The collapse of Silicon Valley Bank (SVB) was rooted in an entirely avoidable error. As has been widely reported, SVB had an investment portfolio tilted toward longer-term maturity bonds to earn higher returns during a period of historically low rates.

The problem was not with the bonds themselves; many were of the highest quality—U.S. Treasury Notes. The problem stemmed from sharply rising interest rates, which, as any investor knows, causes the value of bonds to fall.

SVB’s predicament was triggered by a run on customer deposits that forced SVB to sell their bonds at a deep loss, leading to their demise. SVB made the fatal mistake of mismatching their investments with their potential liabilities.

Lessons For Individuals

Individual investors relying on investments to fund retirement spending face a similar challenge of matching investments to future liabilities (i.e., retirement expenses). Selling stocks or bonds at an inopportune time to fund spending can result in unnecessary investment losses that damage the sustainability of retirement savings. But, there are strategies individuals can implement to mitigate that risk, including:

• Hold sufficient cash and cash equivalents. Funds that may be needed in the next 12-24 months to meet retirement expenses should be held in very short-term debt instruments, such as a money market fund or six-month Treasury Bills to reduce the risk of capital loss.
• Match bond holdings’ maturity to withdrawal needs. One effective way of doing this is to create a five- or six-year laddered bond portfolio of high-quality bonds in which a specific amount equal to withdrawal needs mature every year.
• Consider dividend-paying stocks. While dividend payments are not guaranteed, many well-managed companies have a record of paying dividends uninterrupted over many years. Generating income through dividends has the added benefits of potentially increasing dividend payouts and allowing investors to tap stocks’ capital growth potential.
• Diversification remains essential. Investment losses early in life are rarely fatal; in fact, they can be valuable lessons that will be of benefit later in life. For retirees or near-retirees, they can be calamitous.
• Question the experts. SVB executives and its board never questioned the investment strategy. Perhaps more troubling is that independent experts at accounting firm KPMG issued a clean bill of health only days before SVB’s collapse.

Investors should never be shy about asking questions of the experts, including their financial professional. The clothing retailer Syms once had a tagline, “Come to Syms, where an educated consumer is our best customer.” Competent and ethical financial professionals actually welcome questions because when investors understand the investments they have and what they are designed to accomplish, they become satisfied, lifelong clients.

Please reference disclosures at: https://blog.americanportfolios.com/disclosures/