While not commonplace, banks do fail for a variety of reasons. When they do we get questions such as, “should I pull out my money” or “what should I do because these banks are failing?”
- The answer is do exactly what you have been doing, which is have faith in the portfolio we built for you and stay the course!
Banks failing is not good. However, as with all macroeconomic happenings, it does not mean an individual investor should try to make investment moves to do something about it.
- Banks are still safe, and cash is insured by the federal government up to $250,000 per depositor per bank.
It is very unlikely, not impossible, but very unlikely, we will see anything near a cascade of bank failures like we did during the 2008 financial crisis again. The banking system has fundamentally changed since that crisis, and banks have much stronger balance sheets than they did back then.
With that being said, even if we did have an all-out crisis, look at what the best thing to do back then would have been. It would be to stay the course and keep investing. The message is the same for today:
Crisis of the Day: Banks are failing – what will it be tomorrow?
Bank failure is just another speed bump in a long history of hardships and challenges. These economic pullbacks are half cyclical and half unpredictable. We know over several decades we will see many periods of rate increases, recessions, market pullbacks, etc. You can count on it.
Look at the chart below to see some of the crises we have experienced and overcome throughout our great nation’s history.
It may be helpful to realize that the math we use to build your portfolio uses both the good times and the bad times. Those bad times include all the items on the left of the chart above and more. In other words, we know something will come at some point, be it a recession, a war, a big bank failure, something. In fact, your portfolio is built with anticipation that it will come.
- The history and the math give us confidence that the system you are in works!
In addition, for our clients that are taking monthly withdrawals, we make sure you have an adequate War Chest of really safe investments (bonds and cash) set aside for you. The War Chest provides two incredible benefits to you which are as follows:
- It limits your downside – in other words when you see that markets are getting hammered, your portfolio should not be falling to the same degree, and
- It gives you income, typically anywhere from 3-10 years depending on your allocation, to ride out the next “crisis of the day.”
Remember, even if some banks are failing:
Your portfolio is built the way it is because it gives you the greatest likelihood of having enough money to live your life the way you want, with the least amount of risk. That does not mean it will not go down at times. That does not mean it will not be painful at times. It does mean you have the greatest chance of meeting your goals without running out of money.
A Word to Those of You Holding onto a Stockpile of Cash: Invest It!
If you have been holding on to a large sum of cash because of the world events, you are playing against the odds:
- Your cash is basically burning away everyday from the fires of inflation, with no chance of recovery.
Look below at how ripe the market is for you to put your cash to use!
The average return of the market during the 10 years following a bear market is +210%. That is an annualized rate of +12%which is even better than the +10% average that we have seen throughout the history of the stock market.
Conclusion:
Something bad will inevitably happen. Nobody knows for sure what it will be. In fact, nobody knows when the next “crisis of the day” will happen, the scale, or the duration of it.
Instead of trying to make money moves to avoid the inevitable downturns, charge through and look at them as an opportunity to profit when everyone else is letting their emotions ensure they lose money. Keep investing and stay invested. When the market inevitably rebounds (which it will) you will be handsomely rewarded!
It may be wise to reach out to a financial advisor to ensure that your investment portfolio is well-balanced to suit your specific needs.
“When Banks Fail?” and “After the Crash” Charts provided by Personal Finance Club.
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