Exactly four years ago my retired cousin did three things. She called the financial advisor I’d found for her three years earlier. “I want out,” she said. Then she went to his office, collected a cheque and put her money in a CIBC savings account. Finally, she called me. Empathetic as always, I told her she was an idiot.
Despite having a balanced portfolio with just a fraction of the stock market’s volatility, her investments had declined by 22% while the Dow tanked 60%. Completely mesmerized by CNN and ignoring the advice of her financial guy, she bailed. A year later it was evident this had been the bottom. So I told her again she was an idiot.
I no longer get a call on my birthday.
People do this repeatedly, and never with good results. They buy high. They sell low. They scoop up unknown mining shares on a tip and have their asses handed to them. They think every market hiccup’s a 2008 redux. They gamble instead of invest. They never sell stuff that goes up because it’ll go higher. They turn into yield pigs. They take investment advice from relatives who drywall for a living. They panic instantly. They buy socks on sale, but never stocks on sale. They trust no one. And most fail.
Now we have this. Here’s Kate.
With banks confiscating depositor money in Cyprus and legislation on the books to do the same in several other countries, how do I protect my RRSPs? There are rumours that the US gov’t. may force all IRA holders to buy government treasuries. Do you think this might happen in Canada? Also will holding my mortgage in an RRSP protect me, as long as I am paying my monthly payments on time. Would it be a safer option than holding stocks and bonds in my RRSP that the government may try and control?
She sent this to me yesterday amid the latest news of Europe’s bailout of the sad little state of Cyprus. The headline news is that in return for a $13 billion bailout, which will save the country from bankruptcy (of its own making after having built an economy based on dodgy banks), large depositors will be slammed along with bank shareholders and bondholders. In fact, the second-largest Cypriot bank will be forced out of business.
Typically, media coverage is focused on people lining up at ATMs where daily withdrawals are limited to a pathetic $130. Bank branches are closed for a week, which is better than the alternative (forever). People with big bank balances, including businesses and lots of rich Russians, will lose 20% to 40% of their funds in a one-time tax. Without the EU bailout, of course, a currency collapse might mean double the losses.
The bank being shuttered, called Laiki, will be split into two, one holding protected deposits under 100,000 euros, the other holding larger balances which will be taxed. It’s estimated about $31 billion in Russian money is being held on an island of only 800,000 people, which should tell you something about how Cyprus has been run.
The implications? If you have a fortune stashed in a bank in Slovenia, Spain or Greece, or own some of its bonds, then pay attention. Uninsured depositors are now fair game. This could certainly encourage some people to take all their money out, so they can feel safe before being mugged on the way home. Any bank runs or bond market selloffs would, of course, makes these stuttering states even weaker.
Ironically, though, the attention messy, conflicted little Cyprus is getting could ensure that European leaders never repeat this tactic. After all, bailouts and austerity measures don’t work when there are riots in the street.
But back to poor Kate, who’s obviously been wasting time reading that damn Internet. There is no legislation now passed to steal bank deposits in other countries. The US would never force retirement money into 1.7% government bonds. There is zero threat to private wealth, investments or savings in Canada. No government in a major country could ever control the stock or bond market. There is no contagion. There will be no financial collapse. No Canadian bank will fail. Nobody’s after your RRSP.
Still worried? Some days ago I wrote about what $100,000 deposit insurance covers (CDIC), and how investors are covered for at least $1 million in the event of a financial institution crumble (CIPF). The best protection, however, is the kind of portfolio I keep writing about – broadly diversified and carefully balanced between growth assets and safe stuff. The biggest risk for 90% of people remains the same. It’s not losing money, but running out of it.
Ask my idiot cousin.