We all learn from mistakes, either it is done by ourselves or others. In the case of Silicon Valley Bank failure, there is a lot to learn from them. However, in this article, we are not proving the point that SVB have made any mistake on their part. Before learning, let’s dive deeper into what happens with the bank.
It all began in the post-Covid era when companies were reluctant to borrow money from Silicon Valley banks due to the US dollar's ongoing appreciation versus nearly all other currencies. As a result, startups from other nations face higher interest rates than those from their home countries.
The surplus deposit was put to use by Silicon Valley Bank in the markets. Newly issued fixed-income instruments are likely to become more appealing as central banks continually raise interest rates around the world, therefore the bank decided to invest in long-term, low-yield, well-rated bonds and other securities, assuming it to be a secure investment.
By looking at the story of one of the highly ranked bank failure, here are 5 things to learn from the same-
Liquidity is a critical concept in the world of finance and investments. For you are an investor, having a liquid portfolio enables them to capitalize on opportunities as they arise and to manage risk effectively.
Investors often consider cash flow as a key indicator of a company's financial health, as it provides a more accurate picture of a company's ability to pay its bills, meet its financial obligations, and reinvest in its operations.
Positive cash flow signals that a company is generating enough money to fund its operations, pay dividends, and invest in future growth. By contrast, negative cash flow can indicate that a company may be struggling to pay its bills or may require additional capital to finance its operations.
Diversification involves spreading your money across different asset classes, such as stocks, bonds, and real estate, as well as different industries and geographic regions. This can help protect against downturns in any one particular area and increase the likelihood of long-term success.
Rebalancing is important because asset values can change over time, leading to a shift in the risk and return characteristics of a portfolio. Without rebalancing, a portfolio could become too heavily weighted in one asset class or sector, potentially exposing the investor to greater risk than they intended.
Strategic entry and exit
Before entering the market, investors must have a clear understanding of their investment goals and risk tolerance, as well as conduct thorough research and analysis of the securities they are interested in.
Exiting at the right time can help investors maximize their returns and minimize their losses.
Having a full-fledged investment plan from entering the market to exiting from the particular investment to established financial objectives, would help to keep yourself financially stable and sound enough to tackle financial emergencies. It is better to plan in advance and make informed decisions before you and your family have to suffer with your own financial decisions.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com