Neglected risk when invest in stocks and bonds through mutual funds and ETFs
We kept talking about risks when investing in the three well known asset classes like if we were lost some or all of our capital due to many factors involved but failed to consider one particular risk that will result us in losing some or all of our capital that has got nothing to do with what we actually invest in.
We all know that mutual funds are in general are diversified, how diversified it is for active managed funds will depends on each specific fund and for the case of passively managed index funds, will have to depend on the specific index tracked, like both the United States Dow Jones Industrial Average and Singapore Strait Times Index only got 30 companies each. For current purpose, we assumed that mutual funds and ETFs in general are well diversified such that the probability of losing every capital is next to zero.
However, you can still lose everything if the company that issue that mutual funds and/or ETFs or brokerage house that stores your mutual funds and/or ETFs, went bankrupt due to the greed of the CEOs. There was a time when Bear Sterns and Lehman Brothers operated America’s most prestigious brokerage houses, now their names have become history.
Most of us know that our savings and fixed deposits will be safe if the banks are FDIC insured. The insurance by government on savings and fixed deposit is necessary so as to prevent banking panic in times of financial crisis. But given that the citizens and residents of the nation and most other developed countries also got billions in various countless mutual funds and exchange-traded funds, is there similar protection for it?
Similar to Federal Deposit Insurance Corporation to insure liquid cash and savings in banks, there is this Securities Investor Protection Corporation, short form SIPC, which insures your funds up to US$500 000. In other words, if the brokerage houses went bankrupt like Bear Sterns and Lehman Brothers, the mutual funds still remain yours for transfer to other financial institutions. But just like the FDIC for liquid assets, there is a limit, but in this case, higher at US$500 000 which will be more than enough for most people.
For cash and savings, if what you have exceeds the limits, simply place in different banks, for mutual funds, you can also simply do so should you exceed the US$500 000 limit by utilizing the services of different brokerage houses. Alternately, you can check whether the brokerage houses involved got carry supplemental insurance to protect portfolio beyond half a million. For example TD Ameritrade and Zecco got offer protection for up to US$150 million and US$35 million respectively.
More information on this risk that has got nothing to do with the stocks and bonds that the funds contain is available at official website of Securities Investor Protection Corporation, http://www.sipc.org/.
For other countries, you will need to check with relevant authorities whether your government got provides this protection for the average investor who can only well afford to participate in returns from equities through mutual funds, be it actively managed or index funds, in mutual fund form or exchange-traded funds.
After your portfolio exceeds or going to exceeds US$500 000, or have initial capital near to or more than US$500 000, it is wise to ask current or prospective brokerage houses about whether they got contain supplemental insurance to cover amounts more than half a million as it is simply stupid to lose whole or some capital due to no faults of the stocks and bonds that you invest in.
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Interesting and informative. But will you write about this one more?