Episode: 03-14-2023 | The Bank Crisis & Investing Myths

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Unpacking The Silicon Valley Banking Crisis

Allison Dubreuil, Wealthway Financial Advisors:  We like to keep this show focused on financial planning topics, and strategies for you to maximize your financial resources. And always try to, you know, live the best quality life as possible. But there are some aspects of the financial planning process that are more investment related. So, we want to talk about some of that tonight. And we do want to address the elephant in the room that you’re probably hearing so much about, because we’ve been getting calls, we want to talk a little bit about banks and FDIC insurance.

Kevin Zywna, Wealthway Financial Advisors:  Right, and the soundness and safety of the entire banking system. And, yes, we are sort of loath to react to every single crisis of the day, as we call them, because there is always a new crisis of the day. Anybody waiting for perfect clarity and certainty in an economy as large as the United States, will be waiting for the rest of their life. There’s always something going on. That can be a little unsettling. So, the current crisis du jour is the fact that there were a couple banks that have gone out of business. Whenever there’s a crisis or something, I think it’s always best to meet it head on, talk about it, and try to see it with clear eyes, from a clear eyed perspective, and then determine if there’s anything that needs to be done about it. 

Essentially speaking, the banks that have run into problems have been very unique type of banks. In fact, they bear little resemblance to the local banks we have here in Hampton Roads, whether they be credit unions, small community banks, startup type of banks, or the larger banks, like truism Bank of America, our deposit base here in Hampton Roads, and the rest of the country bears little resemblance to what was going on at Silicon Valley Bank. And so as the name suggests, born out of the Silicon Valley, meant that their deposit base, their customers were largely tech related companies, and startup, tech related companies. So, really some of the riskiest type of companies that exist in one of the most volatile type of industries that exists.

And if there’s anywhere that we’ve seen softness in the economy or layoffs in the economy, we’re seeing it in the tech sector, you do see, companies like Google and Facebook and some other those big technology companies, actually laying off people where almost everybody else in the economy is still looking to actively hire and can’t find enough people to hire. So, technology is just one of those areas where it’s feast or famine. Their highs are higher, and their lows are lower and just more volatile.  So, when you have a deposit base made up of tech companies who deposit some of their earnings there and use that to pay the company payroll, and you have employees of tech companies, then when there is a problem, where there’s an economic slowdown, and those companies are hit harder than the rest of the country and unrest of other industries, it’s only natural, that’s going to affect a bank that is concentrated around that deposit base.

So, employees get laid off, or they’re unsure of their future, they start withdrawing more money out of the bank than they put into it, because they needed to pay their mortgage, make the car payment. Same thing with companies if their revenue is starting to decline, but they still have to make payroll and pay the rent and their large office buildings and so on and so forth. They start withdrawing more money out of their bank account than they’re putting into it.  And then there’s also some other complicating factors.

The bank was engaging in sort of higher risk lending activities and startup type of businesses, the tech industries or newly formed businesses that are less certain – their revenue less predictable. So, that carries with it a higher risk. Some of those did not perform, which means the bank doesn’t get paid back.  A traditional bank takes your deposits in and then what it doesn’t lend out, it then usually purchases treasury bonds, which are very safe in the fact that you’re going to get your money back in over a certain amount of time with interest.

But the price of even treasury bonds fluctuates with interest rates. So, we all know we’ve been in a rising interest rates environment over the last six months or so, and rising interest rates and bond values act like a seesaw. So, when rates go up, bond values go down. And so when the bank had to sell some of their bonds, in order to meet depositor demands, they had to sell them at a loss. And so all these competing factors, working at the same time just created sort of the perfect storm, and boom, you have banks going, defunct. 

Now, it’s important to note that even if the bank goes out of business, which looks like it, it’s going to the depositors, the customers of the bank are being made whole, and there is zero concern about that, at least from anything I’ve read at this point. You get the FDIC insurance up to $250,000 per account, that covers probably about 90% of your average banking customer. Anything above that, I have read that the FDIC insurance fund has also agreed to basically backstop all of it. So, even amounts over $250,000 are being paid out to the depositors. And it’s happening this week, there’s not even a delay in the amount of time between a bank going belly up. A customer receiving their deposits back where traditionally, if that would happen, it could be weeks or months before the claims get processed. And that is not happening in this case. So, it’s a very unique type of bank with unique characteristics that bear little resemblance to the rest of the banking sector. Therefore, we think there is no need for alarm concern, or certainly not any panic regarding the situation.

