Banks and brokerages have a new bail-in plan. The next time they get in trouble, taxpayers won’t have to bail them out. The customers will. How? In 2016, the rules changed around money market funds. The changes are buried in the fine print. Basically, your investment in a money market fund is subject to losses, redemption gates (a temporary suspension of your ability to sell your shares in the fund) and liquidity fees (a fee charged to sell your shares). Money market funds are not FDIC-inured.
Here are links to the fine print of a Schwab, Oppenheimer and JP Morgan money market fund. They are all subject to the same rules – redemption gates and liquidity fees. However, each company has a different way of explaining what will transpire if the bank needs to keep your money. Scroll to the bottom of the page to read the fine print.
Bank staff are trained to sell customers away from FDIC insured accounts and into money market funds, where they will at least earn a little return. The gates and fees were part of a plan to thwart a run on the bank. These restrictions are also the reason why you hear the federal reserve board and other bankers talk about greater stability at the banks. Since banks and brokerages can prevent you from withdrawing your money, they’re become less vulnerable.
How many of customers really understand what they’ve signed up for, when they agree to transfer their money out of an FDIC insured account and into a money market fund? Oftentimes, the percentage rate is only one or two percent higher. If the value of the fund shares fall, then you can lose money on the principal, in addition to having the redemption gate and liquidity fees risks. I have yet to meet any Main Street investor who has ever even heard about the rule, though many own money market funds. Either the salesman who sold them into the money market fund doesn’t understand the risks, or she does, and sold them into it anyway. Either way, when you are sold into a product that you don’t understand, you’re still subject to the terms and conditions that you signed up for. Trying to sue because you don’t feel you were properly informed is not a good strategy.
Never Reach for Yield
This is a reminder that in today’s world, when interest rates are so low, trying to get any return at all on your safe side can be more dangerous than you think. It is a fool’s game to gamble that everything will keep coming up roses, when deficits and debts are ballooning, while economic growth is predicted to be under 2% in 2020. (The coronavirus is predicted to impact the first quarter pretty severely worldwide, and to slow growth in most countries this year.) We all know that you cannot borrow from Peter to pay Paul forever. There comes a time when Peter wants his money back, too.
Another $3.4 trillion has been added to the public debt over the last three years, which has soared to $23.4 trillion. Consumer debt is higher than it has ever been, at $14+ trillion. Corporate debt has gone completely bonkers. 50% of corporate bonds are at the lowest rung of credit rating, just above junk bond status. Trying to get a measly 2% on cash, or 4% in a bond, puts you in speculative territory. The truth of the matter is buried in the fine print. You may have bond or money market funds in your nest egg that you’ve owned for years, which have now become far riskier than they were just a few years ago. Many bond funds lost money in 2018.
Money Market and Bond Funds are vulnerable
Cash and bonds are supposed to be the safe side of your portfolio. If you tell your certified financial planner that you are worried about the risk in bonds, then they might try to sell you into money market funds. If you balk at that, then you might get sold into an annuity or REIT (both have risks). That is just the way that a commission-based business plan works. Brokerages sincerely want you to make a return on your money. Everyone wins in that scenario. They also have to protect themselves from downturns, as business cycles include recessions.
The Bottom Line
It’s time for you to know exactly what you own in your financial plan, and why. A good salesman will always lead you to believe that you are just fine the way you are – or sell you something else that might earn them a higher commission. That is why you have to know the ABC’s of Money that we all should’ve received in high school. If you can’t access your money, get charged to access your money, or lose your money, you don’t have much recourse, other than just to wait and hope that everything recovers sooner rather than later. The safe side of your financial plan is supposed to be protected from loss of your principal.
Everything is coming up roses today. Stocks are higher than ever. Real estate prices are higher than ever, and unaffordable in 71% of US cities. Debt is eye-popping & astronomical. That is why, rather than enjoying the ride (if you’re on the right side of the income disparity), it’s time to fix the roof while the sun is still shining.
The Wealth Challenge
That is why our team has issued a wealth challenge to you. Add up everything you have in all of your accounts, including your 401(k) your IRA, your HSA, annuity, REITs and any savings accounts you might have. Once you get that total, celebrate! Hopefully it makes you very happy to see how much wealth you have amassed.
Then divide that number by half. Ask yourself if you are really willing to risk losing that much money. Why? Because the last two recessions have cost investors more than that. Buy & hope is a 20th-century strategy that hasn’t worked in the 21st-century, and will not work going forward until we cycle through this period of extremely high debt and very low economic growth.
If your strategy is just to contribute and never look at your statements, then you are just riding a Wall Street roller coaster. If you lost a third or more last time and haven’t made any changes, you’re just as vulnerable today as you were in 2007. We’re at the high now. It’s time to keep your wealth.
Is there a better plan than Buy & Hope? Yes. Our easy-as-a-pie-chart nest egg strategy is based upon a trademarked system of Modern Portfolio Theory, with annual rebalancing, that earned gains in the last two recessions and has outperformed the bull markets in between. (Click to see Nilo Bolden’s video testimonial.)
The time to get wealth savvy and adopt a time-proven plan is now. You have a lot to gain by understanding what you own, and getting properly protected and diversified, and a lot to lose if you don’t. If you wait for the headlines that the economy is in trouble it will be too late to protect yourself. Politicians don’t admit that the economy is contracting until most of the losses have already occurred.
Call 310-430-2397 to get pricing and information on our unbiased 2nd opinion of your current wealth strategy, or to attend a 3-day life transformational investor educational retreat, where you will learn the ABCs of Money that we all should have received in high school. Wisdom is the cure.
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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.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. 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.