So what’s happening with markets at the moment?
If you haven’t seen already, about three or four days ago markets started to drop, and they started to drop pretty heavily. Over the last week, we’ve wiped up nearly all the gains that we had from about November last year.
So what has done that and what’s actually the problem?
It’s really a throwback to some PTSD from the global financial crisis. A bank run is what’s happening right now. We saw this happen with a cryptocurrency holder/stock platform, a major tech bank called Silicon Valley Bank.
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So what actually happened?
So what’s actually happened? What does it mean? And really, what are the likely outcomes and what you should do about it? What is it that you should be undertaking at the moment to make sure that you secure your position and keep growing your wealth, because at the end of the day, that’s what I’m here for, and that’s what we help our clients do.
The facts
What happened is ultimately a bank run. It happened to the 13th largest institution in the US at the moment, called the Silicon Valley Bank.
A bank run is effectively when a whole bunch of people need to take or want to take their money out all at once from a bank. In this instance, people got spooked, and we had a situation where the Silicon Valley Bank needed to cover off a number of their losses that have happened through rising interest rates, so they started selling off assets fast, and people got wind of that.
People started saying, “Hang on a minute, I want my money!”, and when everybody starts to say that, the bank starts to get into a whole bunch of trouble.
The reason being is that the bank doesn’t hold every dollar that you’ve deposited in there in cash in a vault anymore, we’ve moved beyond that as a banking system. Banks will invest your money and lend it out, and sometimes in order to cover off what they need to hold as a minimum in their bank, they need to start selling off assets. So that’s exactly what happened.
So what’s the problem?
Why people are getting really upset about that and why it’s causing a whole bunch of drama is really because they’re not sure whether or not this is going to be a contagious issue. There’s a lot of rickety movements at the moment happening in markets, where banks all around the world are wondering if there’s going to be another bank that starts to domino and does the same thing as people become more and more spooked.
They’re wondering if it’s going to happen to another bank, what’s going to happen to their bank, and what we can start to see happen is what started to happen in the global financial crisis as well. We started to see bank runs across the board, where people are starting to try to take more and more money out and the banks are having to sell assets at a loss to cover their positions at an alarming rate.
So we’re heading to a GFC?
The good news is that so far, it doesn’t look like that’s happening. You won’t know for sure until maybe the next few weeks. It could even be a couple of months before things start to get a little bit more on solid ground. If it doesn’t catch on, if it’s not a contagious thing, if it’s not something that is going to affect other banks, then there shouldn’t really be too many dramas and most of what we’ve seen fall off the market should pick up pretty nicely and come back over the course of the next little while.
If it does turn into a contagious thing, and we start to see other banks domino, depending on their size, we’re going to start to see some big problems and some big movements in markets. The reason being is people have that PTSD – they have flashbacks to the GFC, where asset prices dropped by 35 to 40%, and banks needed to be bailed out.
It’s really important to keep in mind that this is the biggest bank failure of this kind since the Global Financial Crisis and the Washington Bank collapse, which was really the catalyst for the 2008 GFC, which is why people who remember that time are starting to worry.
Do we need to worry?
One of my favorite sayings when it comes to investment markets is that nothing is usually as bad or as good as they’re saying it is. We’re not going to know exactly what’s happening for a little while, and quite frankly, I don’t think you should be too concerned about it.
There’s going to be a lot of beat up in the media about this, there’s going to be a lot of naysayers and doomsday people who always are predicting market crashes, and we are going through challenging markets, there is no doubt about it.
But ultimately, I don’t think this is going to be a major contagion. That being said, I could be wrong. I have a very optimistic view of the markets over the next 12 months or so, and if you’re one of my clients, you’ll know that my feelings are that the banking sector is actually doing pretty well. The major issue facing banks at the moment is the completely ridiculous increase of interest rates that don’t need to happen, because the issues facing them aren’t actually the issues that they’re addressing.
So what’s the plan?
So what does it actually mean for you.
What you’re going to see is your portfolio rising and falling, and some market volatility. I was hoping that this year would be completely free from market volatility, and we’d be on the up and up, but here we are.
What you can do about it
What should you do about it? Well, there are three things that you can do about it:
- One is that you can leave your money where it is, and you ride the highs, you ride the lows, and you continue investing over a long period of time. You take an unemotional outlook to the investment markets, and you treat these investments just like you would any other long term investment, like an investment property, where you hold it through thick and thin and we have a long term view.
- Option two is that you panic, you go nuts and you want to sell everything or you want to reduce your position. This is the this is not something I would recommend that most people do, as short term market fluctuations don’t mean that you should be panicking, selling and changing direction. You should only be looking at reducing your overall exposure to markets if you need to fund income, which if you’re one of my clients, you normally have about two to three years’ worth of liquidity within portfolios to protect you against exactly this kind of thing happening, and needing to sell down during periods of time like this.
- The third thing to do is to look at the opportunity and figure out how we can actually put more money into investments whilst they’ve depreciated in price. For example, nothing has really changed that dramatically for the Australian banking sector, and yet most of the Australian banks and Australian financial institutions (which are some of the largest players in the Australian stock market) are down by 2.5% to 3.5%. If you can start to take advantage of these things, then that’s probably a better solution than the alternative, which is to panic sell.
For my clients:
If I haven’t already reached out to you advising you exactly what it is that you should be doing, then the answer that you should be holding on and hold on to our seats. We take the good with the bad and we are adding money into these investments over time, which ultimately will reduce the overall cost base and provide a greater market return over the long term.
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