Understanding The FDIC Insurance Thresholds

Allison Dubreuil, Wealthway Financial Advisors:  And we can talk a little bit more about FDIC insurance, because I think a lot of people are pretty attuned into that level of $250,000, it is per account registration. So, it’s not actually per person, but per account registration. So, if you are a married couple, and the one spouse has an account with $250, and the other spouse has an account with $250,000, and then maybe you have a joint account with $250,000. And then maybe for those people that have more complicated affairs, if you have a trust and the trust owns a bank account, it can be insured up to $250,000. So, you can spread your funds across different account registrations at the same bank and get additional protection because we like the idea of consolidating as much as possible, especially as you age and you go into retirement, simplifying and consolidating is usually preferred, but you can you can still do that. And keep your account balances insured up to the FDIC level.

Kevin Zywna, Wealthway Financial Advisors:  Right. So multiple accounts get you multiple coverage at the same financial institution. So, you don’t have to spread it out all around town, you just have to have multiple accounts. You can keep it at the same institution and enjoy that same level of insurance protection. I have to stress that it is an extremely low probability event that any bank is going to have to rely on that insurance. Especially the bread and butter banks of a community bank, or a credit union, which basically, we all learned from, in “It’s a Wonderful Life” when everyone wants their money at once. It’s not all sitting in cash in the vault.

You make a deposit and a portion of that, 50-60%, then gets turned around and lent out to other customers of the bank in the form of credit cards or car loans or signature loans or lines of credit to check attached a checking account or home equity line of credit or mortgage. And then those people who borrow that money pay it back slowly over time. The bank has enough working capital to meet the ordinary demands of depositors and withdrawals at the bank. But if everyone wants it all at once, for whatever reason, now it’s going to take some time before that gets done. So, these are unique circumstances.

There are a couple other banks involved. Those two are unique. If you’ve heard the name Signature out there, its Signature Bank, they had large bets in cryptocurrency. Which if anyone’s paying attention to that, that has been on a downward, generally downward trajectory for the last six months. So, that’s another unique animal. All the regular style banks and credit unions that we have here in Hampton Roads, and the deposit bases that we have here in Hampton Roads bear little resemblance, if no resemblance to those other banks. We don’t think there’s anything to be concerned about.

Investing Myths & Realities

Allison Dubreuil, Wealthway Financial Advisors:  Tonight, we want to talk about some myths and realities about investing. There are lots of myths and misconceptions out there about the stock market, about how investing works, about what investing in the stock market actually is. And so we wanted to spend a little bit of time to kind of bust some of these myths open and talk about the realities of investing so that as an investor, you have a better understanding of what you’re doing. And then you’re less likely to be shocked and surprised and to make the big mistake of selling out at the wrong time or buying in at the wrong time.

Kevin Zywna, Wealthway Financial Advisors:  Yes, as this sort of market pullback has dragged on now we had the last market peak, I believe, January 4 of 2022. So, we are about 14 months past that previous market high and about 18% down from that market high as well. So, there’s a lot of people starting to maybe question what’s going on here and what they should do about it. So, hopefully, we can clear some of that up.

Investing Myth #1: The Stock Market Always Goes Up

Allison Dubreuil, Wealthway Financial Advisors:  So, we’ll just tackle a really basic myth, the stock market always goes up. And really I’ll say the myth could be called the stock market always blank. It does not always do anything. Always does not apply to the stock market. But you can understand what investing in the stock market actually is. And so you may understand better why it does what it does, when you’re investing in the market. If you’re investing in stocks, you’re investing in companies that produce goods, or provide services that are valuable to us as a society. And then as a result of that, they make a profit. You are investing in future profits of that company. And so, the stock market does not always go up. It does not permanently go down. Always is a word you should probably remove from your vocabulary, but it is going to fluctuate on a regular basis due to corporate earnings and a lot of other noise out there.

