AssetPreserver News

I thought long and hard about making my investment life easier – just merge all the investment accounts into one broker. One monthly statement. One broker. One online institution. Good idea?

Bad idea.

After all the turmoil of the financial system in the past year or so, it seemed self-evident that holding all of ones assets in a single institution was toxic. When a financial institution gets into trouble all your money may be tied up for weeks or months. I couldn’t imagine pleading with a bank or broker for my money so I can pay the bills and be told sure, in a few weeks.

Another eye-opener is if someone swipes your financial identity and drains your account. If you have more than one, it is not an immediate disaster. Yes, there have been notices sent out that your personal information has been compromised and we promise to watch your credit account for 90 days. BFD. Identity thieves know about the 90 day limit. Check out the identity theft prevention tips.

What is the solution?

Dividing up assets into three institutions is prudent. Make sure there is a checking account or easy money transfer available at each one. Be vigilant in monitoring your accounts.

The unthinkable can happen.

AP

Good news. The FDIC has extended its coverage through 2014. To quote:

Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except for IRAs and other certain retirement accounts which will remain at $250,000 per depositor.

You can check with the FDIC periodically to see any changes to their policy.

Also, credit union members are covered, too.

The National Credit Union Administration who administers the National Credit Union Share Insurance Fund (NCUSIF). Backed by the full faith and credit of the United States government, the NCUSIF insures the member accounts in all federal credit unions and the substantial majority of state-chartered credit unions.

Starting Oct 3rd, 2008 and ending Dec 31, 2009, the deposit insurance for an individual has been raised to $250,000. This has been extended to Dec 31, 2013:

The Emergency Economic Stabilization Act of 2008 increased the insurance coverage on all accounts up to $250,000. until December 31, 2013.

AP

The standard Standard & Poor’s 500 is capitalization-weighted; that is, each stock’s percentage of the index is based on its market capitalization. The other S&P 500 is equal-weighted; that is, each stock has the same percentage of the index so no stock dominates the index’s influence. Is this good?

Not bad, so far.

In 2009, the equal-weighted S&P 500 is up 17% while the cap-weighted index is up about 5.5%.
From 1990 through June, 2009, the equal-weighted index was up 9.1% vs. 7.5% for the cap-weighted index.

Disadvantages

There are some caveats with equal-weighted index:

1. Higher transaction costs.

The equal weight indexes are rebalanced every quarter (which adds to higher cost) whereas the cap-weighted index requires balancing only if the stocks of the S&P 500 index changes.

2. More volatile. This is primarily due to the propensity of smaller companies to be more volatile than larger. Since there is equal weighing, the small company volatility is amplified.

3. The dividend yield tends to be smaller than the cap-weighted index.

All is not perfect. In 2007 and 2008 the equal-weight index performed worse than the cap-weighted version.

Indexes

RSP – Rydex S&P Equal Weight Index (ETF). Replicates the S&P 500 Equal Weight Index. Inception date: May, 2003. 0.40% expense ratio.

SPY – Cap-weighted S&P 500 Index (ETF). Replicates the S&P 500 Capitalization Weighted Index. 0.10% expense ratio.

There are a few mutual funds that emulate the equal weight index but their expense ratios are more than 1.00% which is outrageous for an index.

As usual, this article is for informational use only.

I have been studying monetary policy, banking, the Fed, and overall money creation. I came across this snippet from THE CREATURE FROM JEKYLL ISLAND – A Second Look at the Federal Reserve which is relevant to today’s banking situation.

The FDIC has three options when bailing out an insolvent bank.

The first is called a payoff. It involves simply paying off the insured depositors and then letting the bank fall to the mercy of the liquidators. This is the option usually chosen for small banks with no political clout.

The second way is called a selloff, and it involves making arrangements for a larger bank to assume all the real assets and liabilities of the failing bank. Banking services are uninterrupted and, aside from a change in the name, most customers are unaware of the transaction. This option is generally selected for small and medium banks.

In both the payoff and selloff, the FDIC takes over the bad loans of the failed bank and supplies the money to pay back the insured depositors.

The third option is called a bailout. In a bailout, the bank does not close, and everyone – insured or not – is fully protected. Such a privileged treatment is accorded by the FDIC only rarely to a select few.

The select few are wealthy and powerful banks that are considered too big to fail without doing terrible harm to the community. Note that ALL deposits are covered; even those over the FDIC limit. This gives these banks a definitive competitive edge.