How do we navigate SVB and the banking crisis?

With what has gone on for the past week about Silicone Valley Bank and some stress levels tested, this is a good time to relook at how we can make great decisions and evergreen investment decisions in both good and bad times.

In times of crisis, there are many concerns and unknowns going forward, but in our practice, we focus on things we know as facts and information that we can control.

We focus on the things we can control and have an understanding of how investment markets work.

What are the strategies we can use to navigate this current environment and achieve your financial goals?

If there will be enough interest for a webinar like this, I will be happy to conduct one.

But in short, here are a few pointers.

1.Uncertainty is unavoidable

Remember that uncertainty is nothing new and investing comes with risks. Consider the events of the last three years alone: a global pandemic, the Russian invasion of Ukraine, spiking inflation, and ongoing recession fears. In other words, it may have seemed as if there were plenty of reasons to panic. Despite these concerns, for the three years ending February 28, 2023, the Russell 3000 Index (a broad market-capitalization-weighted index of public US companies) returned an annualized 11.79%, slightly outpacing its average annualized returns of 11.65% since inception in January 1979. The past 3 years certainly make a case for weathering short-term ups and downs and sticking with your plan.

2. Market timing is a hard game to play

Inevitably, when events turn bleak and headlines warn of worse to come, some investors’ thoughts turn to market timing. The idea of using short-term strategies to avoid near-term pain without missing out on long-term gains is seductive, but research repeatedly demonstrates that timing strategies are not effective. The impact of miscalculating your timing strategy can far outweigh the perceived benefits.

When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with predictions of more doom and gloom. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.

3. Diversification is your best friend.

Nobel laureate Merton Miller famously used to say, “Diversification is your buddy.” Thanks to financial innovations over the last century in the form of mutual funds, and later ETFs, most investors can access broadly diversified investment strategies at very low costs. While not all risks—including a systemic risk such as an economic recession—can be diversified away (see Principle 1 above), diversification is still an incredibly effective tool for reducing many risks investors face. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.¹ As of February 28, Silicon Valley Bank (SIVB) represented just 0.04% of the Russell 3000, while regional banks represented approximately 1.70%.² For investors with globally diversified portfolios, exposure to SIVB and other US-based regional banks likely was significantly smaller. If buddying up with diversification is part of your investment plan, headline moments can help drive home the long-term benefits of your approach.

If you are a doctor, high income earner, are affluent and open to have an initial chat with no pressure, just drop me a message to connect with me.

FOOTNOTES

1. ¹Consider that a study of single stock performance in the US from 1927 to 2020 illustrated that the survival of any given stock is far from guaranteed. The study found that on average for 20-year rolling periods, about 18% of US stocks went through a “bad” delisting. The authors note that delisting events can be “good” or “bad” depending on the experience for investors. For example, a stock delisting due to a merger would be a good delist, as the shareholders of that stock would be compensated during the acquisition. On the other hand, a firm that delists due to its deteriorating financial condition would be a bad delist since it is an adverse outcome for investors. Given these results, there is a good case to avoid concentrated exposure to a single company. Source: “Singled Out: Historical Performance of Individual Stocks” (Dimensional Fund Advisors, 2022).
2. ²Regional banks weight reflects the weight of the “Regional Banks” GICS Sub-Industry. GICS was developed by and is the exclusive property of MSCI and S&P Dow Jones Indices LLC, a division of S&P Global.

Should I be shifting more money to cash now?

Given the past few days of volatility, it can feel concerning and scary. I can totally understand that because our human mind is wired to prevent us from making sound decisions when it comes to investing! The reason is our brain wants to protect us from danger, which is a reactive decision making process.

Whenever things are uncertain, that is where it comes the sweet spot between danger and opportunity as the Chinese proverbs say.

Well, if you plan to use the investment funds over the next few years, then maybe it might be better to shift money to cash because we can never know what will happen in the short term.

And if that was the original intention, you should have a lower allocation to equities to begin with.

But if your goals are further out, this can be an opportune time to buy on discounts. We may never be able to buy with the highest discounts but we know in 5-10yrs, on a broad diversification, you know that you would have made a great decision.

The right allocation mix would be the key to successful investing.

Clarity of your goal gives you better management of emotions.

Volatility is the “emotional price you pay” in order to get returns you want over time.

Having allocation to single stocks, single bonds and concentrated areas is generally bad assumption of risks.

If you had just bought into a low cost globally diversified portfolio risk adjusted based on your specific goals, this can be a great time to take advantage of the discounts.

Just like in the picture where you see art pieces, financial planning and investing is both an art and science. We use both abilities to our advantage.

If you are a doctor or wealthy individual who would like to find out how you can grow wealth with peace of mind and confidence, we can always give you a 2nd opinion to see your allocation, with regards to reduced risks, reduced costs, reduced volatility, enhanced diversification and enhanced returns together all at the same time.