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I am fortunate enough to have a decent amount of “cash” in the bank, and have had it all in one bank for many years.
With the fall of Silicon Valley Bank, I need to diversify my funds. I understand that $250,000 is insured by the Federal Deposit Insurance Corporation, so I was going to move money in that amount to different banks and take advantage of some high yield, short-term CDs. The thought of managing multiple CDs at multiple banks every 6 to 9 months is not an ideal situation.
I have been talking with the banker I have had for over 30 years, and of course he wants me to keep everything in his bank. He is proposing I put a large amount into U.S. Treasury Bonds, which he said are fully backed by the U.S government (not FDIC). He also mentioned something called “liquid insured,” which he said is FDIC insured up to $2.5 million. How can this be?
What do you recommend for people who don’t want to lose a lifetime of savings if their bank fails? What is a smart way to diversify?
Worried
Dear Worried,
Turn your fear into a goal.
I agree with you: It’s not good to have all of your money tied up in one place. The one thing that protects your money against stock-market turbulence, banking crises, real-estate crashes, and Ponzi schemes (not to further worry you) is diversification. Uncertain times provide a timely reminder to park your wealth in different places.
“It’s not ideal to have millions of dollars just in cash in the bank,” says Cary Carbonaro, senior vice president and director of women and wealth at Advisors Capital Management. “As a financial planner you are not keeping pace with inflation. I don’t know the returns you are receiving currently. Your banker would never want you to take your money out.”
As you note, the Federal Deposit Insurance Corporation covers deposits up to $250,000. Some companies work with financial advisers and a network of banks to maximize deposit insurance coverage as well as interest rates on cash balances. Among companies that help spread your cash are StoneCastle Cash Management, MaxMyInterest and IntraFi Network.
You can learn about I-bonds through this site. They are U.S. savings bonds issued by the government. You can buy up to $10,000 worth of I-bonds per individual each calendar year, so the new calendar year reset on Jan. 1, opening up purchases again.
“Please be patient because it is a government-run website that looks dated,” says Larry Pon, a financial planner based in Redwood City, Calif. “Last year, the system crashed when too many people were trying to buy I-bonds, when the interest rate was 9.62%. You can also get up to $5,000 of I-bonds through your tax refund.” Read more about how to do that here.
Savings accounts are good safe havens in a high interest-rate environment. The annual percentage yield or APY for an online savings account now averages 3.76%, per DepositAccounts.com, which tracks rates, up from less than 0.5% a year ago. The yield for a one-year CD from an online bank can be had for up to 5.20%, up from 0.5% a year ago.
“‘Savings accounts are good safe havens in a high interest-rate environment.’”
A brokerage account would enable you to purchase CDs from multiple banks at the same time, Carbonaro said. “If you had a fee-only fiduciary financial planner, they can do this for you as well so you don’t have to manage when the CDs come due.”
You can read more about Liquid Insured Deposits here. They are offered by investment professionals and brokers, and insured in aggregate by up to $2.5 million. You are correct regarding U.S. Treasuries. (For maturities up to 12 months, they are known as U.S. Treasury Bills, or T-Bills. For 2 years to 10 years, they are U.S. Treasury Notes, and for 20 or 30 years, they are Treasury Bonds.)
In its 2023 forecast, Vanguard projected U.S. bond returns would return an annualized 4.1% to 5.1%. As interest rates go up, bond prices go down.
However, Larry Pon is not a big fan of Treasury Bonds. “They were paying basically ZERO interest until recently,” he says. Also, as you have seen with the SVB collapse, they purchased long-term Treasury Bonds when rates were low and when rates rose, the Treasury Bonds dropped in value, he adds. This is true of all bonds, not just Treasury Bonds.
If you buy CDs from one bank, you are limited to $250,000 FDIC insurance. Buying through a brokerage will allow you to spread out the FDIC insurance over various banks. “This is certainly easier than filling out applications with multiple banks,” Pon says. “Depending on how much cash you have, you can ladder the CDs so there is at least a CD maturing every month.”
“Let’s say you have $240,000 to put into CDs,” Pon says. “I would purchase a $10,000 certificate of deposit every month for the next 24 months. If I do not need the money when they mature, I would purchase another CD 24 months out. This helps me lock in the higher CD rates, but also provides some liquidity if I need the money.”
“For the same reason, I am not a fan of holding municipal or corporate bonds directly,” he adds. “As retail investors, we are at a disadvantage compared to institutional investors. We do not get the best prices, etc. Accordingly, if you want to hold bonds in municipal bonds, corporate, or Treasury Bonds, I suggest investing in well run mutual funds or ETFs (Exchange Traded Funds).”
My colleague, MarketWatch columnist Philip van Doorn, says everyone should have a brokerage account even if they are not buying stocks and bonds. “With Charles Schwab
SCHW,
for example, you can do so with no fees and no commissions, for the most part. You do not need to have an ‘advisory’ relationship with Schwab if you make your own decisions. No need to pay an adviser an annual fee if you are selecting your own investments. This can include brokered CDs. You might need to call the broker with a question once in a while, but they will only charge if they do a special phone trade, which many investors won’t need.”
You don’t want to take money out of your equity portfolio in a depressed market. It’s usually a mistake to try to time the market, or panic in a down market. Just make sure you have enough cash for an emergency fund, including a job loss or medical emergency, and for big-ticket purchases like a home. Good luck with diversifying your cash. It’s an absolute luxury.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
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