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WHAT CAN INVESTORS LEARN FROM THE BANKS?

WHAT CAN INVESTORS LEARN FROM THE BANKS?

May 15, 2023

Did you lose money in Silicone Valley, Signature or First Republic Bank?  No, no one lost money in those banks thanks to FDIC insurance and a generous Treasury that paid depositors with balances above the insurance maximum.  Yet, everyday on the news you heard about investors who were worried about the stock of those banks.

Putting your money in a bank here in the U.S. is a very safe place to store your funds.  Unless you are nearly 100 years old, you have not witnessed depositors face the risk of loss.  Investors, ´╗┐on the other hand, do not place their money in the bank.  Instead, they purchased stock and became an owner of the bank.  

Individual banks, like individual companies in other industries, operate in different ways.  Some banks are run more aggressively, taking on more risk to the owners, while some shy away from risk.  Just because depositors' monies are safe in a bank thanks to FDIC insurance, doesn't mean investors funds are safe when invested in a bank.

How do you invest in a bank and protect your money?  Through the use of diversification.  While the stock of 1 bank, no matter how well established or wealthy its clientele, can underperform the market, several banks are less likely to do so.  And while one industry such as banking can have a bad year, investing in several industries will be less volatile. 

It is safe to assume the entire stock market will not crash to a value of $0.  But the same cannot be said about any individual stock, no how promising the future of a company might seem.  Can anyone predict which companies will fail? Fortunately, there’s no need to. You can have a positive investment experience without knowing what’s going to happen with any individual stock because of diversification. In investing, diversification is the closest thing any of us can have to a free lunch.

Nearly all investing horror stories start with a simple fact: Someone took too much risk. In the case of the 3 banks listed above, management took too much risk. But investors don’t have to. Anyone who lost their shirt when these banks' stocks lost their value had too much invested in them.

Its never been easier to create a well diversified portfolio.  Securities such as mutual funds and Exchange Traded Funds (ETFs) allow investors to purchase a wide swath of stocks or bonds in a simple order.  Today there is no excuse for taking too much risk in your portfolio.