The startling and swift collapse of Silicon Valley Bank (SVB) , along with crypto-friendly Silvergate Capital and Signature Bank, shocked industries and investors on a national and global scale.
Even as the U.S. Treasury steps in to suppress economic turmoil, its unknown what lies ahead with the U.S. banking system or whether we’ll see additional bank failures in the short-term. In its aftermath, the bank runs and subsequent crashes, along with lingering talks of a recession, touch on the significance behind adequate financial and retirement planning, experts say.
“When we unpack what happened with the SVB collapse, there’s a lot of the commonalities and the same types of risk that face retirement plan investors or individual investors,” said Eric Krause, managing director and portfolio manager at Prime Capital Investment Advisors, and who works closely with the retirement plan practice arm of Qualified Plan Advisors.
The first commonality being diversification. Just how SVB succumbed to the pressures that came with an absence of diversification in their deposit holders, retirement plan investors can fall victim as well, says Evan Press, managing partner at Pacific Coast Wealth Strategies and regional director of retirement markets at Equitable Advisors. When one particular sector—like the venture capital and technology companies SVB worked with—falls under pressure, it can force institutions and individuals to go down with them as well.
“The Silicon Valley Bank closure is a lesson in proper diversification and not putting all your eggs in one basket,” added Press. “When it comes to retirement planning assets, these should be diversified among different accounts, investments and strategies to ensure that all of your money is not in one place and subject to that specific bank, brokerage or company.”
The role of diversification brings us to another important role in retirement planning—having ample liquidity on hand, said Amar Shah, financial advisor and founder of financial services firm Client First Capital. Since Silicon Valley Bank did not have any short-term liquidity or an emergency buffer, they were forced to sell their investments at a loss and during a volatile market. “The liquidity part of retirement is to be there as a safety net,” he said in an interview with 401(k) Specialist, based off his own article on retirement planning lessons in a post-SVB environment. “You’re not going to know when you’re going to need that liquidity. The value of having liquidity is the optionality, not really the yield.”
As more investors express feelings of uncertainty and fear over the current volatile market, its imperative to warn them against selling investments, and instead, stashing enough liquidity away. Otherwise, peddling investments in a challenging market can result in substantial losses that are tougher to recover from.
“The lesson that we can take from that is when we approach retirement, we have to make sure that our risk tolerance and time horizon are aligned, and make sure we have that emergency savings in place while we accumulate assets but also in advance of retirement,” added Krause. “So, if there is a run on the bank or an emergency withdrawal that comes up, we have the adequate short-term liquidity to meet that need without having to sell our long-term investments.”
Expenses and risk
The second component is managing risk in portfolios, including personal risk such as expenses. Since expenses are one of largest variables that retirees can control during their retirement, many don’t realize the impact this can have on their portfolio, said Shah. When it comes to financial planning, some advisors may just factor essential expenses like rent and food, but the reality is that discretionary wants and wishes should be considered, too.
“Those two should be a variable. The higher the expenses and the higher the withdrawal on a portfolio means more stress on the portfolio to maintain those expenses,” he explained. “Whereas in good years, there’s probably more money to spend cause the stress on the portfolio is not as much, in negative years, curving some of your expenses can have a huge impact on the longevity of your portfolio.”
Creating a financial plan
Shah touches on the significance behind creating a valuable financial plan with clients, and one that can calm investors and retirees during unstable market environments. “The value of an advisor who is totally independent and gives that third-party perspective of a financial situation is very important,” he said. “It helps clients avoid being in a disastrous scenario.”
In fact, having another set of eyes to watch the market and build a plan before a crisis can have drastic measures on client portfolios. “Most people can make good financial decisions, but it’s the smallest decisions that have a compounding impact,” Shah added.
Krause touches on a similar point, adding that proactivity, communication, and objectivity during times of uncertainty are integral to calming down investors. As bank failures, along with the recent tumble of Charles Schwab stock, hits the news, it’s easy for investors to panic. Preventative maintenance is key to putting those fears at bay.
“An advisor could help manage some of the emotion by staying objective and making sure that there is a financial plan before the crisis takes place,” he said. “Knowing that you’ve already met the diversification, you have the emergency fund, and your risk tolerance and your time horizon match— you’re already prepared for the crisis.”
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
