Announcer: You have just joined the Weiss Research’s emergency question and answer session with Safe Money editors Martin Weiss and Mike Larson.
Martin Weiss is the nation’s leading advocate for investor safety, and he’s seen this kind of crisis before. In the 1980s and 1990s, when big banks and insurance companies failed in the United States, he helped millions of Americans find safety and avoid the disasters. The New York Times wrote he was QUOTE the first to see the dangers and say so unambiguously. And the U.S. Government Accountability Office reported to Congress that his track record of warning of future failures beat his closest competition by a factor of three to one.
Mike Larson has a similarly stellar track record in warning investors of the real estate bust and the mortgage meltdown, beginning TWO years before Wall Street discovered the crisis.
And together, these gentlemen have warned about nearly every one of the recent big bank and broker failure far in advance, saving investors fortunes.
Today, they’re here to give you frank, honest, unhedged answers you need to get yourself and your family through the most devastating financial crisis since the Great Depression with your money completely intact.
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Martin D. Weiss: Welcome and thank you for joining us.
This is a sad time for our entire country.
Mike and I, for one, are not the least bit pleased that our dire warnings about a mammoth financial crisis have come true.
Nor have we been sitting idly by as the crisis has unfolded.
With our free e-mails and reports, we have done everything in our power to help you keep your money safe.
And with our pro bono efforts in Washington, we have provided our nation’s leaders with the research and data we feel can make a difference.
We have made some strides and have had some small victories. But at this volatile stage, we have no pretense of influencing the course of events, and neither should you. Instead, you need to focus on what you must do now to protect yourself and your family from the financial firestorm that rages around you.
Two important things are changing:
First, at this juncture, inflationary pressures are receding. And in their places, powerful deflationary forces are now sweeping across the world economy. That’s an important change in the world around us — and in our outlook.
For now at least, it means that, instead of a falling dollar, we have a rising dollar. Instead of focusing on alternative investments that go up when the dollar falls — like commodities or foreign markets — it’s now more important to focus on building cash and putting it in the safest place you can.
There’s still a place for natural resources and global investing. But right now, to the degree that you own those alternative investments, make sure you have plenty of cash and some solid hedges against a broad market decline in all asset classes.
Second, this crisis is unfolding very quickly, and most government efforts to forestall it are bound to backfire. Events and changes that typically would happen in years are being compressed into months; and months, into days.
So we have very little time for macro-economic discussions. We have just 60 minutes to cover urgent questions that will give you what you need to act now.
What is TRULY Safe?
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Mike Larson: The first question we have is the most fundamental question, and it comes from many readers in many forms. But let me get to the bottom of what they’re asking:
Q: “It seems nothing is safe any more. Not so-called ‘conservative stocks.’ Not big banks that were supposedly ‘strong.’ Not even some money market funds. So how do we find safety in this unsafe world?”
Martin: True safety has two elements. The first is capital conservation — no losses. But it’s the second element that most people miss: liquidity — the ability to get ahold of your money and actually use it whenever you want to. No waiting, no penalties, no bottlenecks or shutdowns standing in your way.
Absolute perfection should not be you goal. But on both of those aspects — capital conservation and liquidity — the single investment in the world that’s at the top of the charts is short-term U.S. Treasury securities (not long-term bonds). These enjoy the best, most direct, and most reliable guarantee of the U.S. government, over and above any other guarantees or promises they may have made in the past or will make in the future.
In the weeks ahead, many other supposedly “safe” investments will be called into question — most stocks, of course, but also bank CDs, annuities, high-rated bonds in companies that are supposedly too big to fail, even tax-exempt bonds issued by supposedly sound cities and states.
It will be a financial war zone. But despite the wealth destruction everywhere, U.S. Treasury bills will stand head and shoulders above every other investment, returning 100% of your money plus interest, with your money available when you need it.
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Eva Kaplan: This is Eva in Weiss Research’s customer service department. We are getting a lot of questions on the safety of Treasury bills, and this one is a perfect example:
Q: “Martin, you say Treasury bills are safe. But how do we know they will hold up in a future worst-case scenario?”
Martin: No one can predict the future with certainty. But we can look at past worst-case scenarios.
