Is Cash Safe? Considerations for Investors Following Silicon Valley Bank
You likely saw regulators take control of the California bank late last week, and over the weekend the FDIC announced it expects all deposits to be recovered.
Coverage of the bank’s collapse is hard to miss, so we won’t cover those details here. If interested, the Wall Street Journal had a great summary and you can read it here.
In September last year, we wrote a short post about bear markets through the lens of 2022 performance, and briefly mentioned the Federal Reserve seemed intent to raise interest rates until something in the economy broke.
Well, something just broke. When asking, “What happened?”, one might point to higher interest rates. It appears SVB took some unnecessary and, in hindsight, inappropriate risks, namely owning longer-dated bonds and failing to hedge interest rate risk. Many other banks have avoided these risks. So while higher rates may have been the trigger for SVB, it seems unlikely to me the Fed will be deterred from future hikes as long as inflation remains stubbornly high and unemployment remains historically low. This remains to be seen but no doubt will be a topic of discussion in the coming several days and weeks.
What now?
We will continue to monitor the fallout from SVB closely. Initially, regional banks felt the most pain in public markets, while the market didn’t seem to have many contagion fears for the nation’s largest diversified banks. Shares of publicly traded banks could remain volatile while the market debates the most likely outcomes.
The financial sector was at the eye of the previous storm, so don’t be surprised to see articles comparing this “crisis” to 2008’s. We would encourage readers to take this with a large dose of salt. Circumstances appear quite different.
Some may be tempted to move to cash. Investors have already found this to be an appealing option, before recent news.
We would suggest revisiting the purpose of the money before making any big moves.
Long-term goals deserve long-term allocations, which typically include more growth-oriented investments like stocks that can preserve and even grow purchasing power.
Short-term goals deserve short-term allocations. Cash and money market yields, at least on the surface, are much more attractive today than in previous years.
However, if your goals are long-term in nature, short-term investments are not likely to get you there. Consider putting a plan together to reallocate cash to a portfolio that improves your chances of achieving the goals that are most important to you.
How to protect your cash
What if you have short-term needs, or perhaps have seen cash accumulate and feel like you need to make sure it’s protected? Here are a few ideas.
Stay below the limits
FDIC guarantees bank deposits up to $250,000 per ownership category, per institution. Single accounts, joint accounts, and revocable trust accounts are each considered a unique ownership category, among others. Click here to read the details. If deposits in a category at a single institution approach the limit, consider moving some cash to a different institution or a different ownership category to keep your deposits below that $250,000 threshold.
By the way, if you’re searching “FDIC insurance” recently, you aren’t alone. Interest spiked in the wake of SVB news, according to Google:
Consider alternatives
Running between banks may not be the most convenient option for those with significant bank deposits. At least two alternatives are available, without taking significantly more risk or sacrificing liquidity, and could potentially earn the investor higher returns.
Money market funds can be a good option for many. They can only invest in high-quality, short-term investments and in many cases will offer higher yields than savings accounts. Money market funds typically come in three main varieties.
Government money market funds invest in short-term debt issued by the U.S. government.
Prime money market funds can invest in short-term securities issued by other institutions like corporations as well as government securities.
Municipal money market funds invest in short-term municipal debt issued by states or local government entities. Interest is generally federally tax-free.
Treasury securities may also be an attractive option. Treasuries are issued by the U.S. government and are backed by the full faith and credit of the United States Government. They can be purchased to meet most maturity needs, are considered very high quality, and are typically among the most liquid securities in the world.
Interested in talking more? Email me at eric@divviwealth.com or set up time with the Divvi team to continue the conversations.
