Do you have contingency plans fo a digital bank run? If not, perhaps you should. The markets are extremely frothy again and another downturn could happen. If there is a downturn, there will be another digital bank run that will put pressure on the money market system. It happened in March 2020, it may happen again.
Beware Of The Digital Bank Run
When the S&P 500 futures were pointing to another -5% opening on February 6, 2018 I got excited. After all, the S&P 500 closed down 4.5% on February 5. I get aggressive whenever the stock market corrects by 10% or more because history has shown positive returns in subsequent days and months.
The initial down 5% move was blamed on the 10-year bond yield jumping to 2.85%. But since the 10-year bond yield declined from 2.85% to 2.75% after the 5% stock market drop, and futures were signaling another 5% drop in the stock market, I figured it was time to deploy some significant cash. Fundamentally, corporate earnings growth and economic indicators were still sound.
Armed with $200,000, my plan was to use $100,000 to buy the morning gap down. I would then deploy the remaining $100,000 throughout the day just in case the stock market panicked even further. My focus was on buying growth stocks for further capital appreciation.
I set my alarm clock for 6:15am just in case, brushed my teeth, sat on the toilet, and fired up my Fidelity account to put in my $100,000 buy order.
Preventing A Digital Bank Run
Of course, when I tried to log onto Fidelity, I couldn't! I remember this happening to me several times in the past. So, I just kept on trying, all to no avail. While all the previous times, failure to be able to log on immediately was simply annoying, this time it was important because I had some serious cash to put to work compared to my usual $5,000 – $20,000 buy orders.
As you probably already know, the market went from down ~4% at the opening to finish up ~2% that day. We're talking a 1,000+ point swing on the Dow. My inability to place timely buy orders caused me to lose out on potential gains of up to $16,000. Once I finally got online, I ended up investing only about $20,000, or 10% of my original plan for that day as prices were not as attractive.
I wondered whether other people had the same issue of not being able to log onto their online brokerage account. From the feedback I got over social media, it looks like Fidelity, Merrill Lynch, and some robo-advisors went down as well.
Banks Shutting The Digital Doors!
Could it be that financial institutions are purposefully shutting their digital doors to prevent a bank run? I run a website and have had many talks with my system administrator on how to keep Financial Samurai up 99.9% of the time. You would think with multi-million dollar technology budgets, online brokerage firms wouldn't have frequent outages anymore.
The only time Financial Samurai was down for more than several hours was when a construction worker accidentally sliced a main internet cable underground. Whenever there is a traffic surge or anticipated traffic surge on Financial Samurai, we have proper caching in place. I could tap some keys to shut down my site as well, but I won't.
If the online brokerage firms are not purposefully shutting their digital doors, then there is some serious incompetence going on because people's livelihoods are being affected. A digital bank run feels scary because your stocks are crashing and you start imagining losing all you money.
If you are an investor, you've got to ask yourself this question: during a large and sustained market correction, will you be able to place trades or access your capital?
Based on the historical track record of online brokerage accounts, it's hard to say yes with full confidence. Therefore, it's important to develop a contingency plan in anticipation of the next bank run.
Please note I'm not a trader. I'm a long term investor who is trying to build a risk-appropriate portfolio to provide a financial tailwind for my family. Given I have dependents, I need assurances my money will be there if truly needed.
If you are a trader, having a contingency plan is important as well because you could miss out on big gains or get wiped out if you cannot exit. Day traders tend to get wiped out in a digital bank run.
Contingency Plans When Market Freaks Out
During a digital bank run, things get bad. Have these contingency plans.
1) Have two or more investment accounts.
During the Fidelity outage fiasco, I kept trying to log on to their site for 45 minutes until I gave up and decided to do something else. I could have bought stock in my Citibank wealth management account, which was accessible, but by the time I remembered to do so, the stock market was already in the green and I didn't want to chase.
Therefore, the next time there is some huge market move, have all your investment accounts ready to go at once. Unless there is some type of online brokerage conspiracy, hopefully at least one of your accounts will work.
During the Gamestop mania in 2021, many online brokerages, including Robinhood, shut down its trading business in the stock and other names. During a digital bank run, may online brokerages tend to follow suit, so beware!
2) Create staggered limit orders before the market is open.
I could have potentially bought the gap down on February 6, 2018 if I had put in staggered limit orders the night before or way early in the morning. For example, if the futures were portending to a 5% gap down, I could simply put a limit order on a S&P 500 index fund 5%, 4%, and 3% lower.
The same goes for buying individual securities, but their opening prices will be harder to gauge. I just don't like putting in large limit orders because things change so quickly.
3) Make a phone call.
It never occurred to me in this digital age that I could just call Fidelity to place a trade. Perhaps they would have jammed me with a 10 minute hold period, but I don't know for sure. Again, everything was moving so fast that by the time I could have gotten hold of a live person, the markets would have moved.
Therefore, the strategy is to call before the market opens to deliver the trading instruction before things get too hectic. It's just hard to know exactly what the market will do because the futures market isn't a 100% reflection of normal market trading.
If There Truly Is A Digital Bank Run
So far, we've just discussed three no-brainer things we can do if we wanted to make a trade, add capital, or withdraw capital. You're never going to get your timing right, even if you are a full-time trader. Therefore, don't beat yourself up too badly if you miss things.
But if you can envision things getting really bad, then it's probably a good idea to spread around your capital across various banks, and limit each account to $250,000 per person.
The standard FDIC deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank.
For example, a revocable trust account (including living trusts and informal revocable trusts commonly referred to as payable on death (POD) accounts) with one owner naming three unique beneficiaries can be insured up to $750,000. This is straight from the fdic.gov website.
Cas Management Is Key
During times of uncertainty, everybody needs to do a thorough rundown of their cash holdings. It's cash that allows you to survive a prolonged downturn without having to sell anything at fire sale prices.
It's cash that allows you to take advantage of panic selling. And it's cash that allows you to sleep better at night so you can be energized to take care of your family every day. Cash management is really stress management if you think about it more.
As for the future of the stock market, I'm still relatively bullish. If the 10-year bond yield doesn't breach 2% until 2022 we should be fine. I don't want to see another 5%+ gap down again, but if there is, I'll be ready to buy during another digital bank run.
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Invest In Real Estate For Stability
A digital bank run will happen again. Consider diversifying your investments into real estate. Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuation and higher rental yields. Further, 18-hour cities potentially have higher growth due to demographic trends.
I've invested $810,000 in real estate crowdfunding. The capital is spread across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.