Go back to Rhode Island in 1991, when the governor declared a state bank holiday. All the state-chartered savings banks were closed down. Depositors were marching down the streets in protest. Every single citizen with money in one of those banks was locked out.
One of our Safe Money Report subscribers happened to have a checking account in a closed bank. Thankfully, he had almost all of his money at the Treasury Department in Treasury bills, so he was safe. But he called and asked:
Q: “My account at the Treasury is set up to wire the money straight into my bank account, which is frozen. Will my T-bill money get frozen too?”
Mike: Good question. What was your answer?
Martin: I told him to check his mailbox. Instead of wiring his funds, the Treasury had taken the extraordinary measure of cutting hard checks and mailing them out immediately. They want to make absolutely sure he got his money without any delay. The moral of this story is that even in a worst-case banking scenario, the Treasury makes sure you get your money.
Or go back to the early 1930s. A record 13 million Americans — 25% of the workforce — were unemployed. We had a head-spinning wave of bank failures. We had a complete shutdown of the banks. But owners of Treasury bills never lost a penny.
Or go back even further, to the Civil War. Investors financed 65% of the Union’s war costs by buying Treasury securities. But the war was far worse than those investors dreamed possible, leaving over half of the entire economy in shambles. So investors in Treasuries were very worried — and for good reason. But as it turned out, the U.S. government made the repayment of its debt the number one priority. Investors got back every single penny, and more.
My main point is this: The crisis ahead will not be nearly as severe as the war that tore our nation and our economy apart. If Treasury securities were safe then … they will certainly be safe now.
Eva: I have a question from a reader that seems to tie in nicely with what you just discussed:
Q: “What happens if we get another bank holiday like the 1930s? What happens if I want to cash in my Treasury bills? If the banks are closed, where am I going to get the cash?”
Martin: Just like in the Rhode Island bank holiday, the Treasury will take extraordinary measures to make sure you can cash in your Treasury bills. They’ll send you hard Treasury checks. They’ll designate special bank offices in every city in every state, and those banks will exchange your Treasury checks for hard cash. Ditto for checks written on Treasury-only money market funds.
Mike: Explain why you feel so strongly about this.
Martin: Because the Treasury Department is directly responsible for feeding money to the utmost, mission-critical operations of this country. Defense. Homeland Security. Emergency response. The Treasury will do whatever they have to in order to continue providing that funding, and that means making sure they never default on their maturing Treasury securities, that they never have any unhappy customers.
Eva: Here’s a question from one of Larry Edelson’s Real Wealth Report subscribers:
Q: “Throughout history, many governments have defaulted on their debts by devaluing their currency. Why are you recommending Treasury bills if you yourself have warned that one of the consequences of this disaster could be a devalued dollar?”
Martin: As I stressed at the outset, the trend right now is toward deflation and a stronger dollar. But even if that changes, the solution is not to abandon the safety and liquidity of Treasury bills. It’s to set some money aside and buy hedges against inflation, like gold.
Eva: Here’s another question:
Q: “I checked the latest yield on Treasury bills and it’s barely enough for a diet of stale bread and water. I need income. How can I get that with T-bills?”
Martin: We believe your T-bill yields will go up, and by staying short term, you’ll be able to roll over into the higher yielding T-bills as they become available. Plus, the Weiss companies have special investment solutions to grow your wealth in this crisis. But that’s not what we’re here for today. Today, our goal is to make sure you get to safety. And for the money you want to keep safe, do not expect high yield.
Mike: Cash, especially the safe, liquid cash we’ve been recommending, is very valuable right now. So if the price you have to pay for that cash is less yield or even no yield, it’s worth every single penny of it. If we’re right about deflation, your cash will buy more, not less. Cash will be king, and with the cash you save and protect now, you will be able to pick up amazing bargains — in real estate, in stocks, in virtually every asset out there.
Eva: This viewer is asking:
Q: “In your reports, you’ve recommended two ways to buy U.S. Treasury bills: Either via the Treasury Department or via a money market fund that buys exclusively short-term Treasury securities or equivalent. Which is better?”
Mike: I personally prefer the money market fund for a number of reasons. No matter who actually holds the Treasuries, they enjoy the same guarantee from the Treasury. Also, with a Treasury-only money fund, you have immediate access to your money all the time. You can have it wired to your local bank account. Or better, you can just whip out a checkbook that the money fund provides and write a regular check against it.