Kevin Zywna, Wealthway Financial Advisors:  Obviously on a day to day basis its schizophrenic. The market movements in the short term don’t make much sense and don’t have much significance to the actual valuations of the companies they represent. So, Allison said the key words generally speaking, the stock market is a forward looking mechanism that responds to the future problem profitability of the underlying companies and the shares of stock that are on the exchange. So, the more profitable a company is likely to be in the future, the more valuable its stock, the more its stocks price should rise in the future. And over time, you step back 10 plus years and take a look then yes, almost always a 10 year investment period. There is a rising stock market, but in that interim period of time there could be swift, hard, significant downturns that you have to endure if you want to enjoy the long run higher rates of return of eight, nine, 10% that you typically get out of equities.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, so 10% has been the long term average of the S&P 500. Well, you almost never earned 10%. In 2021 we were up 20%. Last year we were down 20%. It’s going to be all over the place.

Kevin Zywna, Wealthway Financial Advisors:  It was like a pyramid from start to finish from the beginning of ’21 to the end of ’22. And we’re right back where we started at the end of ’20.

Allison Dubreuil, Wealthway Financial Advisors:  We’re going to keep going through our list of investing myths and realities. What you need to understand about investing so that you can still sleep at night regardless of what is going on in the markets from day to day. So, we talked about the stock market. It does not always go up and it does not go down permanently. There’s no word “always” around the stock market.

Investing Reality #1: Stock Shareholders Earn Dividends When Companies Are Profitable

Next, we want to talk about what we mentioned when we were talking about what investing in the stock market is – actually investing in companies that produce goods and provide services and make a profit.

And so how that works is, when a company has a profit, they can distribute that to their investors, to their shareholders, as dividends. And you may think that dividends are so small, you get this little tiny deposit into your account every quarter or maybe at the end of the year. And you don’t even really notice it until tax time, and you have to pay the tax bill. But dividends are not to be ignored. They are a very important part of the investing piece and can make a big difference in your overall return depending on how you treat your dividends.

Kevin Zywna, Wealthway Financial Advisors:  Yes, so most mature companies, when they have excess profit, excess cash flow, the Board of Directors may declare a dividend which means that we have enough cash to fund our operations and future growth. Therefore, let’s reward our loyal shareholders and distribute some of the profit in the form of a dividend. And then whether you own shares of Company stock directly or through a mutual fund that owns the shares and you know could be hundreds of different companies that those dividends get then distributed to you. 

How To Use Stock Dividends

And then you have a choice. You can either take that money and spend it or use it for a different type of investment, or you can reinvest it into the same shares of the same company or same mutual fund or same exchange traded fund or same investment vehicle. I will say as a matter of investment practice for our clients, we always have the dividends reinvesting into same shares of the same investment that we use. And by so doing, we take maximum advantage of the compounding effects of stock, equities growth, as well as the dividends that the equities spinoff unless there is a unique circumstance with that client’s accounts so that we do have a few exceptions. There are always exceptions, we do have a couple of accounts that we purposely have the dividends paid out in cash. But for 98% of our client base, we have those dividends reinvested because that’s where you sort of turbocharge your long term investment returns.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, I saw this stat – that since 1945, dividend reinvestment has contributed to 33% of the overall return of the S&P 500. I mean, that’s significant.

Kevin Zywna, Wealthway Financial Advisors:  The typical dividend payout rate is usually about 2 to 4% of the value of the stock on the date that the dividend is declared and paid out. So, call it 3%. So, there was a period of time not too long ago, for 10 years, remember, when interest rates were almost zero. Remember, when you were getting almost zero in your bank savings account that the dividends from stocks were paying like three times as much as what you would earn in a bank account, and you have the future growth potential of the stock that you purchase. So, it was a great time there for a while from an investing standpoint, that from, let’s call it about 2010 through 2021, where we had excellent dividend growth and good stock appreciation over that time period. And that’s where a lot of the good money got made.

Allison Dubreuil, Wealthway Financial Advisors:  And there’s still power even in a market downturn, because there were stocks that still paid a dividend. And if you reinvested them, then you purchase shares on sale, at a discount.

Kevin Zywna, Wealthway Financial Advisors:  Right, excellent point, the best time to buy is when your stock is depressed in value, assuming all other financial characteristics are still intact. Its more market driven than fundamental driven. But yes, the best time to reinvest those dividends is in a declining market, the best time to add new money to your company retirement plan is when the market is declining, because you’re buying more shares at a lower price. And when the eventual market recovery comes, then you’re going to recover much faster and go much higher than everyone else.

