Are You Better Off Now Than You Were Four Weeks Ago?

Every month when that envelope arrives from your broker, do you open it up and pore over the performance of your investments? Or do you stack up the envelopes in a dark corner of your desk waiting for better news from Wall Street?

Some folks talk about their portfolios in the same hushed tones that you hear at a funeral home. Things like, “Don’t worry. It will be all right.” Or maybe you have heard, “Are these the good old days?” The performance of the stock market has caused a lot of us to reconsider what we consider to be a ‘safe’ investment.

One of the questions that I hear when discussing stockbrokers and brokerage firms in general is, “Can I buy any type of insurance against losses?” Some folks are under the mistaken impression that their investment portfolio downturns are in some way insured or guaranteed against loss, like their bank accounts. If you read last month’s article about the Federal Deposit Insurance Corporation, you learned that bank accounts are pretty well insulated from loss because there is insurance to protect it.

But is the same true of investments? The short answer is no. There is a type of insurance against the default of a broker, run by the Securities Investor Protection Corporation (SIPC), which is a federally mandated, nonprofit corporation that protects securities investors from harm if a broker or dealer defaults. But it is critical to understand that investors are not insured for any potential loss of the value of their investments while their money is in the market. This is why your stock broker or the fellow at the bank who is selling you stocks, mutual funds or an annuity is so careful to tell you that the principal of the investment is not guaranteed or insured against losses.

If a broker or dealer fails, which means that the company went out of business due to bankruptcy or other financial conditions, then the SIPC steps in and works to distribute the customer’s cash and securities back to the customer. To the extent that the cash or securities are not available for immediate distribution back to the customer, the SIPC provides insurance to cover up to $100,000 of the customer’s cash and $500,000 of the customer’s total securities.

However, the SIPC is not an insurance company that insures against losses on your investments. It does not replace your losses if the value of your holdings declines in a market like the one we have seen lately. So if you bought 100 shares of a stock at $90 per share, and that stock is now worth only $60 per share, you will have to make a decision whether to ride it out and wait for the stock price to come back, or sell the stock at $60 and take a loss.

There might be a very good reason to sell the stock and recognize a loss, particularly if you were lucky enough to sell something else this year at a gain. Then you can use the loss to offset the gain and reduce or eliminate some income taxes. If you are in this type of situation, you should talk to your tax advisor soon so you can make some moves in December before the calendar year ends and you lose that opportunity.

The SIPC does not insure against fraud by a broker or a dealer. If you think that you have been misled or defrauded, then you should contact the Securities Exchange Commission, the Federal Trade Commission or even the Federal Bureau of Investigation. Your local congressman’s office can help you get started.

So what can you do to protect yourself? The SIPC website suggests that you invest only with reputable firms and limit the amount that you have invested with each firm to its insurance level. Also, be watchful of the type of investments that you purchase, so that you are not surprised to learn that you bought something that does not really exist, like that swampland in Florida that we all used to laugh about. Wouldn’t it be fun to laugh again?

Christopher M. Abernethy has been practicing law in Hampton Township since 1976. He focuses on elder law, which includes wills, trusts, powers of attorney, living wills and probate matters. He also is proficient in all aspects of real estate law and business law. He is a member of the National Association of Elder Law Attorneys and the AARP Legal Services Network. He can be reached at 412-486-6624 or by email at cabernethy@aaylaw.com.