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How to Keep Your Money Out of Harm’s Way

October 02, 2008 – by Richard Band

Some investors take the attitude: "It doesn’t matter. My account is protected by a government guarantee." That may be true, as of this minute.

But there’s always a danger in counting too heavily on such guarantees. If the government agency that offers the guarantee finds itself overwhelmed with claims, Congress enters the equation. Ultimately, it’s up to the legislative powers-that-be on the state and federal levels to vote on the taxpayer funds to bail you out. And that doesn’t always happen.

So, of the guarantees floating around today, which ones can you trust?

At the top of my list is the Federal Deposit Insurance Corp. (FDIC)—the agency that insures bank deposits. Just about all Americans keep at least some money on deposit with a bank, and it’s unconscionable that the U.S. Treasury wouldn’t stand behind the FDIC if the insurance agency ran short of funds.

On the flipside, the guarantees covering brokerage accounts and insurance policies are murkier. Case in point: The Securities Investor Protection Corp., which insures brokerage accounts. (See also: "How to Make Your Money "Pop" Safely.")

The SIPC is funded from assessments it levies on brokers. If the next shoe to drop were to wipe out the assessment fund, the SIPC could apply to the Securities & Exchange Commission for a loan, but only up to $1 billion. Now, I’m not saying this to frighten you. The SEC requires brokers to keep investors’ securities separate from the firm’s, and no investor has ever lost money in a brokerage failure. But the important thing for you to remember is the SIPC’s pockets aren’t bottomless, so it’s up to you to keep track of the fine-print guarantees. (To learn more, check out: "6 Questions to Ask Before Choosing a Broker.")

Sleep Easy

We’re back to the old principle of caveat emptor—Buyer Beware. As a careful, cautious investor, where can you entrust your money? is a great online resource if you need help identifying which banks are the safest and best equipped to manage your money. Bankrate’s Safe & Sound rating system gives Capital One Bank and Discover Bank five stars. These two institutions also pay some of the nation’s highest savings yields.

On the brokerage front, I like Fidelity first, followed by Schwab and TDAmeritrade. I’ve got my guard up around "full service" brokerages that do a large amount of investment-banking business. As we saw with Lehman Brothers, investment banks tend to carry large amounts of maturity debt, which creates huge risks. A discount broker is the safest way to go.

Not sure if you need a full-service broker? Do you already have a broker but aren’t sure if you’re getting the service you deserve? Want to compare the services of online brokers? Get answers to these questions and a whole lot more by visiting our Broker Center.

And Finally…

As we just learned with American International Group (AIG), even businesses that appear to be competently and honestly managed can unravel with shocking suddenness. Your last and best defense against the stupidity—and even criminality—of these institutions is to diversify.

Diversification is an old principle, but it’s an added layer of protection, regardless of the type of financial provider you’re patronizing. Wherever possible, spread your risks among several banks, brokers and insurers. Even the FDIC sets insurance limits: $100,000 per depositor, $250,000 for tax-sheltered retirement accounts.

Take the necessary steps to ensure that you’re dealing with the safest financial institutions. I’m not expecting a financial holocaust, but there will be more failures. By doing business with strongest banks, brokers and insurers, you’ll know your money is actually there when the next great growth phase begins!

As editor of Profitable Investing, Richard E. Band is the newsletter world’s #1 authority on investing for low-risk growth. His flagship Total Return Portfolio has more than quadrupled in value since its inception in 1990, while taking far less risk than the popular stock market index funds. Click here now to find out how you can get the same advantage for your portfolio!

And for more great insight and advice on how to protect your money AND profit during these turbulent economic times, check out: