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Is the Silicon Valley Bank (SVB) collapse worth your concern? Maybe not directly, but it reveals valuable lessons to be learned about your liquid dollars – and investing.READ THE ARTICLE
A background on bank risk: Like investors, banks ask themselves: How much can we earn while still being (generally) safe? Some banks utilize risk-free investments (treasury bonds), while others buy almost-risk-free investments (quality corporation bonds) that yield more. As a result, instead of being fully liquid, banks that take on slight risk end up being “somewhat liquid”.
Ultimately, SVB went “too far out on the risk curve with other people’s money”. When clients realized they might be in trouble, deposits were pulled and panic ensued. As said by Ernest Hemingway, “Going broke happens gradually, then suddenly.” However, if we can take wisdom away from this bank failure, it might include the following lessons:
📌 Time is risk: “Beware of safe assets that have a different timeline than when you might need them.”
📌 Low-probability risks are still probable: It only takes one unpredictable event to wreak havoc. As such, your investment strategy should be prepared for anything.
📌 Don’t lend money, love or friendship if you can’t deliver on the expected timeline: Reliability sits right up there with trust. You can’t help others with their needs if doing so is based on your timeline.
The risk you don’t see, or more likely underestimate, is often the biggest one that you have at the end of the day. What are you ignoring? What are you underestimating?