Silicon Valley Bank, and its applicability to you

March 17, 2023

Charles Schwab, both the firm and the eponymous founder, have put out a statement regarding Schwab's financial position. I encourage you to read it here.

A week ago Silicon Valley Bank (SVB) went down in spectacular fashion.

First, they had "Bank" in their name, but everyone in the Valley knew they were a pseudo-bank. 25 years ago I was in their offices in California trying to get a loan from them, and I was dumbfounded at their model: little asset backing requested, they'll take some warrants in the firm, if things go well they'll piggyback along. This sounded like some sort of hybrid VC-firm-bank-thing, and I could see it had a role! But it didn't feel like a traditional bank.

Tech firms are often unprofitable, especially when young, and as the venture capital spigot dried up last year, SVB customers withdrew funds. With a lopsided Treasury portfolio of long-dated bonds, SVB had a mismatch between a short-term demand for funds and a long time horizon on its investments. At some point the CEO actually realized this novice mistake and started dumping his own shares in the bank. As the bank had to sell its Treasuries to meet redemptions, they had to report the loss on those positions, and the tide went out.

Let's look at three things that relate to you, using SVB as a backdrop:

1. Your portfolio is marked-to-market in real time. The values you see are extremely close to the actual cash value of the portfolio were we to sell it all today. There are some rare exceptions in the firm, all of which are due to positions brought in from other firms. These are general private REITs and other complex investment products that are not marked-to-market daily.

So, unlike universities fudging their investment results with the help of private equity shops and venture capital outfits, you know what you own. And unlike Silicon Valley Bank, there is no complex accounting obscuring that fact.

2. Holding a substantial amount of cash above the $250,000 is an error and shouldn't happen. This only occurs at One Day In July for brief periods of time while cash is in a position to move, or at client request. Otherwise short-term Treasury bills serve as a safer short-term store of value.

3. You don't want to create the same time-dating error in your retirement that SVB created in its bond portfolio. SVB was long-dated and had short demand. The risk today is that with interest rates higher in the short duration sector of the bond market, people are shifting assets to shorter positions to meet a need, retirement, that is fundamentally long. Although they don't perceive it as such, this is a risky move, as declining rates could leave them short on cash years from now.

Related to the item above, in terms of matching assets to needs, is the impact inflation will have on a retirement portfolio. As people today shift money from equities to short-term bonds or cash, they are ignoring the inflation-fighting characteristics of businesses. And inflation is a big deal for a retirement portfolio. If inflation stays at a long-term average of 2.5% over 25 years, in real dollars $1,000 drops to $545. But if inflation stays at 4.5% over the same 25 years, that $1,000 drops to $331. This erosion of buying power could affect many Americans facing retirement, and their short-term bonds and cash will exacerbate the issue.

Dan Cunningham