The recent banking crisis, which started with Silicon Valley Bank (SVP) and may not yet have run its course, has made several of our clients ask “How safe is my money?”
Let’s start by first looking at two ways we can store money. Cash deposits versus investments, and you can decide for yourself which is safer.
Cash deposits are held in bank accounts which, in most cases, are then lent to borrowers. Banks pay you an interest rate and then lend out your money to borrowers at a higher rate. The difference between the two is their profit.
Cast your mind back to 2008, and the Northern Rock bank collapse was no different to what happened at SVP in 2023. Those who deposited their money with each bank understandably lost confidence and rapidly asked for it back. This is known as a “run on a bank”.
The system is known as Fractional Reserve banking and while banks must now hold higher deposit levels than before, it’s not 100%. Any bank would collapse if everyone who deposited their money with it, turned up at the front door at 9am on the same day and asked for their money back.
When you invest, you lend your money to the stock market. We believe the best way to invest is to own as much of the stock market as possible. The whole stock market, if it could even be purchased at any one time, would be over 6 million stocks. But, over 25,000 stocks is sufficient to replicate the market at the lowest fee possible.
What if one of those companies collapses? In 2020 it happened. Wildcard, a German firm, overstated $1.9 billion dollars on its balance sheet in an international scandal. Within weeks, its CEO Marcus Braun was arrested and the company was worthless. At its peak in 2018 it was worth $24bn.
Wildcard was a stock held in our index. It represented less than 0.01% of our Navigate portfolios. So what happened? Well, the following day, the portfolios continued as they had the day before, with no noticeable change in value.
Strength in numbers protects our clients from the risk of a company going bust, even if that company is your bank. Personally, I’m happy to know the majority of my wealth is held in thousands of companies run by thousands of CEOs, employing millions of people. Would I feel the same if all my money was deposited in a ‘safe’ bank. I don’t think I would.
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