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Stan Pyatt: This is Stan. I also work here in Weiss Research’s customer service department. The question I have here is one that we get all the time:
Q: “My banker has tried to talk me out of money market funds. He says they can lose money and they’re not insured but my account at the bank is insured and now, to sweeten the deal, the FDIC has raised the insurance limit up to $250,000.”
Martin: As to losing money, he may be right about some ordinary money market funds. But I think he’s wrong about Treasury-only money market funds. My view is that you only need insurance to protect against the risk when there is a risk to protect against. But short-term Treasury securities are the highest quality investments in the world, stronger than any insurance company. So in my view, buying insurance for Treasuries is silly.
Mike, help me set the record straight here: Who backstops the FDIC if the FDIC runs out of money to pay off insured depositors?
Mike: The U.S. Treasury. The Treasury has promised to provide more funding to the FDIC as needed.
Martin: OK. So let’s say I have a Treasury bill or a Treasury-only money fund. And let’s say you have a CD in a weak bank. What have you got in terms of a guarantee?
Mike: I’ve got FDIC coverage up to $250,000, which, in turn, is backed by the Treasury.
Martin: Exactly. You have an indirect guarantee from the Treasury — with a sick banking industry between. Plus, your guarantee is capped at $250,000.
Mike: Correct. And what do you have with your T-bills?
Martin: Aha! I have a direct guarantee from the Treasury department without any cap. I could have a thousand dollars in T-bills. I could have a million or ten million in Treasury bills. There’s no limit to the guarantee whatsoever. The Treasury securities the money fund buys are all 100% guaranteed by the Treasury Department.
Eva: I have a question here from Nancy:
Q: “How can we bail out Wall Street and still owe billions to China? Where will these dollars come from and how long will we be paying for them?”
Mike: The government obviously can’t suddenly raise the money by jacking up taxes. And contrary to what a lot of people think, the government can’t just print the money endlessly, because that would kill the ability to continue borrowing from investors all over the world — not just in China, but in the United States, Europe, Japan and all over Asia. So they have only one choice. They’re going to have to borrow the money and that borrowing will put upward pressure on interest rates.
Stan: Bernard has e-mailed a series of good questions. His first question is:
Q: “Is a time coming when I should bail out of everything and try to hold cash only?”
He’s talking about cash in a safe or under his mattress.
Martin: Some cash for emergencies make sense, provided you take all the obvious precautions and provided you keep the amounts reasonable, say enough to cover a few weeks of expenses.
Mike: I agree. We can’t rule out the possibility of a bank holiday. Indeed, the New York Times has reported that this was actually an option the Fed Chairman and the Treasury Secretary were considering. But I have question too: Let’s say you have a couple of weeks of cash. Where would you put it?
Martin: You can put it in a safe at home. But you can also put your cash in a safety deposit box right at your bank. Even if a bank is shut down for withdrawals, it is not shut down for services like safety deposit boxes.
The same applies to bank custodial services. All the Treasury-only money funds use a bank as the custodian. But those Treasuries are totally separate from the bank’s assets. So even in the worst-case scenario, your money would not be affected.
Stan: I have a second question from Bernard:
Q: “Do you think I can get through this crisis safely without resorting to moving my money to another country?”
Martin: We recommend investing in foreign currencies at the appropriate time. And there’s nothing wrong with having accounts overseas, if that’s convenient for you. But I’ve lived overseas for many years — in safe places and not-so-safe places — and I can tell you flatly: There’s no compelling reason to rush overseas. This is a global crisis — not just a U.S. crisis. At this juncture, I think it’s just as easy to find a safe, quiet place for your money — and for your home — right here in the United States as it is overseas.
Eva: Mina asks:
Q: “Are you familiar with the Swiss annuities? The ones I’m looking at were designed for wealth preservation during a global depression using the safest banks and insurers in the world.”
Martin: We don’t have ratings on Swiss insurers. But as a rule, Swiss annuities are solid. The question is: How liquid are they? What kind of penalties will you pay for early cancellation? If you’re not comfortable with those, stick with short-term U.S. Treasuries.
