Is it 2008 all over again? Should we be worried about the financial system collapsing?
Deep breath. Let's discuss.
On March 10th, Silicon Valley Bank (SVB), a bank catering to startups closed its doors after it could no longer cover withdrawals.1
Days later, regulators also took over Signature Bank.
There's reason to believe a number of other banks may be in trouble.2 Rising interest rates are hitting many banking portfolios hard and weaknesses are emerging.
Should we be panicked about these bank failures?
No. Here's why:
The affected banks are small in the context of the overall banking system.
You can see in the chart above how small the two failed banks are relative to other, larger financial institutions.3
(Another interesting perspective to try and comprehend the difference between “billions” and “trillions” is a billion seconds is equivalent to about 31 years whereas a trillion seconds is equivalent to about 31,000 years).
They also serve high-risk niches. These banks have a lot of exposure to cryptocurrencies, startups, and other highly volatile asset classes.4
Those risky assets can make them more vulnerable to bank runs and liquidity issues. Which is what we're seeing happen.
Will more banks collapse?
That’s very possible. Moody’s, a rating agency, reported that it’s watching several other institutions with potential problems.2
Some larger banks may be affected as well, but it looks like regulators are stepping in quickly to protect the overall financial system.
What can we take away from the SVB failure?
I think it's a good time for one of Warren Buffett's famous bits of wisdom:
"Only when the tide goes out do you discover who's been swimming naked."
What he means is that adverse conditions expose vulnerabilities and risky choices.
Many strategies can look brilliant when markets are booming. You don't always know or appreciate the risks until conditions turn against you.
Clearly, a number of institutions are finding that out.
I think there's a lesson here for us as well:
When times are good, we might not worry too much about our income or our expenses. Or the risks we take in the market.
But when times get tough, we start appreciating the risks we've taken and the obligations we've taken on.
Understanding our actual tolerance for risk and our ability to withstand rocky times is absolutely critical.
It's very hard to do when the sun is shining and life is good. But it's a skill well worth developing because we can expect to experience bear markets, recessions, and uncertain conditions throughout our lives.
The question we are asked most during volatile markets is “how much risk should I be taking?”
Most investors are twice as concerned about avoiding losses than they are about achieving potential gains. That’s one of the reasons why people tend to sabotage their own investing. Selling when they get scared, missing the recovery, and buying back in when the market feels safe again. But, how do you know when it is “safe?”
If you are an existing client, you know that’s why we use Riskalyze to take the emotions out of investing. It all starts with a risk number. A quantitative way to pinpoint how much risk you want, how much risk you need to take to reach your goals, and how much risk you actually have in your portfolio.
The results are powerful. Once we know how our clients feel about risk, we design their portfolio to operate within a comfortable bandwidth of risk. We use their number and a 95% probability range to set expectations for what is normal for their portfolio. Keeping track of your investments this way helps you to understand that any six-month result that falls within your range is right on track.
This enables you to give yourself permission to hang in there even during market turbulence.
I don’t know how this situation will play out, but we are watching closely, and we’ll be in touch if we have any specific recommendations for you.
P.S. If you have any friends or family who are very worried or about to make some financial moves because of the headlines, will you send them this email or ask them to reach out to me? These are the times when an objective, professional take can help folks understand their options and make good decisions.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Ironhorse Wealth Management is an independent firm with securities offered through Saxony Securities, Inc. member FINRA/SIPC and investment advisory services offered through Plan Group Financial, Inc., an SEC registered investment advisor. Ironhorse Wealth Management, Plan Group Financial, Inc. and Saxony Securities, Inc. are separate entities.
Accounting & legal services offered through Steven D. Kaestner P.C.