Wow! What a crazy month! The biggest news of the month was the failure of Silicon Valley Bank (SVB) after a bank run caused a liquidity crisis. The Federal Deposit Insurance Corporation (FDIC) stepped in to make depositors whole which likely averted a major crisis, for now. It is still unclear how widespread the banking issues may be. Watch here to learn more.
SVB was not the only bank to fail this month, but it was by far the largest. SVB had a unique set of clients concentrated in venture capital and start-ups. The rising interest rates have been particularly difficult on that sector. SVB mismanaged their risk around some of the bonds they were planning to hold to maturity. These bonds had a lower interest rate which means they lost value as rates rose. Rising interest rates are the main risks to bondholders and the mismanagement of this caught up to SVB.
This has some major takeaways for the individual investor.
- Be prepared for the worst case scenario. SVB, like all banks, knew that rapidly rising interest rates would dramatically affect their balance sheet. The rate at which the Federal Reserve raised rates was surprising to every one, but SVB let it ruin them. You, too, can structure your personal finances for worst case scenarios.
- It doesn’t matter how good your returns are if you blow up in the end. SVB Financial Group, the parent company of Silicon Valley Bank, returned nearly 19% annualized for its shareholders since it came public in the late 1980s. These are AMAZING returns, but in the end, the company still failed and is now nearly worthless. Individual investors need to pay attention to their risk levels and the “black swan” events that might cause them to “blow up” and lose everything. Position your finances and investments so that “blowing up” is nearly impossible. The most important part of compounding is to not interrupt it.
- Don’t put all your eggs in one basket. SVB as a business really focused on the entrepreneurial clients and start-ups in a very specific part of the country. As interest rates rose and the economy started to suffer, this part of the economy really started to struggle. Unfortunately for SVB, this was a major part of their business. Most banks are not so singularly-focused which greatly reduced the risks SVB faced. This is why we talk so much about diversifying our investments. If you own 50 companies and one fails, not a huge deal. If you own 2 and one fails, look out!
The situation with banking and what other problems is still a moving target. This could essentially be done and dealt with or there may be more cracks to be discovered in banks and economy in the coming weeks and months. Keep remembering to focus on the long-term and situating your personal finances to weather any economic shocks that may or may not occur in the next few months.