Eva: Martin, Mike, we’re getting a raft of questions and comments from folks who saw your “X List” video in which you named big banks and brokers that could fail, and they are so thankful that you warned them ahead of time about some of the biggest failures. But they’re asking for an update. Plus, here’s a question, also from Mina, that you have not addressed:
Q: “I have a brokerage (but not bank) account with E*Trade, and notice that E*Trade Bank is on your list of banks likely to fail. Is it time to transfer to another broker?”
Martin: The bank and brokerage firms are separate. But if you have a choice of brokers, it’s probably better to use one that’s not affiliated with a weak bank. And yes, the report we’re going to send you will have an update on the weakest and strongest banks. Plus, we include insurers also.
How Much Gold Should You Own
Eva: This subscriber is asking:
Q: “I have nearly all of my money in gold. Other than physically owning gold coins, what do you recommend?”
Martin: Nearly ALL of you money in gold? I think that’s way too much. Yes, gold is your insurance policy against politicians running amuck and letting the dollar fall. But it’s also a commodity, and commodities can fall in value. In this crisis, cash will be king — perhaps in the form of gold, but mostly in the form of cash assets like Treasury bills.
For a small portion of your money, say, up to a maximum of 5% of your total assets, some gold makes sense; and our favorite vehicles are bullion coins or gold ETFs like GLD. But not for a large portion of your money!
Stan: While you’re on the subject of gold, let me ask this question from Jeff:
Q: “Why do gold and silver drop when the market is going down? It makes no sense. As uncertainty increases, precious metals should rally, right?”
Martin: Actually, I think it does make sense. When markets are falling, investors often throw out the baby with the bath water — dumping good investments to help make up for the losses they’re suffering in bad investments. Silver is more vulnerable to this because it’s more of an industrial commodity. But gold can also be affected by this kind of selling, which is one reason why, at this juncture, we do not recommend it for more than 5% of your money.
Eva: This question comes from a Safe Money subscriber, who asks:
Q: “What exactly can I expect if my bank fails? What will the FDIC actually do? How long will I have to wait for my money?”
Mike: The FDIC insurance limit is now $250,000 per Social Security number or tax ID number, per bank. So if you have a spouse or you own a corporation, each of those could have separate accounts at the same bank, and each would be covered up to $250,000. Think of it as a legal way to multiply your insurance coverage. Beyond that, you could open more accounts in other banks.
You ask: What’s the wait time? Right now, there’s virtually no wait on your insured deposits. But you will have to wait for your uninsured deposits, and on those, you could lose maybe half of that money.
Martin: And if too many banks fail while the FDIC is understaffed, you may have to wait longer.
Moreover, looking at the big picture, the government is making too many promises, some of which they may not be able to keep. I think it’s a pipedream to think that the U.S. government will be able to take care of their own massive obligations and rescue the banks, and save the big brokers, and fund the FDIC, and backstop the short-term borrowing of thousands of corporations, and on top of that, save local and foreign governments.
Promising is one thing. But when they actually get down to the practical business of cutting the checks, they’re going to have to cut back on those commitments — and they’re going to have to do so drastically.
Mike: Which ones?
Martin: No one knows. But there’s one obligation they will not cut back on: Refunding maturing Treasury securities.
Mike: Some people think they can just print money endlessly and effectively default by paying investors back with money that’s nearly worthless, like governments have done in the past. Like was done recently by President Mugabe in Zimbabwe.
Martin: Our government is different because it must get its money from a vast, open market of millions of investors all over the world. But it does not control those investors. And if there’s one thing we know about those investors, it’s that they’re not stupid. They know all about the danger of money printing and what it could do to them. If they see the U.S. government heading down that path, do you think they’re going to continue financing the U.S. government? Heck no! There’s only one way the U.S. government can keep them on board, can continue to count on them for the cash it needs every single day to keep the government running, to meet payroll.
Mike: Which is …
Martin: Avoid wild money printing. And when the going gets tough and money is scarce in a recession or a depression, the government will probably have to abandon some of these bailouts. “We’ve got the money for you,” they’ll say. “You just can’t have it now. You’ve gotta wait.”
How Safe Is My Broker
Stan: This next question is about brokers.
