Gyroscopic Investing

Hello everyone,

I am in the process of liquidating my old 60/40 portfolio and I am deploying everything into a permanent portfolio.  I am having a very hard time weighing the risks of holding my bonds in my Fidelity brokerage account versus at Treasury Direct.  With Fidelity, there is counter-party risk.  I believe the bonds would be held in Fidelity's name (street name) and Fidelity's internal records would reflect that the bonds are owned by me.  If Fidelity were to fraudulently misappropriate my assets and then go bankrupt, along the lines of what MF Global did, my assets may be at risk.  I believe SIPC insurance will cover this type of fraud up to $500,000 per account.  But SIPC is not backed by the government and is funded by the private brokerage firms.  Once SIPC's funds are tapped out, the money stops flowing.  SIPC can probably always handle a single brokerage firm collapsing here and there, but in the worst case scenario of a serious economic collapse where there are mass brokerage failures, SIPC would not have nearly enough funds to pay everyone.  A totally separate risk is the risk of your account being compromised by identity theft or malware on your PC capturing your password.  Fidelity has a generous customer protection guarantee here:
https://www.fidelity.com/security/custo ... -guarantee

With Treasury Direct, there does not appear to be any counter-party risk, but I came across a post on another forum that says that Treasury Direct's security policy is:
"You are solely responsible for the confidentiality and use of your account number, password, and any other form(s) of authentication we may require. We will treat any transactions conducted using your password as having been authorized by you. We are not liable for any loss, liability, cost, or expense that you may incur as a result of transactions made using your password."
I was unable to find any other information online about this policy, so, assuming this is their actual policy, I take this to mean that if, for example, my computer has undetected malware that is monitoring my PC, then my password could get stolen.  I have antivirus software installed, but that is obviously not 100% effective.  If someone steals my bonds with my stolen Treasury Direct password, I am screwed.

So, the question is, what is more likely to happen - mass brokerage failures across the United States, or someone stealing my Treasury Direct password and stealing my bonds?  Both scenarios are possible, but I think it would be more likely that my password will get stolen than the US experiencing mass brokerage failures.  There are some very high tech malware programs out there than can use JavaScript to bypass antivirus software, and PC's are compromised every day.  So, right now, I am leaning towards Fidelity for safety, because I won't be responsible if my account gets hijacked.  Fidelity is also much more convenient than Treasury Direct.  I would love to get feedback on this from other members of this forum.

Thanks!
Greg

Welcome to the forum, Greg!

I agree with your assessment. Password theft and having one's online accounts compromised is the kind of personal disaster that many people unfortunately experience every day. Much more likely IMHO than a cascading failure of all the major brokerage houses that SIPC is unable to handle.

Pointedstick wrote: Welcome to the forum, Greg!

I agree with your assessment. Password theft and having one's online accounts compromised is the kind of personal disaster that many people unfortunately experience every day. Much more likely IMHO than a cascading failure of all the major brokerage houses that SIPC is unable to handle.

Concur. Also cyber-theft of that sort would be traceable. And since TD is an instrument of the US Government my guess is that they would cover any loss. And finally I am not sure how someone would be able to steal electronic bonds and try to cash them in or collect interest off them without being caught.

I don't really worry about any of the above nightmare scenarios. But if you are worried about a mass chain reaction brokerage bankruptcy then I'd definitely hold your bonds via TD. I really wish that they would just issue the damn things as paper bearer bonds, though those too had drawbacks.

FWIW I index everything except the gold. But I have no problem sleeping at night with that level of risk and it sounds like Greg does.

i don't think you can sell LTT before maturity in TD.

like when time to rebalance, or at 20 years to maturity.

you might also use vanguard, which is customer owned...less incentive to commit fraud?

btw...I think there's an older thread discussing similar questions

From an account safety standpoint I think TD would be preferable.  In addition to your account password (which you enter via a virtual keyboard, so even a keystroke monitor on your PC won't capture it), any time you log in from an IP address from which you haven't logged in before you must first enter a one time password sent to your email.  And, then, even if your account is somehow hacked, the only thing the hacker can do is transfer assets to your bank account.

Fidelity's security is not as good (not that it's bad).

Regarding selling bonds in a TD account - you simply have to transfer the bonds to a brokerage account (essentially one extra step).

Thanks for the info.  rickb, I set up a TD account a few days ago, and when I set up my password, originally, I typed it on my regular keyboard.  Only after I set up my account did it show the virtual keyboard when I logged in.  So, if my PC had a keyboard sniffer on it, criminals would have seen the password I originally typed in.  I agree that a criminal could only send funds to my bank account (or buy bonds, which would take money out of my bank account).  I don't think a criminal logging into my account is likely to start making bond purchases, since they would not benefit from the transactions, but it is possible.  Do you know what would happen if someone forged one of these TD transfer requests?
http://www.treasurydirect.gov/forms/sec5179.pdf
A criminal could forge this form and transfer my bonds out of my account.  I am confident if a similar situation arose with Fidelity, they would cover me 100%.  How would TD handle this situation?

Thanks!
Greg

greg9840 wrote: Do you know what would happen if someone forged one of these TD transfer requests?
http://www.treasurydirect.gov/forms/sec5179.pdf
A criminal could forge this form and transfer my bonds out of my account.  I am confident if a similar situation arose with Fidelity, they would cover me 100%.  How would TD handle this situation?

Why are you confident Fidelity would cover you 100%?

Note that this form (and perhaps the more applicable http://www.treasurydirect.gov/forms/sav5446.pdf) requires a certification stronger than a notary.  I don't know what TD would do in such a case.  You could ask them (https://www.treasurydirect.gov/WF/WebFe ... =tdacctsec). 

rickb wrote:
Why are you confident Fidelity would cover you 100%?

Well, in looking further at Fidelity's security policy at
https://www.fidelity.com/security/custo ... -guarantee

The language is sort of vague, but it implies that they will cover the losses if the losses are not my fault, whatever that means.  I do think if I got hacked and a dispute arose over whose fault it was, Fidelity would not want to damage their own reputation by getting sued.  I think TD might not care as much about their reputation considering they don't even advertise, as far as I know.

Regarding that transfer form that requires a special type of certification, I don't know anything about how easy or hard it would be to forge it.  I do get the feeling that Fidelity will be more helpful in the event of a problem than the US government, but you're right, I should contact TD and ask them what their policy is.

Thanks!
Greg

I just transferred my bonds to TD Ameritrade because Treasury Direct doesn't give you a current value.  How do you know what their value is holding them at Treasury Direct?

Christina K. wrote: I just transferred my bonds to TD Ameritrade because Treasury Direct doesn't give you a current value.  How do you know what their value is holding them at Treasury Direct?

You have to look up their current value in the aftermarket using the CUSIP.  See, for example, this thread: http://gyroscopicinvesting.com/forum/ht ... hp?t=26.15