Although I have been warning my readers for several months, the recent developments this past week have apparently gotten people’s attention. We have been inundated with e mails from readers asking us what they should be doing to assess their situations and make the appropriate moves to protect their money. In this week’s column, I will address the four most common questions I have been receiving.
Check out my latest podcast covering this issue in more detail. James L. Paris Podcast
1. What Should I Be Doing With The Money I Have In My Bank?
First of all, everyone should be checking the financial strength of their banks through the tools available at www.bankrate.com or www.thestreet.com. Also, the FDIC's site (www.fdic.gov) has something called an Electronic Deposit Insurance Estimator you can use to check on the coverage of your specific accounts. Be more concerned about the smaller, more regional banks, but you should check the strength of your bank even if it's large and well-known. Make certain any money you have in a bank meets the following criteria: Your account size is well below the maximum insured amount, and the bank itself is on strong financial footing (as determined by your check of same). Example; if you have an IRA with $250,000 in it, another account with a CD that had $100,000, and then one more account in your spouse’s name with $100,000 you would be covered by FDIC. I would not suggest that you go any further than this by trying to be clever and add children to your accounts, trust, etc… In this example, you would have nearly a half million dollars in one bank. In these troubled times, and with the FDIC basically out of money I would not get too close to the edge of a financial cliff.
2. What Do I Do With My Fixed Annuities?
Fixed annuities are probably the only "safe" investments I would pointedly avoid with new money at this time. Once the AIG mess shakes out and insurers are shown to be on more certain footing once again, it may be OK to once again look at fixed annuities, but I'd avoid buying them right now. The bottom line is that fixed annuities have no guarantee, either real or implied, from the government, and are backed only by the financial strength of the insurer. As for those people who have annuities currently, the first step is to check on the rating of the insurance co. (
www.moodys.com,
www.ambest.com). If your insurance still enjoys a high rating presently, you're probably OK. If not, you can either withdraw the annuity altogether or transfer it to a higher-rated insurance co. In both cases, however, you may face deferred sales charges, so be aware of that. Also, if you withdraw the money entirely, you may face tax consequences, as well.
3. What About My Money Market Accounts?
Money markets are not insured by FDIC or any other government agency. Money markets are mutual funds comprised of cash instruments and other highly-short term debt instruments. Because the underlying investments are so safe, they are generally regarded to be as safe as bank accounts, except w/o the government insurance. The best money markets for safety are generally those that are backed by US Treasuries. If your money market pays a competitive yield, that's because it may have some instruments not backed by the govt. In this climate, don't bother chasing yield in your money market. Opt for a money market at a large asset manager that is backed largely, if not exclusively, by the safest instruments, like Treasuries.
4. What About My Bond Funds?
Short-term bond mutual funds are close cousins of the money market mutual funds. The difference between the two is that the maturities of the underlying instruments in short-term bond funds are usually a little longer than money markets. As a result, there can be a slight fluctuation in principal, but the yield is generally much higher (4% vs 1%, for example). In this climate, I would look to ST bond funds made up primarily of US Treasuries (for example, the Vanguard Short-Term Treasury Fund). (the average maturity length of the bonds in these funds is usually between 1 and 3 years)
5. What About My Stock Mutual Funds?
Longer term investors who are already in the stock market should generally stay put. However, exposure to the financial services industry should be lowered, and replaced with positions from utilities and health care; defensive issues. In other words, you can still remain in the market, but be mindful of which companies/sectors you own. Investors with a wide variety of funds and stocks should be fine in the long run.
New investors into the market should be maintaining a high cash position, and moving into equities on an incremental basis. This approach accomplishes two things: First, it allows you to access the market in an orderly fashion during this period of high volatility (as in dollar cost averaging), and by doing so, you still keep a high cash position on-hand for the foreseeable future should something occur in the near future that requires you to access your cash holdings.
You should evaluate the strength and safety of your bank right now, make sure your money markets are backed only by Treasuries, check the strength of your annuity insurers. Bank depositors should diversify across the right banks and money markets, and those with a little more flexibility to look to short term bond funds, as well. If you're not in a fixed annuity presently, stay away for now.
Agree or disagree, I welcome your comments below.
James L. Paris
Your website preys on fearful Christians. Shame on you!
Posted by: Not afraid! | September 23, 2008 at 04:10 PM
We are Christians and we own an Income Tax Company as well as doing financial advice. Some of the ministers in our church as saying that it's unbiblical to have your house foreclosed on, or do a deed in lieu of foreclosure and not pay back the balanced that might be forgiven. They state they when my clients signed the loan they gave their word they would pay it back. So, if they go into foreclosure they must pay back the difference of any foregiven debt. I don't feel I can counsel single mothers to do that. If they have an opportunity to move and to do a short sale and not go bankrupt I want to help them prevent that. Can you advise and give the scriptual basis for not having ones house foreclosed on? I can't seem to find it. I pray the Lord's guidance and wisdom. Thanks
Posted by: Rosemary | September 24, 2008 at 01:52 AM