Q: “I’m worried about my brokerage account. Precisely what should I do right now before something serious happens to my brokerage firm … and what should I do after something happens?”
Martin: First of all, make sure your broker continually sweeps any uninvested cash into a money market fund that invests strictly in short-term government securities. Most brokers have one of those funds in-house. If not, tell your broker to put your idle cash in a 13-week (3-month) Treasury bill. He can buy them for you in a Treasury auction or on the secondary market.
Second, the risk of loss in your stocks and bonds is far more immediate than the risk of a brokerage firm failure. So if you haven’t done so already based on our earlier recommendations, you’d better start taking steps to either cut that risk down to practically zero or buy hedges against it, such as inverse ETFs or put options. You want to do that on a rally. It doesn’t have to be a huge rally. As soon as you see it, go in and take action.
Third, make sure you’re doing business with a strong brokerage firm.
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Mike: Can we go over the basic criteria for a strong brokerage firm?
Martin: There are two we look at: The first criterion is little or no trading for its own account. The second is plenty of capital.
Mike: The second part of the question is what to do after a broker failed.
Martin: In recent history, this has rarely been a problem for investors. Few brokers failed. And when they did, the authorities immediately found a buyer and transferred the customer accounts. But in this crisis, that could change, so the authorities that step into failed brokerage firms could have a big mess on their hands.
Mike: And then …
Martin: Then, until they can sort it all out, they may have to freeze all accounts, preventing you from selling your securities. Despite the fact that those securities may be falling quickly in value, you might not be allowed to sell them.
Mike: Even if it goes to that extreme, though, you should still have recourse. In that scenario, we recommend you do two things right away: Open a separate account in a stronger firm. Then buy inverse investments to hedge against the losses you might suffer in the account that’s frozen.
Stan: Ever since Reserve Primary Fund got stuck with Lehman Brothers’ commercial paper and broke the buck, we’ve been getting lots of questions about money market funds, such as this one:
Q: “Are money funds as safe as they say they are? Is the insurance that they’re starting to offer really going to work? What’s the scoop there?”
Martin: Let me start by saying this: If you compare the portfolio of most money market funds to the portfolio of most banks, you’ll see a day-and-night difference. The money market funds are, by law, restricted to prime, short-term money market paper. Bank portfolios, meanwhile, are loaded with everything from soup to nuts. They’ve got bad residential and commercial mortgages. They’ve got loans to delinquent consumers and businesses. They’ve got international loans going bad.
So in a money market fund, even if it falls below a $1 per share — breaking the buck — the losses are how much? 1%, 2%, 3%. They could be significantly more in a worst-case scenario, but that will still be a lot less than the 50% losses you already typically see on uninsured deposits in a failed bank.
Mike: I have a question that just came through on my laptop. This person wants to know:
Q: “I have been buying put options and inverse ETFs per the recommendations in your premium services, and as the market has tumbled, I’ve been making a ton of money. Thank you! But I’m worried: What happens if the company fails? How will that affect my ability to collect my profits?”
Martin: Don’t thank me. Thank Mike! Options and inverse ETFs are traded on regulated exchanges and have nothing to do with the companies they’re on. They surge in value when the companies fail. And you sell them on the market, regardless of the fate of the companies.
What Should I Do with My 401k?
Eva: A Safe Money Report subscriber is asking:
Q: “I have my money in my company’s 401k. I thought I had a nice diversified portfolio in conservative mutual funds. But now everything is in the red. Should I take my money out of my 401k and just pay the tax penalties? Suze Orman says I should just hold everything for the long term, keep adding money to my 401k and keep investing it in the stock market funds that my plan offers.”
Martin: I think you — and probably a lot of people — are confusing two separate things. The first and most urgent question is: What investments do you own? The second issue is the kind of account you’re using to buy those investments.
Mike: Why don’t we deal with the investments first?
Martin: Of course. If those investments are going down in value, you’re going to lose money regardless of what kind of account you have them in. And based just on what we’ve seen so far, depending on what investment choices you made, your retirement could be cut half from current levels, or worse. So although I agree with Suze Orman on many things, I disagree with her if she’s saying you should hold the stock mutual funds in your 401k and just keep buying more on the way down. You cannot afford that risk.
