A Less-Obvious Lesson in Widespread Deposit Worries

With regional banks back in the spotlight this week after First Republic’s FDIC-brokered sale, bank health is once again top of mind. Yesterday, a Gallup poll revealed nearly half of Americans are worried about the safety of their bank deposits.^[i] This is a very curious snapshot of sentiment, considering the FDIC’s report on potential deposit insurance reform, released Monday, revealed a whopping 99% of US bank deposits are under its normal $250,000 insurance limit. So clearly there is a disconnect between sentiment and reality if only about 1 out of 100 bank deposits are uninsured while nearly half of Americans think their savings are vulnerable.^[ii] Perhaps that is because people aren’t aware of FDIC insurance caps or how that program works. Whatever the reason, it seems pretty clear people are concerned about protecting their large deposits. And if you have more than $250,000 stashed away, perhaps that is important. But we also think that should raise a question: Why have so much cash stashed away in the first place? In our view, that can be a long-term drag on returns, making the current bank saga a call to reconsider whether your asset mix really matches your goals.

For most people, $250,000 is an awful lot of money to keep in the bank. For those who are close to buying a house and need their down payment to be liquid, we get it (although we might suggest money market funds are a better place to park it). For businesses that need cash to make payroll, sure. But beyond that, we think most people carrying over $250,000 in cash might benefit from taking a hard look at their goals and needs and whether they are positioned optimally to reach them.

Everyone’s situation is different, but if you will allow some generalizations, a cash cushion’s primary purpose is to cover near-term and potential emergency expenses. It is probably wise to have about 3 to 12 months’ worth of spending needs available on demand as a guard against job loss, unexpected home maintenance needs or—if you are relying on your investment portfolio to support cash flows—stock market volatility, so that you reduce the likelihood of selling during a down market. So whatever you pay for your mortgage or rent plus food, utilities, gas, tuition and other essentials, multiply the total by however many months of buffer you need, and squirrel it away. If you are retired and collect Social Security or have other pension income, deduct it.

But for investors whose time horizons, goals and needs are commensurate with equity-like returns, cash holdings exceeding that mark—that aren’t earmarked for a big near-term expense—could be excessive. That is true whether your deposit balances top FDIC limits or not. If that is you, ask yourself why you are holding this much cash. In the wake of a disappointing 2022, we think quite a few folks do so thinking they will keep some “dry powder” to put to work in the stock market when conditions look better. But here is the thing: Early bull markets, which the rally since October increasingly looks like to us, basically never look like sanguine times to invest, as we discussed earlier this week. Said differently, there isn’t ever an all-clear signal trumpeting “New Bull Market!” when they begin. So, in the absence of a material reason to be bearish—in our view, a major negative shock few consider—equity investors should default to being bullish.

So if your goal is to achieve market-like returns over time and stocks are in a bull market, we think the best time to invest will almost always be “now.” Short-term volatility is impossible to time, and waiting for the perfect entry point usually means sitting on the sidelines while stocks rise. Not only do you miss those returns in real time, but you miss the opportunity for them to compound over your entire time horizon. That snowball effect can add up. 

The biggest risk those with outsized deposit balances face today isn’t bank failures—there are ways to mitigate that, as we showed a few weeks back. Rather, the risk is limiting your return potential and making it harder to reach your goals. So if you find yourself worrying about the safety of large, uninsured bank deposits, by all means, do whatever homework you think necessary on that front to get your ducks in a row. But also think carefully and objectively about whether your cash is working against your long-term goals by limiting your total return potential. And that is true whether your deposits top $250,000 or not.