So are CD’s still Safe?
In all significant market drops over the past 20 years, CDs have been the single most likely place for investors to feel safe. This time feels no different…but it is! Why? Because the stock market is not the problem this time, it is merely the symptom of a much larger banking problem. So, buying CDs is more like running into the burning building to avoid the smoke in the street. Yes, they are “guaranteed” to certain limits by the FDIC. However, the FDIC is not stronger than the U.S. Government, so short-term U.S. Treasuries, being direct obligations of the government, are thus safer than CDs and can be sold any day.
Further, the higher the rate the bank is offering on the CD, the weaker the bank, and the more they need your money. If you stay under the FDIC limits you’ll probably be alright—if conditions don’t get worse in banking. But as of now, they are getting worse and the FDIC might not be able to handle the failure of some really big banks. Plus, you don’t want to be in the position of having to hope for the guarantee for your “safe money” because (1) it might not be there, (2) you might lose all your interest, and (3) it might take months to even get your money back. Short-Term U.S. Treasuries are far safer and that is how we are holding virtually all your “cash.”
Another item to consider is that CD returns are low right now and the stock market is actually less risky now. It was more risky one year ago (but no one really knew), and now it is less risky (but we’ve finally felt it) because the market has already experienced a 40% drop. Hindsight shows that CDs would have done vastly superior to stocks or bonds over the past year, but that is looking backward. Looking forward, most stocks and bonds will very likely beat CDs over the next 12 months. There are great bonds available paying 6%-9% or more, and it will be time to buy them as soon as the credit markets settle down. For the near term, Treasuries are the safer investment and easier to buy and sell than CDs.
If after reading this note you still desire, you can purchase CDs for you through Schwab. But, what may have felt like the right answer in the past may very well be the wrong answer this time. I’m not worried enough to be taking my checking account money from my bank, but I feel much better having my safe money in short-term Treasuries
Banks, Brokerage Firms & Trust Companies
I believe I’ve ordered them from least safe to most safe. All three types are very regulated businesses with government auditors virtually living in their main offices and strong reporting requirements. We use two custodians: Schwab is a brokerage firm and SEI is a trust company. A trust company, like SEI, is a very safe custodian and is held to the highest standard to make sure all your funds are accounted for and safe in their care. Brokerage firms, like Schwab, are also a safe custodian. They must account for all the securities they hold for their clients, but do have somewhat more business risk than a trust company because they allow some of their clients to do certain activities not allowed at a trust company (like margin accounts, options trading, etc.). These activities increase the risk, but they are very closely monitored and should only impact the account in which they occur and not any other account. As brokerage firms go, Schwab is one of the safer ones and that is why you have not heard its name in the news.
Banks, on the other hand, face a different risk known affectionately as a “run” which doesn’t happen often but ‘tis the season. Because banks take in deposits as checking, savings, and CDs, then lend them out as car, business, and home loans, they really don’t have all the money sitting there that has been collectively deposited. So, when enough people request withdrawals in a short amount of time, the cash runs out. As the fear of this spreads, people “run” to their bank to try to get their cash before their neighbor does. Investment accounts at brokerage firms and trust companies don’t face this same risk.
Based on current events and the weak state of the global banking system, short-term treasury securities at brokerage firms and trust companies are vastly superior to banks or their CDs, and better investing opportunities are just around the corner.
Courtesy of Manchester Financial
Banks, Brokerage Firms & Trust Companies
I believe I’ve ordered them from least safe to most safe. All three types are very regulated businesses with government auditors virtually living in their main offices and strong reporting requirements. We use two custodians: Schwab is a brokerage firm and SEI is a trust company. A trust company, like SEI, is a very safe custodian and is held to the highest standard to make sure all your funds are accounted for and safe in their care. Brokerage firms, like Schwab, are also a safe custodian. They must account for all the securities they hold for their clients, but do have somewhat more business risk than a trust company because they allow some of their clients to do certain activities not allowed at a trust company (like margin accounts, options trading, etc.). These activities increase the risk, but they are very closely monitored and should only impact the account in which they occur and not any other account. As brokerage firms go, Schwab is one of the safer ones and that is why you have not heard its name in the news.
Banks, on the other hand, face a different risk known affectionately as a “run” which doesn’t happen often but ‘tis the season. Because banks take in deposits as checking, savings, and CDs, then lend them out as car, business, and home loans, they really don’t have all the money sitting there that has been collectively deposited. So, when enough people request withdrawals in a short amount of time, the cash runs out. As the fear of this spreads, people “run” to their bank to try to get their cash before their neighbor does. Investment accounts at brokerage firms and trust companies don’t face this same risk.
Based on current events and the weak state of the global banking system, short-term treasury securities at brokerage firms and trust companies are vastly superior to banks or their CDs, and better investing opportunities are just around the corner.
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