Just as soon as this event is over, get ahold of the list of funds your 401k offers. Find the safest fund on the list. And then on any rally in the stock market, shift everything to that fund. Check with your company or your 401k manager, and they’ll give you instructions on exactly how to make that shift.
This is not a permanent solution. Later, when the dust has settled and the coast is clear, you can start shifting back to equities. But at this point, no one knows where the bottom in the market might be. Better to be safe than sorry. (See also “What to Do With Your 401k.”)
Mike: I think everyone would like you to give them a list of what you consider the safest funds.
Martin: The safest possible choice in a 401k would be a Treasury-only money market fund. Unfortunately, I am not aware of any 401k plans offering that choice. So the next best choice is a government-only money market fund, which includes not only short-term Treasuries but also short-term instruments in other government agencies like Ginnie Mae.
If they don’t have that, then the next best choice is a standard money market fund, which hopefully has a pretty big allocation to Treasuries and other government paper as part of its mix of holdings.
Mike: I have a question here from someone who’s reviewing his company’s list of 401k options. But he seems to be confused between money market funds and fixed-income or bond mutual funds. He’s asking if the bond funds are safe or not.
Martin: Why don’t you take that question yourself, Mike?
Mike: Sure. The primary risk of bond funds is to the degree that they put your money in the bonds of weak or failing companies. And with so many big, supposedly strong, companies going under, that’s a larger risk than it’s ever been in our lifetime. The second risk is if interest rates rise. Then, the price on lower-yielding bonds that the fund has in its portfolio will naturally fall. Bottom line: Although they’re usually safer than mutual funds dedicated to stocks, you could also lose money in bond funds.
OK. We’ve covered the investments in the accounts. But we also said we wanted to cover the type of account itself.
Martin: On that level, I do agree with Suze Orman. If it’s a 401k, go ahead and continue investing. Take advantage of your company’s matching program. Take advantage of the fact that your money can grow without the drag of taxes. Just make sure you’re putting your money into the safest choice available.
Mike: What about IRAs and 529 savings accounts for my kids’ education?
Martin: Same thing. Just make sure they’re in the safest investments. If you do nothing else as a result of this event, as soon as you have a rally in the market, contact your broker or your HR department or the administrator and say:
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“I do not want to withdraw my money or incur any penalties. I just want you to move my money out of stock investments to safer, cash-type investments like T-bills, a Treasury-only money market fund or the next safest investment available.”
Stan: Charles is asking:
Q: “Can I invest in short-term Treasuries from my IRA?”
Martin: Absolutely.
How Safe Is My Insurance?
Mike: Martin, we’re also getting some questions on insurance.
Martin: Just some questions?
Mike: More people seem concerned with their bank accounts than with their insurance policies.
Martin: I think that’s a mistake.
Mike: Why’s that?
Martin: Because the insurance industry doesn’t have an efficient guarantee system. In the early 1990s, several giant life insurers failed: Executive Life of California. Fidelity Bankers Life. First Capital Life. Mutual Benefit Life. And the state guarantee associations choked. They simply didn’t have enough money — or even the ability to raise enough money — to cover all the customers with cash-value policies who got caught in those failed companies.
Mike: So how did they handle it?
Martin: Unfortunately, not very well. The authorities redefined the word “failure” and said that, technically, the insurers really didn’t “fail.” That way, they were able to legally avoid triggering the state guarantee mechanism and, instead, they simply froze the accounts of two million people.
Mike: Two million people?
Martin: Yes, and months later, when they sorted everything out, they offered policyholders a choice: Either accept as little as 50 cents on the dollar … or accept a replacement policy with far inferior yield and terms.
Mike: And you think that can happen again?
Martin: For the companies that fail, yes. For the companies that don’t fail, it’s not an issue, of course. Let me give you a breakdown of which policies can be affected and how, starting from the most vulnerable down to the least vulnerable. There are three general categories of polices.
First, cash value policies — fixed annuities and whole life, sometimes called universal life. These are policies in which you have your savings in the game. Where does your money go? It goes into the insurance company’s own balance sheet. So if their balance sheet goes down, your savings can go down with it.
