Scott Peterson was a guest writer on the popular White Coat Investor blog—a blog esteemed amongst physicians and other high-income professionals. Scott’s blog outlines our proprietary process for investing, The Perennial Income Model™. The article also presents a retirement income plan creation example of a couple who have accumulated $1 million for their retirement.
Click here to read Scott’s blog in its entirety on WhiteCoatInvestor.com.
Recently, there has been growing concern over the stability of our banking system. Particularly following the collapse of several banks, the two most notable being Silicon Valley Bank (SVB) and Signature Bank. So, what is happening with Silicon Valley Bank and other banks? Is this a sign that our banking system is on the brink of collapse? The answer is likely no and I hope this blog gives you clarity on what is happening with a handful of banks across the nation.
In very simple terms, SVB and Signature Bank have experienced massive growth over the past few years. This was caused by a boom in venture capital. These banks invested a disproportionate number of deposits in long-term bonds when interest rates were at generational lows. Longer-duration bonds are particularly sensitive to rising interest rates. As interest rates rose, the price of these bonds plummeted.
Once it was announced that these banks had lost billions on their balance sheets due to their own mismanagement, customers became nervous and withdrew their deposits. A “bank run” is when large numbers of customers concurrently withdraw their deposits over fears about solvency. The recent bank run occurred over the course of a few days. This resulted in several banks being seized by regulators.
The United States’ primary safeguard against “bank runs” is FDIC insurance which stands for Federal Deposit Insurance Corporation. FDIC insurance covers up to $250,000 per depositor, per bank, per account type. Regardless of the factors that led up to the collapse of these banks, we know that roughly 90% of deposits at SVB and Signature Bank exceeded the FDIC insurance coverage limit and were therefore uninsured. You may now have a better understanding why a bank run by larger depositors was justified.
What is happening with Silicon Valley Bank and other bank failures happens more often than you might think. In fact, there have been 565 in the U.S. since 2000 which is an average of almost 25 per year. The collapse of SVB and Signature Bank are unique, notably due to their size. The Silicon Valley Bank and Signature Bank were amongst the largest banks in the country. So, the question is, will the failure of these banks lead to a systemic bank crisis? The answer is likely no.
Many reputable banks go above and beyond the regulatory requirements that are imposed upon them. This is to ensure that they have enough cash on hand for customer withdrawals. This was not the case for SVB and Signature Bank. Lessons learned during the financial crisis in 2008 led to additional safeguards and regulations. This left the banking system in a much stronger position to address liquidity concerns. The simple way to secure your own bank deposits is to limit your bank account balances to fit within FDIC insurance limits in case your bank fails.
If you have more than $250,000 in deposits, you may want to consider the following ways to protect your deposits:
The FDIC insurance is an important safeguard that helps promote stability in the banking system and protects depositors’ hard-earned money. It’s good to be aware of FDIC insurance coverage limits. However, for the vast majority of deposits, bank defaults don’t pose a risk because most depositors don’t have deposits that exceed FDIC insurance protection. So, you might ask, “why did I write this blog?”
I wrote this blog to reassure our investors that what is happening with Silicon Valley Bank and other recently mismanaged banks is not the beginning of a collapse in the banking system. Unforeseen events like this happen. These events cannot be accurately predicted or prevented. Every investment has potential risks as well as potential rewards. That is precisely why FDIC insurance for cash and a well-thought-out investment plan like the Perennial Income Model™ go a long way toward mitigating risks for investors.
History has taught us that our financial systems do a good job of protecting our money. Volatility is the norm and even though we experience periods of short-term volatility, the economy has proven to be quite resilient. This too shall pass.
Ready to learn more about our proprietary investment plan, the Perennial Income Model™? Learn more here or schedule a complimentary consultation here.
Once in a very great while, there comes a year in the economy and the markets that serves as a tutorial—in effect, an advanced class in the principles of successful long-term, goal-focused investing. 2020 was such a year.
On December 31, 2019, the Standard & Poor’s 500-Stock Index closed at 3,230.78. On New Year’s Eve 2021, it closed at 3,756.07 —15.76% higher. With reinvested dividends, the total return of the S&P 500 was 17.88% From these bare facts, you might infer that the equity market in 2020 had quite a good year, indeed it did. What should be so phenomenally instructive to the long-term investor is the journey the market took to get there.
The stock market peaked on February 19 of last year then reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns—and the result was that the S&P 500 regained its February high by mid-August. The lifetime lessons that were once again on display were that the economy can’t be forecasted, and the stock market cannot be timed. Instead, having a long-term plan and sticking to it, acting as opposed to reacting—which is our investment policy in a nutshell—once again demonstrated its enduring value.
Two corollary lessons are worth noting in this regard: (1) The velocity and trajectory of the equity market recovery essentially mirrored the ferocity of the February/March decline. (2) The market went into new high ground in midsummer, even as the pandemic and its economic devastations were still raging. Both occurrences were consistent with historical norms. ‘Waiting for the pullback’ once a market recovery gets under way, and/or ‘waiting for the economic picture to clear before investing’, turned out to be formulas for significant underperformance as is most often the case.
The American economy—and its leading companies—continued to demonstrate their fundamental resilience through the balance of the year, in that all three major stock indexes made multiple new highs. Meanwhile, at least two vaccines were developed and approved in record time and were going into distribution mode as the year ended. There is the expectation that the most vulnerable segments of the population could get the vaccines by spring, and that everyone who wants to be vaccinated can do so by the end of the year, if not sooner.
An additional important lifetime lesson, of this hugely educational year, had to do with the presidential election cycle. To say that it was the most hyper-partisan election in living memory wouldn’t adequately express it. Adherents to both candidates were genuinely convinced that the other would, if elected/reelected, precipitate the end of American democracy. Everyone who exited the market in anticipation of the election got thoroughly, and almost immediately, skunked. They experienced the same awful result as those that sidelined their money during the 2016 election. The enduring historical lesson: never get your politics mixed up with your investment policy.
Still, as we look ahead, there remains plenty of uncertainty to go around. So, how do you and I—as long-term, goal-focused investors—make investment policy out of that possibility? Our answer: we don’t, because one can’t. Our strategy is entirely driven by the same steadfast principles as it was during the pandemic—and will be a year from now. Equities, with their potential for long-term growth of capital and their long-term growth of dividends have been, and will continue to be, the only logical way to invest your money to stay ahead of inflation. This was the most effective approach to the vicissitudes of 2020, and we believe it always will be.
In my 35 years of investing experience, I have noticed that every failed investor reacts to news headlines and current events while every successful investor follows a plan. We will therefore continue to tune out ’volatility’, and we will continue to act and not react. We will follow the time-tested plan, the Perennial Income Model, that has served you so successfully in the past. We look forward to discussing your plan further with you as we meet this year. Until then, we thank you again for entrusting us with your future. It is a responsibility that we do not take lightly, and we consider it a privilege to serve you.
801.225.0000
info@petersonwealth.com
Orem, UT 84057
Client Login
Schedule a Free Consultation
