I had a session with you, and you said to make sure my cash accounts were guaranteed by FDIC. I found out that several of my accounts are covered by SPIC (or is it PIDC?), which my broker said was better because it will cover up to $500,000 in cash and covers stock and bond losses up to $250,000. Seems like a better deal than FDIC. Would you agree? Signed, The Acronyms Are Confusing
Dear Acronym Sleuth,
We’d all love to put our accounts with a brokerage that covers stock losses! However, sadly, that’s a pretty big misrepresentation of what SIPC insurance covers. That is why it is so important to read the fine print, and not just trust what the broker-salesman tells you. Have you ever heard the joke, “What do you call the person who got Cs in medical school?” (Doctor.)
Below is a general breakdown of what some brokerages offer, with more color on what the acronyms themselves mean. Consult the fine print of your personal brokerage agreement to know exactly what your brokerage does and does not offer.
FDIC-insured. The Federal Deposit Insurance Corporation is an independent federal agency that insures cash held in FDIC-insured banks. Many brokerages and banks now offer a bank sweep program where you can actually be insured above the $250,000 maximum individual coverage. For instance, my brokerage offers FDIC coverage up to $500,000 for individuals and $1,000,000 for join accounts.
SIPC-insured. The Securities Investor Protection Corporation is backed by a fund with assets of about $3.1 billion. The fund ensures against brokerage default (not stock losses). So, if you have the misfortune of investing with Bernie Madoff or MF Global, then SIPC would work with the bankruptcy trustee to restore as much of your principal as possible. FYI: Most of Madoff’s clients were invested for years, thinking they were earning 12% annualized and compounding. So, even though the trustees and SIPC boast of returning 75% of the principal lost in the Madoff Ponzi scheme, it is a much smaller amount than most investors believed they were owed. One important consideration is that when you own stock in a company or a fund, you still own that equity, even if a brokerage goes belly-up (unless, the fund is owned by the brokerage, as was the case in the MF Global insolvency). FYI: the SIPC cash coverage is limited to $250,000 (not $500,000).
Money Market Funds. Money market funds are not guaranteed by the government or by any bank. It is possible to lose money in a money market fund. There can be hidden charges and expenses. Under certain circumstances, the money market fund can impose liquidity fees and redemption gates (in other words, charge you to access your money, or limit the amount you can redeem). Those are some of the reasons why FDIC-insured cash can be a better choice, particularly in the 10th year of a bull market.
Money Under Your Mattress. There’s an old joke in my family that someone buried their cash during the Great Depression, and the chickens dug it up and ate it! Keeping cash on hand is very risky. Wolves and chickens abound.
So, what is safe in a world where bonds are losing money and you have to be careful about the acronym you choose for your cash account? In today’s world of very high-leverage (i.e. a lot of debt), FDIC-insured cash is just the first step in a two or three step process to make sure that you protect your assets and are positioned to earn an income on your wealth in the years to come. Protecting your assets is so important today that I spend one full day on this topic at my Investor Educational Retreats. Call 310-430-2397 to learn more now.
Don't be caught unaware. Don't be complacent. Don't rely upon others to do it for you. It's time to know what you own and be the boss of your money.
If you are interested in receiving an unbiased second opinion on your current investing strategy, email info@NataliePace.com or call 310-430-2397. You can learn the ABCs of Money that we all should have received in high school at one of my Investor Educational Retreats. Only 3 seats remain available at the Valentine’s Retreat in Santa Monica. Receive a complimentary private, prosperity coaching session (value $300) when you register for the Colorado Retreat by November 30, 2018.
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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.
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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.