Banks failure: 3 Steps to Take to Avoid Being Harmed

Inflation was the top concern for many until they were faced with another one: bank failures. Just within several months Credit Suisse, Silicon Valley Bank, Signature Bank, and First Republic Bank turned insolvent or were taken over.

UBS paid USD 3.2 billion in equity to acquire Credit Suisse, which was worth about USD 49 billion five years ago. Credit Suisse AT1 bondholders lost USD 17 billion.

According to Ray Dalio, the founder and CIO of Bridgewater (the world's largest hedge fund and a global macro investment firm), “this bank failure is an early indication of a ‘canary in the coal mine’ dynamic that will have knock-on effects in the venture world and well beyond it.”

Whether one believes that there is a debt-credit crisis unfolding or not, it is prudent to take some precautions.

The following 3 measures can benefit investors in both good and bad times.

1. Do not attempt to time the market

While market timing is a brilliant strategy in theory, even professionals cannot get it right in practice. No one has perfect information, and few can weather market momentum swings.

Frequently, when prices fall, people sell their stocks and then compound their mistake by failing to invest as soon as the bull market begins to recover. The chart of the Swiss Stock Market Index (SMI) below shows the significant difference in returns when an investor misses out on 10, 20, 30, 40, and 50 top days of the index’s performance as for the previous 20 years.

Annualized SSMI performance of staying fully invested versus trying to time the market

According to our calculations, missing 10 best-performance days of the index results in an additional 3.23% p.a. loss. And the consequences of missing out on more of the best-performing index days are significant.

However, investors should not entirely ignore market swings. Instead, they should know their strategy for each asset, as well as their floor and ceiling, and watch the market and ratings agencies accordingly to avoid being pushed around by market fluctuations.

2. Be careful where you go for safety

When a bear market starts, many investors flee to the apparent safety of cash, gold, or even cryptocurrencies. While this may decrease the volatility in the value of your portfolio, you can still lose some of your purchasing power. Why?

Neither cash nor crypto offers any regular income such as a bond or a dividend stock. If you are invested in cash – your enemy is inflation. If rely on gold or cryptocurrencies, there is no guarantee that they will always increase in value. Unlike equity or bonds, they don’t generate any income.

Imagine your purchasing power as a rock on a hill, and the inflation to be the incline of the hill. If you do not invest or choose the wrong assets to retreat to, your rock will simply slide downhill, reducing your purchasing power. That is why people should invest in time-tested assets that are resilient in times of uncertainty. Choosing investments wisely will not only keep the rock from rolling downhill, but it will also drive it uphill.

3. Diversify your portfolio

Diversification has long been regarded as the key to modern portfolio management. Who does not want the same level of portfolio returns, but with less risk?

“From my earlier failures, I knew that no matter how confident I was in making anyone bet I could still be wrong — and that proper diversification was the key to reducing risks without reducing returns. If I could build properly diversified (they zigged and zagged in ways that balanced each other out), I could offer clients an overall portfolio return much more consistent and reliable than what they could get elsewhere.” – Ray Dalio

Ray Dalio’s Holy Grail Of Investing
Source: Investopedia

According to the Holy Grail concept, with 15 to 20 good, uncorrelated return streams, you can dramatically reduce your risks without reducing your expected returns. Based on the chart above, adding 15 to 20 assets with zero or low correlation would result in a return-to-risk ratio of 1.25.

“… this new approach improved our returns by a factor of three to five times per unit of risk, and we could calibrate the amount of return we wanted based on the amount of risk we could tolerate.” — Ray Dalio

With all the aforementioned, uncorrelated assets are truly investors’ goldmine. So, which assets could help you in forming this goldmine?

The answer lies in alternatives such as private equity and real estate. Portfolio managers and UHNWIs have increasingly turned to alternative assets for diversification during the past decade. According to EY and KKR research, 81% of those with more than CHF 30 million in net worth invest in alternative assets, allocating a massive part of their portfolios to private equity (27%) and real estate (11%).

The beauty of private equity lies in its illiquidity nature. As it’s not marked-to-market daily – prices are not affected by dramatic changes in market sentiment, potentially rewarding patient, longer-term investors with higher returns, which is particularly significant given the recent trend of increased correlation between stocks and bonds. The traditional 60-40 portfolio has not performed well in this environment.

Real estate has been another popular alternative asset class in recent years due to its stability, tendency to rise, and its positive correlation with inflation.

And for those wishing to invest in real estate, Switzerland is an attractive option due to its limited supply and high demand, which offers another degree of security to this asset class. While rental yields in Switzerland may not be as high as in other countries, the constant growth in demand for homes and the stability of the Swiss franc mark Swiss real estate as a wise investment choice for discerning investors.

Conclusion

It is hard to change the course of your boat in the middle of a storm. That is why you need an experienced deckhand. We at Moonshot are happy to share timely advice to assist you in navigating your way toward safety in the face of uncertainty.