March 20

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Investment Bank Failure

FAMILY UPDATE

Have you noticed that new gas stations have many more food options inside? I had my son (student driver) drive us to a new station nearby. It had a full kitchen and a full menu. How exciting! It was almost like we had a new restaurant by our house.
We ordered several items from the menu, and after having tasted it all, we came to the conclusion that no matter how fancy they made it seem, it still tasted like gas station food.
My son commented, "We should have gone to Publix."
Below is Jesse holding his best friend's hand (leg).

It was early Thursday morning when Mike and Connie King watched a documentary on Bernie Madoff, the notorious criminal who stole billions of dollars from investors. He was the king of the Ponzi scheme.

A Ponzi scheme is simple.

You invest money with someone.

They put the money in their own bank/investment account to spend on themselves.

If a client wants a small amount of money he pays it out of his bank account.

If too many people want their money back the whole thing falls apart.


They'd been having breakfast in their kitchen with the TV on and discussing plans to play pickleball doubles with friends when the documentary grabbed their attention. Afterward, Connie was worried.

She turned to Martin and said, "We have all our money with a financial advisor too! It all seems so easy. All Bernie Madoff had to do was fake statements. He took all of those people’s money."

"Honey, remember. We talked to our advisor about this exact concern. He explained how we were fine," comforted Martin.

"How do we know he wasn’t lying? Bernie made everything look fine too. He faked statements, Martin, for years," Coretta said.

"Our advisor told us that our money was held at a bank, TD Ameritrade. We get statements from them every month and they have online access. It seems pretty legit to me," responded Martin.

Coretta was not feeling any better. "I saw a TD Ameritrade branch over in Shelbyville. I’m driving over there now."

Martin and Coretta raced over to the bank. As they got up to the teller, Coretta said, "We wanted to check on our account."

"Of course," replied the clerk. She pulled up the account and gave her a statement. It looked exactly like the ones she saw in the mail.

"Have you heard of your financial advisors running away with people’s money?" Corretta asked sheepishly. The teller looked confused. "I’ve never heard of that before."

Martin and Coretta went out to lunch at Chick-fil-A. "Do you feel better?" asked Martin.

"I guess so," answered Coretta. She was now thinking about all the ways she could lose her money.

"I know TD Ameritrade is a big bank and everything, but what if they go out of business?" Coretta exclaimed. "You've read the headlines. A couple of banks went out of business."

So Martin and Coretta went back to the bank again (Martin was getting a little frustrated). Coretta went up to the same teller and asked, "What happens if you guys go out of business? Do I lose all of my money then?"

"No need to worry," said the teller.

"Think about it this way. If you have stock certificates inside a safe deposit box inside a bank, what happens if the bank goes out of business? Do they open all the safe deposit boxes and steal the contents? No. The owner of the safe deposit box goes into the bank and removes the contents. Your stocks are no different. They are held separately from the bank’s assets. It's different than cash in a bank."

She continued, "Back during the Great Depression when many banks were failing, a large number of people lost all of their money. But for the people who had stocks and bonds the bank closures did not affect them. Yes, their portfolio was way down, but they still had the shares. Given time, their stocks would have all come back. The bank customers lost their cash forever."

Coretta breathed a deep sigh of relief. But as they drove home from the bank, Coretta couldn’t get the nervous feeling out of her chest.

"Maybe our investments are safe, but that still doesn’t mean we couldn’t lose our money if the stock market crashes," Coretta said.

Martin, gripping the steering wheel tightly, responded, "Our advisor has been that through, too. Let’s go home and re-read one of his newsletters."

So that is what they did.

Their advisor fancied himself an economic historian and often pointed out long-term historical results that were hard to ignore.

"Coretta," Martin reassured his wife. "We have about half of our money in bonds and half of the money in stocks. Let’s look at his charts again."

Results from
50% Bond Aggregate Index
50% S and P 500 Index

1990 1.5%
1991 24%
1992 9.8%
1993 13.2%
1994 0%
1995 28.58%
1996 13.74%
1997 22.47%
1998 18.15%
1999 10.87%
2000 .15%
2001 2%
2002 -11.8%
2003 20.9%
2004 10.3%
2005 4.88%
2006 11.33%
2007 4.3%
2008 -20.81%
2009 24.64%
2010 11.59%
2011 7.34%
2012 13%
2013 15.55%
2014 11.95%
2015 .34%
2016 11.07%
2017 15.67%
2018 -3.50%
2019 23.28%
2020 12.87%
2021 13.42%
2022 -14.5%

"That doesn’t seem too scary. I know we can’t guarantee the future but even during 2008, we would have only lost 20%. We’ve made a ton of money otherwise. Look at that! It’s only gone down four times in thirty years. We need to hang in there. Our advisor is right. The only way to be financially successful in retirement is to invest in stocks and bonds," said Martin.

"Ok, I feel better, "Coretta said. "Let’s go play pickleball."

Be Blessed,

Dave

I am doing Social Security Strategy webinars each Saturday at 10:00 AM. To sign up go to www.SocialSecurityRSVP.com. I guarantee this one-hour class will help you get the most from the system.
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