The 16th largest bank in the United States just went under and is now controlled by the FDIC, the largest such failure since the 2008 financial crisis.
What, why, and how did this happen?
There will be many fingers pointed in many directions. Was this mismanagement by the bank? Has private equity & debt (with which SVB is involved) grown too much? Did the federal gov’t cause this by over “stimulating” a closed economy during covid, leading people to increase bank deposits during low interest rates, for which the bank had to buy low yielding bonds? Did the Federal Reserve raise rates too high to fast and cause the bank losses in those bonds? Did the media & FDIC cause this by bringing attention to the bank losses, and cause bank holders to panic & cash out, thus causing the bank to lose loss even more money? As usual, the truth is not “cut and dry”, reality (despite what the financial media portrays) is not simple, seldom is there one answer. Our opinion is “yes”, to all the above and then some. However, it’s not our job to determine who’s responsible. We would rather focus on what we can control; help you prepare for these types of market events. As one of our philosophy’s states, “You can’t predict the future, but we can help you prepare for it.”
As early as a week ago, many large firms on wall street still had buy recommendations on SVB Bank stock, with price targets ranging from ~$300 to ~$500 per share. Even certain financial news personalities were recently touting SVB stock as a buy.
“It’s a Wonderful Life!”
Times like this, I’m reminded of the movie we have all seen many times during the holiday season. There’s a well-known scene where Jimmy Stewart’s character, George Bailey, sees a “run on the banks”. Note, this movie takes place before FDIC insurance, when a bank would fail people could lose everything. So, people would literally run to the bank to take every dollar they had out, before the bank would fail. In that famous scene, George Bailey goes to the savings and loan bank and tries to explain to the customers that their money isn’t all at the bank. It’s in “Joe’s house, that’s right next to yours, … and 100 other houses…”
You see, that’s not that far off from current day either. No bank would be able to meet 100% withdrawals from 100% of depositors. That is why there is FDIC insurance to provide confidence to keep fear at bay. Unfortunately, fear is a powerful vehicle, and can impact our decision-making process.
“Fight or Flight”
As humans we are “hard wired”, psychologically speaking, to have a fight or flight mentality. It goes back to prehistoric times, when a big animal starts chasing you, you either run or you fight. The problem is that works for a big animal chasing you, but it doesn’t work for investing (assuming you are invested appropriately). When investments go down, selling based on a panicked emotional feeling seldom works out. And trying to ‘fight’ with the market by day-trading or timing the market, also seldom works out well. What did Mr. Potter do in the movie? He bought; he didn’t panic. The key is to take a pause, digest, and make a logic-based decision.
“True vs. False Diversification”
We believe true diversification involves looking at what drives the return of a specific investment. Returns could be driven by individual stock performance. The risk of an individual stock like SVB Bank going down can easily be diversified out by utilizing mutual funds or ETFs. So individual stock risk should not be of concern.
Other broader risks or as we call it “return drivers” include overall stock and/or bond market performance. Many investors stop with just stocks & bonds, however that means your portfolio could have just 2-primary return drivers. What happens when one of those drivers’ crashes, or if both crash? Having multiple return drivers is key to having a truly diversified portfolio.
Other return drivers besides buy & hold stocks or bonds?
We believe strongly in low-cost passive buy & hold stock/bond positions. However, we do not believe it should be 100% of anyone’s portfolio, as again, you’d have just a few return drivers (imagine a 2-spoke wheel, as shown above left). One needs to include multiple return drivers, as the image above right shows. These images are for illustrative purposes only, and do not represent a recommended portfolio.
What do we do now? What happens next?
Turn off the financial news, get off twitter, and watch “It’s a Wonderful Life.” Or at least watch this snippet referenced above from YouTube: https://youtu.be/iPkJH6BT7dM
I say that somewhat joking, but taking a walk or relaxing to clear one’s mind is crucial to making a good decision. Logical decision making is almost always better than then emotional decision making, especially on financial matters.
Prepare for the future, do not attempt to predict the future. Make sure investment portfolios are appropriately positioned in a truly diversified model based on time frame, risk tolerance and financial goals. If you are an investor, always communicate with your trusted financial advisor, who should know your specific financial situation. Everything starts there, if you have that, then you should not need to overly worry.
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