In all honesty, or by lucky coincidence, this week's blog was due to be about the benefits of a balanced portfolio; with ISA season drawing to a close and our firm belief that P2P should play a part in a balanced investment portfolio, there was a whole bit we had planned on balanced investments, risk and volatility... and then lots of dramatic financial news broke very quickly, and we decided to run with that instead. We will track back to balanced portfolios and P2P later, so please keep reading as the news dovetails into our commentary on risk remarkably conveniently.
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness", Charles Dickens once wrote, and at the time of writing, this week has been about the tale of two... emerging black swan events, Silicon Valley Bank or SVB, and Silvergate Bank, both these stories have rocked the financial press and the financial markets, and the compounding effect of both of these could have repercussions yet to come.
Firstly, we saw Silvergate, a pioneering modern bank and recipient of funding from the now-defunct investment arm of the FTX exchange, collapse in an $8Bil dollar bank run that couldn't be curtailed due to the nature of the digital assets it was holding free-flowing onto exchanges. Then, before people could catch their breath, the broader legacy markets were sent into meltdown as the Silicon Valley Bank (SVB) share price plunged 60% as they traded out of a $21bil loss-making bond portfolio to free up $1.8Bil needed to plug a hole in their balance sheet. Loss-making T-Bills at a time of rampant interest rate hikes are like the "If a tree falls in a forest and no one is around to hear it, does it make a sound? physiological experiment, in the sense that if you are quietly sitting on a mountain of them thinking you are safe, the problem only appears once the market finds out, and then a Bank run/forest fire begins.
The contagion effect has depleted prices across the financial markets, with Lloyds & Barclays falling circa 3.5% as the new spread. There is panic in the air as speculation begins to mount that it's not SVB, it's the system, and many other banks may need to "fire sale" their bond portfolios in the weeks to come to prevent the dreaded "liquidity event" that has lead so many times in the past to bailouts and central bank involvement, the worlds ' Bank of mum and dad" stepping in when the game has gone awry. The worry is - this is an era of Fed Hawkishness, a strategy of rate hikes until something breaks, tough talk in an election run-up - bailouts now won't be as free-flowing as they were under previous US administrations if it gets that far, but time will tell. HSBC has stepped in with a nominal bid to buy the UK business liabilities from the failed bank, which is fantastic news for the grassroots UK technology sector that could have been severely impacted.
So to circle back around at this point, what exactly does this have to do with balanced portfolios? Of course, ultimately, you can't protect yourself from the extremities of life; the news, and these blogs, to a certain extent, focuses on those extreme events because it's interesting, it plays into the bigger financial picture, and it's an engaging narrative. Still, while that narrative unfolds, you can lessen its rigours by treating your portfolio the way you treat your life, employing balance.
Various religions cite balance as the secret to life, rooted at the heart of temperance, which means our principles balance out our passions, so we can all exist in society together. Without getting too deep and meaningful with the comparisons here, most successful investors employ the same strategy, decide on their own risk tolerances, and then structure their investments to cover a wide variety of asset classes and levels of risk exposure. P2P plays a role in that; it's one option amongst many, and in deploying balance in a structured portfolio, you have a decent umbrella to weather volatility. See, I told you it dovetailed nicely.
It's still possible to take advantage of your allowance; Invest & Fund offers an IFISA that serves dual purposes. Firstly, it exposes our investors to the UK property market as an asset class, with all the benefits of a secured physical asset, in the most tax-efficient way possible; please check that out on our website today.
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