A Clarification Worth Noting

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Ok, something came to my attention today and I think it merits a blog post. If you already know this, I apologize for boring you.

• Deposit-taking institutions are where you SAVE

• Technically, you INVEST with licensed securities dealers or in a business. Although the term "invest" is used with "alternative investments" and Ponzi schemes, they are completely different from licensed and regulated forms of investments.
  

• Deposit-taking institutions and licensed securities dealers are not the same. If you are unclear about what category a certain entity is, ask them or ask someone you trust

• Deposit-taking institutions have JDIC or FDIC insured deposits. What does that mean? That means that the institutions have paid a premium to the Government to insure your deposits. Deposit Insurance was introduced as a safety net measure - should the institution that has your deposits get into difficulties, the Government will ensure that you get back your deposit up to a certain limit. The FDIC has a limit of US$100,000 per depositor which was temporarily increased until December 31, 2009 to US$250,000 per depositor. The JDIC has a limit of J$600,000.
  

• Investments are risky and have no safety net. Some investments are riskier than others. Higher interest rates generally reflect higher risk premiums. Interest rates are determined by the base rate (determined by the Central Bank) plus a spread. If you notice, deposit-taking institutions have lower rates than all other "investment" entities - licensed or otherwise.

• Licensed securities dealers are licensed and regulated by the Government. That is why they are specifically called "licensed securities dealers"

• Licensed securities dealers do not offer insurance on your investments. Deposit insurance is for deposits in deposit-taking institutions. There are reasons why these terms are used.

• Investments in Government paper - any Government - are not equivalent to deposit insurance. Whether you make those investments through a money market fund, or buy Government paper directly, the fact is that investments operate differently from insurance. I have heard that people are of the view that since the Government has never defaulted - like Jamaica and the US - then that is the same as insurance. And therefore, the argument is that investments in Government paper is the same as saving. That is not true. Some could argue that Government paper is "as safe as saving", but it is technically not saving. Investments are not insured; savings are insured up to a limit. Deposit insurance exists for a certain purpose, and that purpose is specifically to provide a safety net for savings.
  

• Therefore, I urge you to think about your asset allocations. Save FIRST. Maximize the insured portion, even if you are not getting the high interest rates some other institutions are offering. Make sure you distinguish between deposit-taking and licensed securities dealers. When you have sufficient savings (insured), then think about how much you wish to invest, and what your risk/reward tolerance is.