Second, variable policies — annuities or life. In variable policies, your money does not become part of the insurance company’s portfolio. It goes into separate accounts. Like in a 401k, your money actually goes into mutual funds. And like the 401k, you’re responsible for the investment choices. Check what you have, check their menu of choices and switch to the safest ones.
Mike: The same list of priorities — first choice, second choice, etc.?
Martin: Exactly.
Mike: But suppose the insurance company fails.
Martin: As I said, your money is in separate accounts. In the 1990s, we even saw the failure of a major variable annuity insurer and none of those policies were frozen. Investors could get their money out despite the failure.
Mike: OK. But did they lose money?
Martin: Like in a 401k, that depended on the performance of the mutual fund they chose and the price they paid for its shares. If their fund went up, they made money. If it went down, they lost money.
Mike: And the third type of policy?
Martin: Term policies — term life, health insurance, auto insurance, home insurance, etc. There, your investment risk is greatly reduced because you’re just paying for the insurance. It’s not an investment; your savings are not tied up.
Mike: So as long as I have a variable policy or a term policy, you’re saying I don’t have to worry about the safety of my insurance company.
Martin: No, wait a minute! You’re putting words in my mouth. All insurance policies do have an insurance component. So to make sure your insurance is good, you still need to do business with a strong company.
Plus, if your insurer fails and you have to switch to a new company, you may not qualify for a similar policy. And depending on your health, you may not qualify at all. No matter what, you don’t want to get stuck with a failed insurer. Always seek to do business with a strong firm. (Check our list of Strongest Life & Health plus Property & Casualty Insurers in the U.S. Also see Weakest Life & Health plus Property & Casualty Insurers in the U.S.)
Eva: I have an email here from Cindy. She’s asking:
Q: “I have a whole life policy with $80,000 cash value in it. That $80,000 is taxable if I close out the policy.”
Martin: Cindy, if you’re asking if you should cancel the policy and pay the taxes plus any penalties, my answer is this: Your agent can help you switch your policy to a stronger firm without tax consequences, ideally without other penalties and costs.
Overall, however, whenever you switch, you’ve got to weigh the risks against the costs, and then choose the lesser of the evils.
- If your company has a Financial Strength rating of D+ or lower, I think the risk of staying is likely to be greater than cost of leaving.
- If it’s rated B+ or higher, stick with it. The cost of canceling is the greater evil.
- And if the rating is in the C range, then it’s a toss-up. I’d at least check the rating every three months or so. (For instructions on how to check the rating of your insurer, click here.)
Eva: Cindy’s main question is this:
Q: “What about long-term care policies? I not only don’t trust that I will see this company alive someday if I am still alive in 30+ years … but what really concerns me is the real and total costs for health care if I need the long-term care down the road.”
Martin: Most long-term care policies are not as good as the companies say they are. But if you feel you need long-term care, we have created a free guide to help you avoid the pitfalls and rip-offs. (See Weiss Research’s Step-By-Step Guide to Long-Term Care.)
Eva: What she and others are basically asking is:
Q: “What if my health insurer fails. Can I be denied medical treatment?”
Martin: I hope the state guarantee associations will at least help make sure all health benefits are paid. There’s a difference between losing access to your investments in an insurance company and getting continuing benefits payments. The history has been that the benefits have been paid despite failures. Will that hold up the future? We certainly hope so.
Stan: We have several questions here on credit and credit cards. This reader asks:
Q: “Martin, you’ve always advocated avoiding debts or paying off my debts. Is that what I should be doing now?”
Martin: For the most part, yes! Pay off your credit card as fast as you can. Even before compounding, their rates are astronomical. Also try to get rid of debts with variable rates, especially debts tied to the LIBOR rate. But if you have a fixed mortgage at a relatively decent rate and you don’t have an abundance of liquid savings, just make your regular payments. I’d hate to see you get stuck without cash at a time like this. The more cash you have, the better.
Stan: A question I get often from my friends and neighbors goes something like this:
Q: “Millions of people are skipping out on their mortgage and getting away with it. Why can’t I do the same with mine?”
Mike: No! Tell them not to do that! Instead, they should go to their lender and try to renegotiate terms. As soon as the lender is persuaded that you may default on your mortgage, there’s a good chance they’ll work with you.
