Contingency Plans For A 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 and deploy the remaining $100,000 throughout the day just in case the stock market panicked even further (you just never know). 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

Tried to log on between 6:25am – 7:30am and couldn’t

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, TD Ameritrade, and some robo-advisors went down as well.

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.

Merrill Lynch trading downIf 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.

Contingency Plans When Market Freaks Out

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.

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.

Dow Jones intraday chart during Feb 6, 2018 panic

Feb 6, 2018 DJIA intrada day chart. Tried to buy the open but couldn’t, then the Stocks app on my iPhone froze, hence the straight line.

If There Truly Is A Bank Run

So far, we’ve just discussed three no-brainer things we can do if we wanted to make a trade, add, or withdraw capital. You’re never going to get your timing right, even if you are a full-time trader, so 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.

If you shorted volatility, you got taken out on a stretcher

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.

As for the future of the stock market, I’m still relatively bullish if the 10-year bond yield doesn’t breach 3%. I don’t want to see another 5%+ gap down again, but if there is, I’ll be ready to buy.

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Related: Things To Do Before Making Any Investment If You Don’t Want To Lose All Your Money

Readers, have you ever been blocked from accessing your online investment account? Do you think these financial institutions purposefully deny access to stem any large transactions? How do you protect yourself from a digital bank run? Is this the beginning of the end of the bull run?

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