It’s hard not to see similarities between the 2008 financial crisis and now. Back then an unprecedented banking crisis led to the collapse of more than 400 U.S. banks. Last month we were surprised by two of the biggest U.S. bank failures ever.
The key difference this time is that the federal government took immediate steps to guarantee all deposits at each troubled bank to help limit the damage and instill confidence in the banking system. Bank officials insist the regional banking crisis is contained. Three midsize banks failed in one week. While this is unlikely to be the Great Financial Crisis 2.0, the long-term effects remain to be seen.
One thing we do know is that this bank scare was enough to trigger a stock market sell-off. That is enough to make individual investors nervous and left with more questions than answers. In those moments, it can help to have a financial professional to turn to for guidance. But because the banking turmoil in March was so sudden and there’s still much uncertainty, you may not know what exactly to discuss.
As with any situation, asking good questions can lead to solid information and peace of mind. Here are the key questions to be asking your financial adviser right now.
1. How has the crisis directly impacted me? Your adviser should give you a clear explanation of what has happened and how it directly affects your personal finances.
The recent bank closures were brought on by a combination of factors, and governments and central banks around the world have taken various measures to stabilize financial markets. So, in the immediate term, it may not have impacted you much at all.
Yet how effective these measures will be in the long run is unknown. For one, tighter lending practices could further slow the economy and increase the chances of a recession.
Ultimately, when discussing any ripple effects from this banking crisis, you want to ask about two key pieces of your finances: your financial (cash) accounts and your investment portfolio.
2. Are my accounts safe and set up appropriately? Chances are that you have more than one bank account and brokerage account, especially if you’re married. With the help of your adviser, review your accounts to ensure you’re not uninsured and vulnerable to a bank collapse.
If you have less than $250,000 in an FDIC-insured account your cash is protected by the U.S. government. Meanwhile, a couple with a joint checking account that’s FDIC-insured can receive insurance for up to $500,000 for the same shared account. That means a couple could be insured up to $1 million for two individual accounts and one joint-account at the same bank.
If you are fortunate to have balances above those limits, your adviser may recommend that you store money across multiple bank accounts.
What about your investment accounts? You may have insurance for those, too. Investments in a brokerage account are covered by the Securities Investor Protection Corporation (SIPC). With a SIPC-insured account, you can receive insurance for up to $500,000 (half of which can be used for cash) in the unlikely event that your brokerage firm fails. However, certain rules and conditions apply, and your investment earnings may not be insured.
3. Do I need to make changes to my portfolio? Your adviser can take a variety of measures to help minimize any ongoing ramifications a crisis may have on your portfolio. For example, adjusting your asset allocation to reduce risk exposure or rebalancing your portfolio to ensure it’s still aligned with your long-term financial goals.
When depositors make a “run” on a bank, it is a clear example of why diversification matters. Shareholders of SVB were left holding the bag. That’s why you shouldn’t have too much money invested in any one company, industry, sector or asset class. A broadly diversified portfolio is more than just a lot of stocks. Within your desired asset allocation, you should diversify among styles, regions, sizes and sectors that are not correlated.
Further, you and your adviser may want to revisit your tolerance for stock market volatility. Would you be able to sleep at night when there’s another extreme event that causes the market to drop to new lows? If so, then your current allocation probably doesn’t need to be revised. If not, then your adviser might want to take a fresh look at how your appetite for risk has changed, then adjust strategy and time horizon accordingly.
4. What opportunities, if any, can I take advantage of? What else should I keep my eye on?
Winston Churchill is credited with saying, “Never let a good crisis go to waste.” Current market conditions may have opened the door to new financial opportunities that your adviser can help you take advantage of.
For instance, you can earn higher returns on your cash, including in high-yield savings accounts, money-market funds, certificates of deposit and short-term Treasurys. These are potential opportunities for investors who want to earn more on their excess cash or for those seeking to sit out the stock swings for now. With current rates around 4% to 5%, you’re essentially getting paid to wait.
Your adviser should also update you on market conditions as they relate to your specific situation. Take real estate, for example. If you’re shopping for a home, either as an investment or primary residence, the tighter credit conditions may make it more difficult to get an attractive mortgage. In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.
Yet expectations for slower economic growth or even a recession should reduce inflation and mortgage rates along with it. That would be good news for home buyers and sellers since it improves affordability, bringing down the cost to finance a home.
5. Am I getting the help I need? Admittedly, this is more of a question for yourself. A crisis is often a time for some needed self-reflection. If you’re a DIY investor, any uncertainty or anxiety you may be feeling now may be a sign it’s worth it to collaborate with an experienced adviser.
This is why so many individuals turn to professional help during a financial crisis. Consider a recent report from the FINRA Investor Education Foundation and NORC at the University of Chicago that shows new investors during the pandemic shifted away from their own personal research for information and increasingly started to rely more on financial professionals.
If you’re already working with an adviser, how your adviser responds to your needs right now is a good measure of whether they’re worth the fee. Are you getting timely information and the guidance you’re looking for?
This banking crisis or the next shoe-to-drop might leave you regretful that you didn’t take some steps earlier. But that doesn’t mean you can’t still do something about it today.
Pam Krueger is the founder & CEO of Wealthramp, a free online matching resource that connects people with rigorously vetted and qualified fee-only financial advisers. She is also the creator and co-host of MoneyTrack on PBS and the Friends Talk Money podcast.
April is National Financial Literacy Month. To mark the occasion, MarketWatch is publishing a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.
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