Rethink Financial Decisions After Silicon Valley Bank Collapse?

Rutgers University

Wondering if you should be making different financial decisions after hearing about the collapse of Silicon Valley Bank? We talked to John Longo, Rutgers Business School professor of finance and economics and author of Buffett's Tips: A Guide to Financial Literacy and Life, for tips about how to determine what is a smart investment in a shaky economic climate.

Is it smart to keep most of your money is savings? What are the risks?

Everyone should have an emergency fund or a safe place to put money for important upcoming expenses. I consider an FDIC insured savings account to be safe. In most cases savings accounts do not pay high levels of interest, so they may not be appropriate for the bulk of one's retirement savings. Theoretically, anything greater than the FDIC guarantee of $250,000 is at risk if the bank where you have your money fails, but the U.S. government has bailed out the depositors of many financial firms when things have gone wrong, as we have seen with Silicon Valley Bank.

At what point should someone look to move money out of a bank and into other investments (Should I keep a year's salary in savings?) What should I do instead if not a good idea?

It is generally a good idea to have at least a year of projected expenses in safe, liquid investments. These investments may include checking accounts, savings accounts, short-term CDs, money market mutual funds, and short-term U.S. Treasury securities. Theoretically, if you have more than $250,000 in one bank then your money is at risk in the event of bank failure. If your bank does not have insurance in excess of this limit, the easiest thing to do is to diversify and put your excess savings in another FDIC insured bank. Several money market funds are available for purchase at almost any brokerage firm and they are also generally viewed as being safe.

Should I be worried if I have investments with trusted banks like JP Morgan or Capital One? Are high interest savings accounts a good idea and how do you know which ones are safe?

J.P. Morgan is the biggest and perhaps safest bank in the country, so the credit risk for one of their FDIC insured products is probably only a little bit more than that of the U.S. Treasury. Putting a portion of one's savings in a high interest FDIC insured savings account is a good idea, but you should also evaluate your net return after taxes and inflation. Beyond putting your savings in an FDIC insured bank account as a means of reducing risk, another option to gauge the risk of a bank is to look at its credit rating. S&P, Moody's, and Fitch provide credit ratings on most of the major banks in the U.S. For investments outside of bank deposits, such as with a brokerage firm, you should ensure that the firm has Securities Investor Protection Corporation (SIPC) insurance. SIPC insurance covers losses up to $500,000 per brokerage account and many firms maintain insurance in excess of this threshold.

Should I have a life insurance plan outside of work? Is your answer different for families with young children and other personal circumstances?

Life insurance is useful for someone with young children, or responsible for other loved ones that do not have a sustainable income, and for the wealthy for tax planning purposes. The main idea of life insurance is the policyholder can help financially support those that may be impacted by their death. The pertinent individuals are usually a spouse, children, or other family members. The proceeds from a life insurance policy are generally tax free to the recipient, so some types of life insurance may be used by the wealthy to minimize estate taxes.

With my 401k/retirement plan, how should I invest my contribution? At this moment in time, should I keep my investments conservative and take on risks later? What role does age play in making these decisions?

Each person has their own risk tolerance and specific goals and objectives. As a starting point, a traditional 60% stock / 40% bond portfolio of index funds has worked well over time for many individuals. In 2022 this 60/40 mix had problems due to the sharp rise in interest rates. Therefore, some advisors recommending putting a portion, such as 20% of investible assets, in alternative investments. These alternative investments may include real estate, commodities, private equity, and hedge funds. As noted above, your specific portfolio is partially a function of your risk tolerance. However, in general, younger people may be able to take on more risk in their portfolio since there is time to recover from the inevitable market drawdowns. If someone is near retirement age and their portfolio is decimated due a market collapse they may not be able to afford the retirement plans that they worked so hard to secure. Therefore, older people often are able to take less risk unless they have a substantial portfolio that may withstand large market losses.

What about housing prices? How will they be affected by SVB collapse? Should we wait to buy or sell?

If someone had a mortgage in progress with SVB, it will probably be cancelled. However, for those borrowers with good credit ratings, the panic surrounding the SVB collapse has resulted in lower long-term interest and mortgage rates. I do think banks will be more cautious in their lending activities in the year ahead, making it challenging for someone to purchase a home if they do not have a strong credit rating and verifiable income.

At the national level, prices are not likely to surge or collapse. In general, if someone aims to purchase a home they should ensure that their income is more than sufficient to cover the mortgage payments and other housing related expenses.

If I don't have big investments, should I be worried about the latest banking news?

If your job is secure and you don't have substantial uninsured investments there may not be much to worry about. The U.S. economy will always have its peaks and valleys, even though the long-term trend has always been up. Rather than worrying about the latest headlines, it is importance to understand your own investor psychology and develop a well-designed financial plan that may withstand the inevitable ups and downs in the financial markets.

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