Don’t Put All Your Eggs In One Basket

I was reminded of the old saying, “Don’t put all your eggs in one basket,” when the European Space Agency (ESA) lost touch with their Philae comet lander after only a couple days of operation. The lander apparently bounced when it first touched down on the comet, and ended up in a rather shady spot. There is not enough sunlight now hitting the lander for it to recharge its batteries. After 10 years of chasing down the comet, the ESA only got a few day’s worth of data from their lander.

philae-landing

I think the “eggs in one basket” saying also applies to personal finance and investing.

I like to have lots and lots of eggs through the purchase of low-cost index funds. This gives me very broad diversity at very low cost.

I hold my diversified index funds in Vanguard, Fidelity, and Schwab mutual funds or ETFs. You might wonder why I don’t just use Vanguard, since it typically has the lowest cost. My answer is that the others have brought the costs of their index funds in line with Vanguard, and I don’t want to get caught out if stuff hits the fan.

Mutual funds are not guaranteed or insured by the FDIC or any other government agency. The Securities Investors Protection Corporation (SIPC), a non government entity, will replace missing stocks and other securities in customer accounts held by its members up to $500,000, including up to $250,000 in cash, if a member brokerage or bank brokerage subsidiary fails, but these limits, like FDIC account limits, can be quite a bit lower than a married couple’s total retirement savings as they get near retirement.

From the brokerage websites,

Vanguard — Securities in your brokerage account are held in custody by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation. Vanguard Marketing Corporation is a member of the Securities Investor Protection Corporation (SIPC). To offer greater protection and security, Vanguard Marketing Corporation has secured additional coverage from certain insurers at Lloyd’s of London and London Company Insurers for eligible customers with an aggregate limit of $250 million, incorporating a customer limit of $49.5 million for securities and $1.75 million for cash. Coverage provided by SIPC and certain Lloyd’s of London and London Company Insurers does not protect against loss of market value of securities.

Fidelity — All Fidelity brokerage accounts are covered by SIPC. In addition to SIPC protection, Fidelity provides its brokerage customers with additional “excess of SIPC” coverage. The excess coverage would only be used when SIPC coverage is exhausted. Like SIPC, excess protection does not cover investment losses in customer accounts due to market fluctuation. Total aggregate excess of SIPC coverage available through Fidelity’s excess of SIPC policy is $1 billion. Within Fidelity’s excess of SIPC coverage, there is no per customer dollar limit on coverage of securities, but there is a per customer limit of $1.9 million on coverage of cash awaiting investment.

Schwab — Protection for securities and cash by the Securities Investor Protection Corporation (SIPC): Accounts of Charles Schwab & Co., Inc. (including those held by clients of investment advisers with Schwab Institutional) are insured by SIPC for securities and cash in the event of broker-dealer failure. In addition to SIPC, Schwab’s coverage with Lloyd’s of London and other London insurers, combined with SIPC coverage, provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a Trustee, SIPC, and London insurers of $150 million, including cash of up to $1,150,000. This additional protection becomes available in the event that SIPC limits are exhausted.

I also know that the underlying stocks within the index funds that my wife and I own will still have value, even though the brokerage firm might have failed, but getting our money out of these stocks might prove to be difficult and time consuming. Hence my desire to hold index funds through several different investment firms.

Do you have lots of eggs? Are they all in one basket, or several different baskets?