Investing Myth #2: I Should Only Live Off Of My Dividends and Earned Interests In Retirement

Allison Dubreuil, Wealthway Financial Advisors:  On the flip side, if you are not in the saving phase, if you’re not accumulating and you are in the withdrawal phase, there is another myth we hear often that “I can only spend my income, my dividends and my interest. If I can just live off that then I’ll be fine.” And there’s nothing inherently wrong with doing that. But if you have done your financial planning properly, you don’t need to think about it. So, rigidly, right. So, if you have accumulated enough of a nest egg to retire and you remain invested for growth, and you keep reinvesting dividends and capital gains distributions, then you can actually live off of even more of your portfolio without fear of running out of money. Everyone hears the quote unquote, safe withdrawal rate. I’m using quote marks there. I mean, there’s no one size fits all, even though a lot of books and literature will say it’s 3% or it’s 4%. There’s really no one size fits all, but we can do in depth financial planning and look at what a safe withdrawal rate would be so that you’re not just limited to your dividends and your interest income.

Kevin Zywna, Wealthway Financial Advisors:  Yes, it’s an old, outdated, antiquated notion that you need to get income from your investments in order to have income to spend. There was a time that’s what people did when they retired. They took all their money from their retirement plan. They bought bank CD’s and lived off the interest, or they bought a high dividend reliable dividend paying stock like Johnson & Johnson or General Electric or something like that. And then whatever shares that could purchase or whatever size CD could purchase, that was the amount of interest in dividends that they would live off of. Well, like Alison was saying, you could have a much richer, fuller, more enjoyable lifestyle and enjoy more money with a different philosophical investing approach. It is possible to spend more than the income that your investments pay off if you invest properly, and you manage it properly as well.

Investing Myth #3: I Should Be Able To Withdraw 10% Per Year From My Stocks and Never Invade My Principal

Allison Dubreuil, Wealthway Financial Advisors:  Conversely, though, there’s a myth that if the stock market earns historically 10% per year, then realistically, I should be able to withdraw 10% per year and never invade my principal, and what could possibly go wrong?

Kevin Zywna, Wealthway Financial Advisors:  Yes, because everything could go wrong. Just because the stock market averages 10% does not mean it ever actually returns 10%. And there is a stat out there, which I can’t recall off the top of my head, but the S&P 500 has only returned like 10% or plus or minus one around that, like between 9-11, like three times over the last 100 years, or something like that. So, you can average 10 without ever actually getting 10.  And the problem with taking that high of a withdrawal rate is during times such as we’re in right now, in down periods, when you are taking too large of a percentage distribution from your investment portfolio during a market decline. It eats into a bigger chunk of the portfolio as it’s declining. And so when the eventual recovery comes, you have less principal and corpus there to recover with it. So, the distribution phase is more complex than the accumulation phase. So, that’s why a lot of times as people transition into retirement, and start to live off their savings, you can enjoy a good and healthy income from your investments above whatever interest and dividends they, your investments, throw off. But you have to do it thoughtfully. It is a relatively more sophisticated strategy. We have the financial tools and the experience where that’s exactly what we do with our clients.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, so just to sum it up, you don’t necessarily have to invest in all dividend paying stocks and be limited to dividend income. But we’re not necessarily going to be able to withdraw all of the earnings of your investments every year. You’re not going to have a 10% withdrawal rate because of the 10% long term average return. It is somewhere in-between there. The general rule of thumb that people use is 4 to 5%. But like any rule of thumb, that’s just general guidelines. We can put a much finer point on that for people that we do in depth planning for. Tonight. We are busting myths. Tonight, we’re talking about what exactly is the stock market – breaking it down. So, you understand we have talked about earnings, dividends, and withdrawal rates.

Investing Myth #4: I Can Time The Stock Market

The next big myth, we would be remiss if we did not address is – market timing. The myth exists. So, many people out there hold on to this shred of hope.

Kevin Zywna, Wealthway Financial Advisors:  They don’t think it’s a myth. They think it can be done. They just haven’t figured it out, found the right person to do it.

