Lessons from a Bank Failure

1. Diversification

One of the most important tenets of investing is not having all your eggs in one basket. Investing in companies from a broad range of industries and sectors can reduce the volatility in your portfolio because different industries experience uncorrelated business cycles. This means highs and lows can occur at different times and balance each other out. Case in point, investors in the S&P 500 had a roughly 0.08% exposure to Silicon Valley Bank, whereas a less diversified investor who invested solely in the S&P Regional Banking industry would have had nearly 30 times that much exposure at 2.38%.²

2. Concentrated Positions and Human Capital

Silicon Valley Bank had a rather homogenous customer base as their customers were mainly tech and health care start-ups and venture capital firms. It would stand to reason that when fundraising for these types of companies dried up, it would affect them all similarly and simultaneously. Essentially, Silicon Valley Bank had a concentrated income source. If you’re still working, you likely have much of your income coming from your employer. Therefore, you should be mindful to diversify your investments not just in relation to each other but in relation to your employer and their business risks.  Contrary to this advice, some investors own a good deal of stock in their employer due to loyalty, familiarity, or possibly other factors like equity compensation. Again, failing to properly manage the risks to your concentrated income source could lead to a scenario where you simultaneously experience a layoff and losses to your portfolio.

3. Time Horizon and Liability-Driven Investing

Silicon Valley Bank needed to make short-term payments (when depositors requested to withdraw their money) but had many assets in long-term securities (like long-term treasuries and mortgage-backed securities). Even though these assets were “safe”, the safety occurs when they are held to maturity, not necessarily over a shorter time period. In your account, it’s prudent to invest in short-term assets for your monthly cash flow needs and longer-term assets like equities for your longer-term needs, like keeping up with inflation and making your portfolio last throughout your life.

4. Insurance

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250k per depositor. Beyond that limit, deposits rely on the credit of the bank. At TD Ameritrade, your account’s money market portion is actually FDIC-insured up to $500k per account owner (meaning up to $1M for a joint account or a trust with two trustees).³  TD Ameritrade can achieve this by investing your money at multiple FDIC-insured banks on your behalf. It’s also a good reminder to those who like the safety of holding lots of cash that you will want to consider multiple banks to maximize your level of FDIC insurance. Or, consider letting us help you manage that money at TD Ameritrade for its higher level of FDIC insurance or the fact that 6-month treasury bonds (insured by the full faith and credit of the US government) are paying north of 4.5% right now.⁴

5. Government Bailouts

When certain companies are deemed systemically important institutions, the government may step in to bail them out to prevent a chain reaction of failures and help stabilize the financial system. In the case of Silicon Valley Bank, the government is going to make all depositors whole, even those whose deposits were above the insurance limits.⁵ Equity and unsecured debt holders, however, won’t be bailed out. When it comes to your own portfolio, invest prudently because the government likely won’t be bailing you out.

While some people are learning these lessons the hard way, our risk management approach to investing gives us confidence in facing life’s uncertainties. Please give us a call if you’d like more information or if you’d like to discuss how these lessons apply to your situation.

Regards,
Jodi & Mike