More than 10% of mid-career doctors have upwards of $250,000 in a bank account, putting them at serious risk of loss of money in a banking failure. Managing a bank account is all about finding the right balance between preserving cash for expenditures, but not having so much that the person risks being harmed by a possible bank failure.
Bank Failure Is a Risk to “Cash on Sidelines”
While most people are familiar with the Silicon Valley Bank (SVB) failure, they may not know about other recent bank failures such as Signature Bank, First Republic Bank, and most recently, Heartland Tri-State Bank in July 2023. SVB, the largest bank in Silicon Valley by deposits, broke in March 2023 after almost four decades. Federal regulators closed the bank on March 10.
The SVB collapse was the second-largest bank failure in U.S. history. Most banks are insured by the Federal Deposit Insurance Corporation (FDIC). However, the insurance limit for accounts is up to $250,000. So in a bank failure, the FDIC provides insurance coverage of up to $250,000 for each account holder and ownership category. This coverage applies to savings and checking accounts, certificates of deposit (CDs), negotiable orders of withdrawal (NOW) accounts, money market accounts, and money orders or cashier's checks issued by the bank. All this means individuals with more than $250,000 in their bank accounts risk losing their hard-earned money in case of a bank failure. They should reconsider their capital allocation strategy.
Cash May Not Be The Best Option
Physicianonfire.com, an online community that shares personal finance tips for physicians, recommends all investors pay attention to capital allocation. The website surveyed 490 physicians and found more than 10% of the respondents are exposed to banking risk because they have more than $250,000 in their bank accounts.
Most doctors in the U.S. have significant debt when they finish their education and training, but they must start saving to set up a medical practice. Like many other investors, however, they often sit on cash and wait for opportunities that may not come back. In addition, many established practices need capital for equipment and insurance. High net-worth investors like physicians can up their investment game by improved capital allocation.
According to a CNBC survey, many millionaires converted their stocks into cash and cash-like investments over the past year. As of spring 2023, U.S. millionaires held 24% of their portfolio in cash. This is a significant rise from 14% and 16% in spring 2022 and fall 2022, respectively. The April 2023 study surveyed 764 individuals with $1 million or more in investable assets.
Although having more cash or cash-like accounts suits affluent investors, average net-worth investors should change their allocations. According to the CNBC survey, wealthy millennials are more inclined towards shifting into cash, as opposed to older investors. This could result from their apprehensions about the current economic climate. Many of these young investors expect a weak stock market in 2023 and see hoarding cash as a preferable approach.
Average investors have better options for achieving their financial goals, however.
While holding cash during economic volatility can be a comforting thought, a long-term savings strategy based on liquidity may not help. Investors without access to their investments can still grow their wealth significantly over time by investing in stocks and shares.
Holding on to cash for long periods also affects investors' long-term portfolio strategies and financial goals. These investors tend to pull their money out when the market goes down and hesitate to return until it recovers completely. This means they fail to capitalize on a significant part of the rebound because they are late to return. Therefore, investors with money on the sidelines should look for ways to capture opportunities available in the current markets while managing risk. A proper capital allocation strategy is beneficial for cash management between illiquid and liquid assets.
Asset Allocation Can Mitigate Risks of Cash
Asset allocation is part of an investment strategy that divides an individual's investment portfolio into various holdings, including cash, bonds, stocks, real estate, and more. The whole idea of this approach is to balance the risk and reward of each asset class and create a diverse portfolio accordingly. Proper capital allocation is significant for short-term and long-term investments.
The proper allocation of assets for investors depends on their time horizon and willingness to take risks. A low-risk investment strategy is essential for individuals close to their retirement age. On the other hand, a more aggressive strategy makes more sense for those decades away from leaving the workforce.
When investing long-term, a more moderate approach is better for individuals who are uncomfortable with a high risk/reward ratio. In the recent market scenario, real estate has become an attractive option because of its relatively lower risk and potential for high returns. Appropriate use of credit can be another excellent option. It’s essential for an investor to seek help from experienced financial advisors, to prevent confusion about the proper asset allocation.
Real estate crowdfunding is one of the best options for mid-career physicians looking to benefit from improved allocation of assets. This relatively new concept has gained immense popularity amongst investors interested in diversifying their financial portfolios. It allows investors to pool their money with other investors to purchase a share of real estate by investing in exclusive private market properties otherwise unavailable to typical investors.
Some of the key benefits of investing in real estate crowdfunding include:
- Smaller investment and more significant dividends compared to traditional real estate investment.
- Allows diversification and expansion of the financial portfolio.
- Access to exclusive opportunities and projects in real estate.
- Small upfront outlay, as well as ongoing investment, compared to investing in traditional real estate ventures.
Paying off debts in a responsible manner is another way to ensure proper capital allocation. This is as important for businesses as it is for individuals. Businesses can improve their debt-to-equity ratio by using excess cash or looking for the best business credit cards that meet their needs.
Finding the proper asset allocation may be challenging, particularly for doctors and high-net-worth individuals interested in allocation. Investors moving cash to the sidelines may not realize the risk, even given recent bank failures and FDIC limits. While they may think this is a solid, conservative strategy, in reality they’re missing opportunities for investment, as well as ensuring their capital is allocated to safer places. The all-important aspect is taking the time to understand different asset classes and how they can impact an individual’s long-term financial well-being.
This article was produced by Media Decision and syndicated by Wealth of Geeks.