Stock prices and interest rates continued to bounce up and down in the first quarter of 2023. Despite the volatility, investment results for the first three months of the year were mostly positive in a welcome respite from the deep losses experienced in 2022. Investors are anticipating the end of the US Federal Reserve Bank’s interest rate hikes as inflation declines from the 40-year highs experienced in 2022.
While it appears that investment markets have stabilized and started to recover, many people remain skeptical. Two recent events justify their skepticism. Silicon Valley Bank (SVB) failed in early March as depositors wanted to withdraw their money which the bank had invested in long-term government bonds. To meet those withdrawal requests, SVB would have had to sell those Treasury Bonds at a significant loss. And the cryptocurrency company FTX collapsed in November, leaving more than a million crypto investors with total losses in excess of $8 billion. New management brought in to clean up the mess at FTX has blamed the “hubris, incompetence and greed” of the company’s founders for the meltdown.
Both of these events triggered panic among the customers of SVB and FTX and the fallout from the high-profile failures caused many investors to reconsider their investment strategies. In the case of FTX, investors must have been aware of the risks of cryptocurrency trading, but fraud committed by inexperienced management of the company led to up to $40 billion in value on paper vanishing overnight. On the other hand, depositors at SVB lost no money and were made whole after federal regulators stepped in and guaranteed all deposits, even those above the stated $250,000 FDIC limit.
What lessons can we learn from the collapses of FTX and SVB? First, don’t take investment advice from celebrities in TV commercials. Tom Brady and Larry David are very successful in their own professions, but that does not make them experts on other topics. They were compensated in FTX “tokens”, which are now worthless. Second, while the FDIC stepped up and guaranteed all deposits at SVB, don’t become complacent and maintain balances above the $250,000 FDIC limit in one ownership registration at a single bank. There is no guarantee that federal regulators will bail out all depositors at the next bank failure. Third, and most importantly, build and maintain a diversified investment portfolio with exposure to many different categories of assets.
In both instances, investment markets stabilized and moved higher after the initial reactions to the failures of FTX and SVB. The broader US and global economies are resilient and most people around the globe act in good faith and want to contribute to the greater good. But investors need to be cautious and avoid unproven fads. Most big companies are well-managed and operate profitably without government support. We believe the best way to grow wealth is to invest in the debt and equity of successful companies around the world.
This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or email@example.com.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.
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