Diversification still matters!

Over the coming weeks there will continue to be a stream of information coming out regarding the collapse of several banks in the US and in Europe. We will undoubtedly learn more about the failures that led to the banks collapsing, the cost of the collapse, and what changes need to be implemented to attempt to stop these sorts of things from occurring in the future. One thing we already know that this situation reminded us of is that diversification still matters in your financial life. 

Whenever people discuss diversification in your financial life, most of the time they speak about your invested assets; stocks, bonds, and other investments. This makes sense to most investors as they’ve seen how the economy and markets change over time. For example, the top five companies in the S&P 500 today according to S&P Dow Jones Indices (AAPL, MSFT, AMZN, NVDA, and TSLA) are vastly different from the top five companies in the year 2000 (MSFT, CSCO, XOM, GE, and INTC). Only MSFT was able to perform at a high level during the past twenty plus years, while stocks like INTC, CSCO, and GE have struggled to make new highs after reaching their peaks twenty years ago. Just because a company is performing well today does not mean it always will or that it will be able to keep up with competition. 

One thing that this most recent banking crisis highlighted was that while diversification matters in your investments, it also matters in your bank deposits. The FDIC is a government organization that guarantees bank deposits up to $250,000 per person, per institution. While this insurance is more than enough for many Americans, many others have larger deposits that need more insurance. One way to get more insurance is to spread out your cash deposits among different banks, for example, having an account at both Chase and Bank of America. That can be a pain to keep track of administratively so many investors hesitate to do so. Another option is to utilize a brokerage account that has a “bank deposit sweep program.” These programs take your cash in your brokerage account and keep it in “bank deposits”. Each program is different and details vary on the number of banks but it can allow you to have access to over fifteen banks to store your cash. That is a simple way to go from $250,000 in insured deposits to about $3,750,000 in insured deposits. To be sure, this only guarantees the cash in the sweep program, this does not insure your investments. 

At the end of the day, the collapse of several banks will remind us of many lessons but none may be more important than the fact that diversification still matters. Banks don’t collapse everyday and it is an event that any given day seems improbable to many. Many investors feel the same way about their beloved investments. Unfortunately, these events do occur and the best way to handle them is to be diversified so that none of these events severely sets you back. 

If you have questions about your diversity or ways to mitigate risk, don’t hesitate to reach out to us for a quick review meeting!