A smart man learns from his mistakes, a wise man learns from the mistakes of others.
Many of my clients are in the tech space and thus affected (at least emotionally) by SVB’s failure in early March. On this week’s podcast I will give you the wisdom gleaned from the downfall of the bank that was not too big to fail.
I break it down into three parts:
- What does the collapse of SVB mean for me?
- First, single stocks are very risky. Use low cost index funds to reduce the risk of having all your eggs in one basket.
- Second, go government. Don’t leave your cash sitting in a bank. Invest the cash you don’t use on the regular in a government money market fund. Why? Because it is fully backed by the United States Treasury.
- Lasty, be aware of who you are doing business with. Who is the producer of the financial products you use? Are they credible? What risk is associated with their brand?
- Why did SVB fail?
Banks are a business. They offer products to consumers, in the form of accounts and returns. SVB used its clients’ deposits to invest in other businesses and the market at large, resulting in profits for both the bank and its depositors. Until those investments took a dive. Suddenly, clients want their money back but the bank doesn’t have it to return.
- Long-term bonds: The Golden Egg
When you buy a bond you get two things over a set period of time: an interest payment each year and the return of your principal at the end of the time period. So, here is an example of how bonds lose value:
- Say that you buy a 10-year golden egg for $10k that pays you $100 per year in interest for 10 years, then you get your $10k back.
- Three years later, the government raises interest rates, and a new platinum egg is released. That egg will pay you $400 in interest over ten years. Suddenly your golden egg is now only worth $9k because everyone would rather have the platinum egg.
This is what happened to the 2019 10-year US Bond that SVB bought 3 years ago. It is still paying 1% ($100 per year) but is only worth $9k today. So, if SVB is forced to sell that bond today to pay back a customer, it only has $9k to give back to the customer!
Tune in to hear more about the lessons that should be learned from SVB’s collapse. And if you were affected by the bank’s demise and have questions or just want to chat, reach out!
Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/
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