Allison Dubreuil, Wealthway Financial Advisors:  Yes. Well, anyway, they think market timing works to your point. I just got to find my guy. Right. There is a guy. Well, it’s not possible for anyone to consistently time the market. Some people can get lucky from time to time, and have a good pick, have a good run, but to consistently time the market, there is no perfect solution. And if there was, I would be on a beach somewhere right now.

Kevin Zywna, Wealthway Financial Advisors:  Somebody would have figured out the secret formula by now. But since no one has, we know for a fact that market timing, consistent marketing timing is impossible. And not only can it not be done, but it is ruinous to your long term financial health. Because what it does is it takes the odds of successful investing, and turns them against you. So, it turns it more akin to gambling, the shorter timeframe you make trading decisions buying and selling, whether it’s daily, weekly, or monthly, even sometimes annually. The sooner you make those trading decisions, the greater the probability is that you are going to be wrong, and that the outcome is going to go against you.

So, it’s like, it’s like in Vegas, you know, gamble it. So, it turns into gambling. Gambling is when the odds are not in your favor. But you participate in the game of chance anyway, in the hopes that you get lucky, that for a period of time that you’re in Vegas from Friday through Sunday, that you know the winds of fortune smile upon you, and you walk out with more cash than you went in. But the longer you stay in Vegas, the greater the probability is you’re going to walk out with a lot less money, and you probably’ d be happy if you still have the shirt on your back, because odds are in the favor of the house when you gamble. And that’s what you turn investing into. When you trade short term, trying to time the market.

You become an investor when the probability of success is in your favor. When the probability of a positive outcome is greater than a negative outcome, that you are going to have more money in the future than you have today. And you do that by being a goal focused, long term investor. And by long term, we typically are talking at least five years, closer to 10. But in all practicality, if you do it properly, you do your financial planning properly, you’re going to be an investor for over your entire lifetime. And that’s when you maximize the greatest gain from investment markets, is over a long period of time.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, historically, if you look at history, there are more positive days than negative days. There are more positive months than negative months, quarters years. So, the odds are in your favor if you can just stick to it long term. But you know there are going to be the pullbacks that was the first myth we busted was that it’s not going to be a straight line up. And so that’s where the financial planning is so important. Keeping your eye on the true goal of where you are from a financial perspective. And are you on the path that you want to be on? And how are you going to get there? And how are you going to plan for these temporary declines in the market. Not a complete loss in value, just a temporary loss in value.

Should You Invest Long-term In The Same Stocks Over The Entirety Of Your Lifetime?

Kevin Zywna, Wealthway Financial Advisors:  And I should expand on that. Being a long term investor does not necessarily mean you invest in the same thing over the entirety of your lifetime. It is entirely reasonable and proper, to occasionally make changes to the underlying investment in your portfolio. If certain circumstances change in your life, number one would be the most important reason. But also, if some of the fundamentals of the underlying investments, the companies themselves have changed to make it less desirable, because we know in a capitalist economy, there are always winners and losers. Investments in Sears and Roebuck in 1940 is a lot different than investing in Sears and Roebuck in 2023. So, some active management of the portfolio is reasonable and responsible. But at a high level and with a very low frequency.

Investing Myth #5: I Can Catch-Up On Retirement Savings

Allison Dubreuil, Wealthway Financial Advisors:  And we were talking about being an investor for long term, time is your friend when investing. There’s another myth that you know, well, I’ll get to that later. I can always catch up when it comes to saving for retirement. Retirements this big, unknown way out in the future time is your friend. It is really about time in the market, not timing the market. So, it’s never too late to start. We don’t want to discourage anyone from starting. But start as soon as possible, invest as soon as possible, and you will be richly rewarded.

Kevin Zywna, Wealthway Financial Advisors:  Yes, because it doesn’t take a lot of money to one day, have a lot of money – if you have a lot of time. And so if you’re relatively young in your 20s and 30s. That’s the time to start contributing to your company retirement plan, even if it’s $10 a paycheck or whatever. Getting started in the habit is the most important thing and try to increase the amount of the contribution to investment plan every time you get a pay increase or when life circumstances permit. So, you have a long time horizon. It doesn’t take a lot of money to ultimately have a lot of money, but you get to get after it.