Silicon Valley Bank made scary headlines for several weeks before going belly up. Most investors have at least a vague idea of what happened there: The bank had a higher-than-advisable proportion of uninsured deposits and investments in hold-to-maturity securities. This made the bank vulnerable.
The standing expert opinion is that two external happenings actually had a cascading effect and resulted in the demise of the bank. The Fed reduced interest rates on bonds, which were SVB’s chief investment. This meant that the bank’s earnings would be reduced. Meanwhile, a lot of its tech investors started to pull out their deposits (because the tech sector in the US is going through a challenging period). This meant that amidst reduced earnings, SVB had to pay out huge sums.
To solve the issue, the SVB sold some of its assets. Everything should have been alright but the news that they had sold assets at a US$ 1.8 billion dollar loss, resulted in mayhem. Its stock lost value and investors lost confidence, selling stocks in a panic and redeeming deposits without a second thought.
The bank was shut down in early March 2023. Depositors have received promises about getting their capital back, but how long the process will take remains to be seen.
As an investor, how can you ensure that your investments remain safe? Is capital loss in such a situation unavoidable?
The good news is that you can take steps to avoid capital loss in such a situation. In fact, you can do so with just three simple moves.
- Diversify your portfolio
One of the best ways to protect your investments from sector-linked risks is to distribute your capital over several different sectors.
In the SVB story, many investors had a disproportionate amount of their investments in stocks that somehow linked back to the banking ecosystem. And all stocks in the banking ecosystem plummeted by 40% during this time. This meant that investors who had consolidated their investments in banking or banking-adjacent stocks were bleeding capital. This could happen to any sector, and that’s why it is essential to invest in diverse sectors.
- Don’t overlook bias
Consider bias before taking any investment advice or assurances about a specific investment. The SVB CEO was dumping SVB stock that he held, even while appearing on national television assuring investors that everything was just fine. Credit rating agencies were giving SVB’s shares a buy rating. Everyone is doing business at the end of the day, and all players are going to protect their own interests first. It is important for investors to dig beneath the surface. Look into a company’s financials instead of taking anyone’s word for it, especially when they’ve made headlines for the wrong reasons.
- Monitor your investments
Enterprises are run by human beings. Judgment errors, bad investments and unforeseeable circumstances that kill ROI are unavoidable in any business. Every leader, and every organization is prone to blind spots and companies have loopholes to jump through. This means continuous risk. And continuous risk calls for continuous monitoring. Investors must perform due diligence. Investing in mutual funds? Track the stocks that they invest in. Check if they are adhering to the risk exposure promised to you. Investing directly in stocks? Track how the company is spending shareholder capital.
Risk mitigation and minimization are both your strength and your responsibility as an investor. Don’t get overwhelmed – or chased away from investing altogether – by potential risks. Overcome risks by tackling them head-on.