Martin: I don’t know how long that’s going to continue. Right now, there’s a culture of laxity about debt in this country. The government, the banks, the politicians — they’re all looking for ways to keep people in their homes, to forgive and forget, to ease them through this crisis. I totally empathize with that. But looking at it objectively, that policy could change and it could change very swiftly. Once the economy is down, once money is really tight, you could see some very tough rules and tough penalties for debtors.
Mike: That’s hard to imagine in America.
Martin: A lot of things that have already happened were also hard to imagine.
Mike: Very true.
Stan: Another question my friends have is this:
Q: “Can lenders suddenly demand full payment even if I’m current with my payments?”
Mike: As a rule, no — not with first mortgages. But they can cut your credit limit on credit cards or home equity lines of credit. And then, if you’re over your limit, that can hit your credit scores, and there’s nothing you can do about it. That’s another reason why you want to pay down your credit cards as soon as possible.
Eva: While you’re on that topic, Martin, please help us with this question:
Q: “Does the new $50 billion insurance plan for money market funds mean all money market funds are now 100% safe? Or could my money market fund still break the buck and actually reduce my principal?”
Martin: Only the money market funds that opt into the insurance program will be insured. But this situation is very fluid, and I recommend you largely ignore that aspect. Focus instead on what kind of paper they’re buying with your money. If they’re buying a lot of commercial paper and that commercial paper is shaky, I’d be concerned even if they have insurance. If they’re buying only Treasuries, I would not be concerned even if they don’t have insurance.
Stan: Here’s a question submitted earlier this week by Jeffrey. Jeffrey asks:
Q: “How can the average person who now is so electronically tied to everything even come close to keeping their money ‘safe’? How can we prevent getting electronically ‘turned off’ or ‘locked out’ of any of our accounts of whatever type?”
Martin: I disagree with the notion that financial breakdowns are somehow correlated to computer breakdowns. In fact, I personally think the Internet and electronic systems are actually one of the great strengths of our economy. Remember, we had massive, nationwide upgrades less than 10 years ago in preparation for Y2K.
Mike: Right. I think the worst that you might see in a panic sell-off is a traffic bottleneck on the Internet. But if you’re trying to sell and you can’t get through because of the traffic or a temporary system crash on your broker’s site, that’s probably not a good time to be selling anyhow. Wait until the market settles down.
Or better yet, wait for a rally in the market. Then sell. I don’t care how bad things get. Even in a crash, no market ever goes straight down. There will be intraday rallies or even month-long rallies, and some of them could be pretty dramatic. That’s when you should do most of your selling. Not when everyone’s in a panic to sell.
Martin: Most people will think that’s the bottom. But it may not be the bottom. That’s why I think you need to err on the side of caution, safety and liquidity.
Thank you, Mike, and thank you, our loyal readers and subscribers, for participating in this event. The days ahead will be tough, far tougher than any defender of Wall Street or Washington will acknowledge.
They will be filled with new challenges you never thought we’d face. Already, trillions of dollars have vanished from the portfolios of retirees; and in the days ahead, trillions more could disappear, leaving many retirees dependent on family members, struggling to survive financially.
For most, this is going to be very painful. But it’s not the end of the world. Our country has been through worse before, and we survived. We will survive this crisis as well.
At a time like this, it pays to pinch every penny until Lincoln cries for mercy. It pays to stay in close touch with the news and to follow every alert we send you. We will get through this crisis — together.
It could be an opportunity not only to survive but to improve your life … not only to help yourself, but also steer your friends and loved ones on a path to safety.
The more we can safeguard our cash reserves now, the more we can build up a nest egg of safe money, the better it will be — not only for you and me, but also for the long-term future of the entire country.
Without those liquid, cash reserves, there may not be a recovery. With them, we can pick up bargains near the bottom, reinvest in America and help play a role in bringing about a new era of growth — hopefully steady, wholesome growth.
No matter how dire things may get, please remember that we will recover. But between now and then, there’s much to be done — not only to get safe, but to stay safe as conditions change … not only to keep what you have, but also to grow your money even in the worst of times.
Watch your inbox for your daily emails from Money and Markets or from Mike and me, because this conversation has barely begun. There’s a lot more for us to talk about — and a lot more to do.
Thank you again, and above all, stay safe.
