There is an old adage that we are all familiar with, “Don’t put all of your eggs in one basket”. This adage is a lesson in the timeless wisdom of diversification.
Silicon Valley Bank and its seminal fall to the second largest bank failure in the history of the United States carries with it the lesson of risk and diversification.
It only took 48 hours before the FDIC and California State Bank Regulators stepped in and shut down the bank. Thursday March 9th the bank saw it’s shares plummet. By early Friday morning, after plummeting again in overnight trading, trading was halted pending imminent news.
By noon pacific time Friday March 10th, SVB was shut down by regulators.
What came next were a lot of questions and worries.
- Would companies be able to make payroll?
- Would these businesses have access to their deposits that they needed for day-to-day operations?
- Would the government step in?
- Would there be a “White Knight” to save the day?
- Would depositors be made whole? And if so, how long would it take?
By Sunday afternoon, March 12th, the Fed stepped in and it has become clear that depositors will be made whole. They will have access to their funds thanks to a backstop being provided by both the Federal Reserve and the Federal Deposit Insurance Corporation.
What could have created a crisis has been averted.
But with it comes lessons that any business owner and investor should heed.
There are two types of risk that one can experience:
- Idiosyncratic Risk or the risk of having one investment fail. The best example is you own the stock of XYZ Company and it goes to $0. You lose your investment.
- Systemic Risk or the risk of a particular market declining or failing i.e. the housing market in the Great Financial Crisis.
In the case of Silicon Valley Bank, we see the first type of risk.
Ordinarily depositors of any banking institution are only covered for up to $250,000 by the FDIC. That means anything over that amount is not insured nor guaranteed.
For the depositors of SVB there was a real chance their funds could have been lost beyond $250k. That risk was very real for a weekend.
The fallout for some companies could have been huge. Layoffs and furloughs, not being able to make payroll, all the way to business failure.
Just. Like. That. In a matter of 48 hours.
What’s the lesson for businesses?
Don’t put all of your eggs in one basket.
We have been taught this lesson over and over again in every market cycle.
Diversification in investments, where you place your assets is very important.
For the businesses who had funds spread out, they “kept calm and carried on”. For those with all of their eggs in one basket, the fear became real for a weekend.
Heed this lesson. Diversification is the key to helping when managing for risk.
Though we don’t know what happens next, one thing is certain, Depositors at SVB were visited by lady luck for a weekend.
Have questions about your level of risk and diversifying your assets? Let’s connect!
A diversified portfolio does not assure a profit or protect against loss in a declining market.
The views stated are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.