In the old days, the veracity and speed at which Silicon Valley Bank (SVB) collapsed could never have happened. Making a run on the bank meant standing in long lines, where rumors spread at a snail’s pace (as compared to today). Today, a bank run can start with a simple button click, followed by a quick social media post. Money can be instantaneously transferred between financial institutions by a phone app.
What lessons might be learned from the collapse of SVB that investors can apply to their financial plan?
SVB received enormous deposits in a short period of time from mainly from enterprising venture capital firms in the post-pandemic boom of the late 2020 through 2021. The bank faced an immediate challenge - paying depositors interest, while the Fed Funds rate was a lofty zilch, zero, nada. They were forced to load up on long-dated “risk-free” Treasurys at very low yields. When the Fed started aggressively raising rates, the values of those “risk-free” Treasures were suddenly worth less than the bank had paid for them. When the bank went looking for more investors to shore up its bottom line, it found no takers - their customers, mostly large institutions, started to demand their money back. And the match was lit.
The sudden rush of customers requesting their money back forced the bank to sell most of their “risk-free” Treasuries for a loss; the fire began to rage out of control and eventually engulfed the bank, causing its collapse.
Silicon Valley Bank’s fundamental failure was a misaligned resource allocation with its timeframes. They made long-term investments with short-term money and, as a result, buckled when circumstances changed quickly.
Our clients know that misalignment of their investments with their goals is a recipe for disaster; that’s why we have lengthy discussions on developing and implementing a system that aligns their goals within appropriate time horizons, ultimately leading to owning the optimal mix of investments.
We call it the “Bucket System.”
It’s a system that allows your money to grow for the future, protects it in the short term, and can potentially provide a lifetime of income. With this “Bucket System” approach, you are categorically systematizing how you manage your financial life while simultaneously aligning your investments with appropriate goals and time horizons.
The “Bucket System” works by separating your money into three distinct buckets, each with its own goals and investments. Each bucket employs dedicated strategies for your specific financial goals within a pre-determined time horizon. Optimizing the buckets within your system helps reduce the urge to bail from your plan at the worst possible time because you know exactly where every dollar is and why it’s there.
Indeed, the best reason for developing a system like this is to prevent the “abandon ship” moment from happening. At some point, and no one can predict when or why it will happen, every fiber of your investing self will have the urge and need to call it quits, which means that all of the careful planning you did went all for not.
Even the best-designed portfolios that may own some great American Companies are useless if you don’t stick with them.
Understand that using a systematic approach in developing and implementing a portfolio may help you stick with it, no matter the circumstances.
Ultimately what sunk SVB was increasing its risk exposure over a shorter-time horizon, which is a by-product of not having its investments aligned with its timeframe.
Having your own “Bucket System” may help you to ignore the headlines screaming about the next financial crisis, pandemic scare, or bank debacle and help you remain invested, ultimately leading to the best possible outcome for you and your financial goals.
Stay the course, my friends!