By Heather C. McLeish

 

If you are like me you may have been contemplating passing by the financial section of the news in favour of the sports pages. Grim does not seem to describe it. This year a depressing story is being told with the fall of Bear Stearns, Lehman Brothers, Merrill Lynch – formally some of the biggest and most well respected names in banking. The realities of institutional instability is brought home to us all in the loss of jobs, the tightening of the family’s purse strings and a painful drop in the overall value of one’s portfolio, leaving investors big and small apprehensive. When the foundations shake we are left questioning: are my investments safe?

It is natural to be alarmed, but there is no need to panic. There are safeguards in place to protect investors: Insurance is found in the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC). For cash in US banks, checking /savings and CDs held for short term cash is pretty straight forward as long as it is held in an institution which is insured by the FDIC. Keeping up to, but not exceeding, US$100,000 in any one financial institution ensures its protection under the FDIC mandate.

Investors must keep in mind that any amount over this threshold is not insured and plan appropriately. Interestingly, even some seemingly safe investments like short-term bonds, bond funds and money market funds are not insured. Therefore, to protect yourself be sure that short-term assets that you cannot afford to see decline are held in an FDIC insured manner.

Brokerages are a different story because unlike the banks their safeguards are not as well understood by clients. When a brokerage fails the securities held in the portfolios may lose value, but should be otherwise safe. Brokerages are not allowed to use your money for their own purposes. When one purchases stocks, bonds and other securities these re segregated from the brokerage’s other accounts. This allows the securities to remain intact and unavailable to creditors.

Even if the brokerage had not kept your assets separate from their own the securities are still protected by the SIPC. Under this private body, which is funded by member firms, up to $500,000 of your brokerage assets are protected. In its 38-year history the SIPC has only had to spend $508m to recover the assets lost to customers.

Brokerages fail when they make bad investments with their own cash – not with yours. Therefore making sure your brokerage is a member of SIPC as most are will give you the security you are looking for.

Unfortunately, there is no way to insure against loss when owning direct stocks in companies and brokerage houses. Your only course of action is to make sure you are fully aware of the type of company you are invested in. Do the research, read the industry reports and the news to arrive at a sound decision as to whether it is worth holding on in the hope of a recovery.

For accounts held by financial institutions outside the United States there are also safeguards. Offshore investors whose accounts are held in the Isle of Man or Guernsey are insured for up to 90% and at least 90% of their investments espectively. These assurances allow investors a bit of security in times such as these. When I was in school we had fire drills where the teacher would suddenly say “stop, drop and roll”. We learned the difference between decisive action and blind panic. We learned that in chaotic times one must create order by keeping one’s head. In some ways, the volatility seen in current financial markets is a test of whether or not we learned that lesson or not. Are we able not to panic? To take action instead of running for the nearest window?

For savvy investors the days of doom and gloom are here again. For new investors the end of the world is here. Time to run for the hills? Probably not. Investors must focus on their personal time horizons and re-evaluate accordingly, irrespective of the market’s movement. If your goals have changed it is a good time to sit down with your adviser and review your financial plan.

 

Heather C. McLeish is an adviser working with the American Center in Financial Partners Tokyo branch. She can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it