
You can read about our time-proven, easy-as-a-pie-chart nest egg strategies, in my book The ABCs of Money. (The 4th edition will be published very soon.) You can learn these transformational tools at our Oct. 3-5, 2020 Investor Educational Retreat. You can call or email our office for pricing and information on an unbiased 2nd opinion of your current plan, which comes with a roadmap for safety and diversification. Call 310-430-2397 or email info@NataliePace.com.
Other Blogs of Interest
Do Stocks Fare Better Under Democrats or Republicans?
Put Your Money Where Your Heart Is.
Crystal Ball for the Remainder of 2020 (Including the Election).
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Apple & Tesla Stock Splits.
Schwab's Chief Fixed Income Strategist on What's Safe.
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Wealth Myths That Keep You Poor. Prosperity Truths That Make You Rich.
Protecting Your Wealth and Home in a Recession.
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The Economy Contracts 32.9% in the 2nd Quarter of 2020.
Real Estate: Feeling Equity Rich? Make Sure That Feeling Isn't Fleeting.
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10 Questions for College Success
Bank Earnings Season. Crimes. Cronyism. Speculation.
Real Estate Solutions for a Post-Pandemic World.
Copper and Chile Update.
Gold Soars. Some Gold Funds Tank.
Will the Facebook Ad Boycott De-FANG Stocks?
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Apple Reports Terrible Earnings.
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8 Money Myths, Money Pits, Scams and Conspiracy Theories.
21st Century Solutions for Protecting Your Home, Nest Egg & Job.
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Why Are My Bonds Losing Money?
Tomorrow is Going to be Another Tough Day.
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7 Recession Indicators
Corona Virus Update.
The Bank Bail-in Plan on Your Dime.
NASDAQ is Up 6X.
CoronaVirus: Which Companies and Countries Will be Most Impacted.
Is Tesla Worth GM and Ford Combined.
Artificial Intelligence is on Fire. Is it Time to Buy S'More?
Take the Retirement Challenge.
2020 Investor IQ Test.
Answers to the 2020 Investor IQ Test.
The Cannabis Capital Crunch and Stock Meltdown.
Does Your Commute Pollute More Than Planes?
Are Health Care Costs Killing Your Budget?
2020 Crystal Ball.
The Benefits of Living Green. Featuring H.R.H. The Prince of Wales' Twin Eco Communities.
What Love, Time and Charity Have to do with our Commonwealth. Interview with MacArthur Genius Award Winner Kevin Murphy.
Unicorns Yesterday. Fairy Tales Today. IPO Losses Top $100 Billion.
Will There be a Santa Rally? It's Up to Apple.
Harness Your Emotions for Successful Investing.
What the Ford Downgrade Means for Main Street.
The Dow Dropped Over 1000 Points
Do We Talk Ourselves into Recessions? Interview with Nobel Prize Winning Economist Robert J. Shiller.
Ford is Downgraded to Junk.
Gold Mining ETFs Have Doubled.
The Gold Bull Market Has Begun.
The We Work IPO.
The Highs and Hangovers of Investing in Cannabis.
Recession Proof Your Life.
What's Your Exit Strategy?
It's Time To Do Your Annual Rebalancing.
Are You Suffering From Buy High, Sell Low Mentality?
Financial Engineering is Not Real Growth.
The Zoom IPO.
Uber vs. Lyft. Which IPO Will Drive Returns?
Boeing Cuts 737 Production by 20%.
The Lyft IPO Hits Wall Street. Should you tak
Cannabis Doubles. Did you miss the party?
12 Investing Mistakes
The High Cost of Free Advice.
2018 Was the Worst December Since the Great Depression.
Russia Dumps Treasuries and Buys Gold
OPEC and Russia Cut Oil Production.
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 3rd edition of The ABCs of Money was released in 2020. The 4th edition, updated to include the COVID-19 Recession, will be released soon.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.