The stock market is full of highs and lows, so it’s important to mitigate risk when investing. This is why, at 5 Financial, a key tenant of our investment philosophy is diversification. To achieve this, we make sure to spread investments across various Exchange Traded Funds (ETFs).
The benefit of this approach becomes very clear with events like the collapse of US-based Silicon Valley Bank (SVB) earlier this month. SVB was the 16th largest bank in the US and a major lender to early-stage start-up technology and healthcare companies. Its collapse marks the biggest bank failure in the US since 2008 and has been major news in the finance world in recent weeks.
SVB stock plunged more than 60% to $106.04 on 9 March 2023. Trading in SVB stock was then halted before the market opened on 10 March and the Federal Deposit Insurance Corporation took over the bank’s assets.
5 Financial clients have had exposure to SVB in the Vanguard ETF, VTS, which invests in the total US share market (with over 3,900 different holdings). Of these holdings, SVB made up just 0.04% of the portfolio – thanks to a diversified approach. For clients holding a $1m balanced portfolio, of which VTS represents 10.5%, the total loss from SVB would be $42. The other holding in the portfolio is QUS, representing 4.5% of the balanced portfolio, holding 0.25% of SVB, or $112 worth. It is a hit but thankfully not a big one, and much better than it could have been.
A diversified approach is a cautious one, and that’s our style. We’d rather take a slower, steadier approach to building wealth in the market – and stories like SVB’s collapse illustrate the importance of why we do this.