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Everything you do in life involves elements of both confidence and fear. You have confidence that your car will start in the morning but fear you may get into an accident on the way to the store. You have confidence that the birthday party you are planning for your friend will come together nicely, but fear it won’t.
Everything within the banking and financial system also involves confidence and fear. You pay bills with confidence that the funds from your account will be settled to pay your expenses. On the other hand, your fear of running out of money in retirement causes you to save and invest for the future.
Investing often occurs where confidence and fear collide.
The recent turmoil in the banking sector has shaken the confidence and instilled fear in the minds of many investors. Comparisons to 2008 might seem apt, but the banking sector today is in far better condition than it was 15 years ago. The issue today, accelerated by the technology on your mobile phone, is centered around immediate liquidity.
Think about a large group of your friends going to a neighborhood restaurant one Monday night after some event. The restaurant is staffed and prepared for a normal Monday night and your experience suffers as the restaurant tries to catch up to the unexpected surge.
That’s essentially what happened with some banks over the past few weeks. Depositors were fearful that their funds, particularly those amounts above FDIC coverage, might be at risk. Once the fear was ignited, mobile banking apps allowed the fear to spread quickly as bank customers liquidated funds.
For the main, most of the bank problems haven’t centered around exotic risks, but rather interest rate risk. Banks that held portfolios of government bonds had essentially no credit risk, but suffered market risk as rates increased over the past 18 months and bond values declined.
Both confidence and fear center around perception. Often there is a big difference between what you perceive to be true and reality.
When the unexpected occurs, some investors believe they need to do something with their investment portfolios. For long-term investors, however, re-focusing on your financial planning goals helps protect you from overreacting.
Time + discipline + diversification. That’s a formula for long-term investing success.
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