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Quarterly Client Newsletter

Bank Insolvencies and Your Investments

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Client Newsletter    Volume XXVIII   Number 4   May 1, 2023

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Bank Insolvencies and Your Investments

Almost all of us use banks, generally national banks, to process payments for us, and, occasionally, for conservative investments (e.g. certificates of deposit, CDs).  Earlier this year, a bank in California, Silicon Valley Bank (“SVB”) was closed by the federal regulators who supervise national bank operations.  

Vanguard sent out an article about the situation.  Here are part of the answers to two questions posted in that article:

“How is the rest of the banking sector impacted by this?

We will continue to monitor this evolving situation closely. However, we do not believe there is any financial system risk because of the SVB failure, given that it has very limited investment connections to other banks. Most U.S. banks do not face the same liquidity pressure as SVB, nor are most banks’ depositor bases as concentrated into narrow, interest-rate-sensitive sectors.

The Federal Reserve announced on March 12, 2023 that it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit for the economy.

Should I consider adjusting my portfolio?

Vanguard believes you should continue to work with your financial advisor and focus on the things that you can control, such as having clear, appropriate investment goals, developing a suitable asset allocation using broadly diversified funds, minimizing investment costs, and maintaining perspective and long-term discipline.

Financial markets are driven by thousands of highly experienced investment professionals, such as sophisticated traders…who are focused on future market expectations and the news cycle 24 hours/7 days a week.

When there is breaking news about the economy or financial markets, it tends to be priced into the market right away, considering the open market valuation of each company, sector, and asset class, as well as the future expectations for the company, sector, and asset class.

Trading based on breaking news—be it within five minutes or five hours after the news comes out—is likely not a recipe for success.

Life events, not market movement or news, should drive your strategic, long-term, asset allocation strategy. That strategy should be based on your time horizon, risk tolerance, and financial goals—not swayed by news that has already been priced into the markets.”

Smartt comment: I don’t generally recommend having anywhere close to $250,000 in a bank account or in an series of CDs. This is the limit for FDIC insurance. Above that limit, if one needs to invest more in bank assets, one should consider using more than one bank.

Note too that our money market accounts at TDAmeritrade, our custodian, are also guaranteed to the same limit by the FDIC.

What are YOUR and MY Asset Allocations?

Each of us has a different ability to live with uncertainty (risk) and so our investments will be different:

As of March 31, 2023 Clients John Smartt
Money Market Funds 1.5% 0.6%
Bond Funds 26.7 15.7
Stock Funds 71.8 83.7
Totals 100.0% 100.0%


Remember each of us has different goals and needs, and our asset allocation should fit us and our family.

If you have questions about your asset allocation, or your retirement plan investments, I’d be pleased to assist.

Vanguard Rates of Return (through Latest Quarter End)

Performance percentages are per Morningstar.  Amounts in parentheses are percentile rankings.

(1= best and 100= worst) within category.

Periods ended March 31, 2023 Yr.-to-date 5 Years 10 Years

Total Stock Market Index Admiral 7.2% (36) 10.4% (45) 11.7% (33)
Tax-Managed Capital Appreciation Admiral 7.6% (22) 10.9% (28) 12.2% (12)
Tax-Managed Small Capitalization 2.5% (71) 6.3% (41) 9.8% (4)
REIT Index Admiral 1.8% (70) 5.8% (45) 5.8% (43)
Total Int’l Stock Index Admiral 6.7% (80) 2.5% (60) 4.4% (64)
Balanced Index Admiral 5.6% (16) 6.8% (18) 7.7% (14)
Total Bond Market Index Admiral 3.2% (43) 0.9% (34) 1.3% (36)
Int.-Term Invstmt.-Grade Bond Admiral 3.8% (31) 1.8% (28) 2.1% (56)
High–Yield Corporate Bond 3.2% (55) 3.2% (23)


3.8% (23)


For comparison, here are several stock and bond benchmarks:
Periods ended March 31, 2023 Yr.-to-date 5 Years 10 Years

S & P 500 (large stocks)

7.5% 11.2% 12.2%

Russell 2000 (small stocks)

MSCI World Index







Bloomberg US Aggregate Bond Index 3.0% 0.9% 1.4%
ICE BofA US High Yield Master TR
(bond index)
3.7% 3.1% 4.0%

Vanguard mutual funds and ETFs (exchange-traded funds) continue to perform as expected.  I expect each Vanguard fund or ETF, for each ten-year period to be in the top 1/3 before taxes based on low cost, and they ought to be in the top 1/4 (stock funds) after income taxes.

The Vanguard High Yield Corporate Bond fund takes significantly less risk that the average “high yield” (also known as “junk bond”) fund.  The Vanguard fund, which takes less risk, continues to rank highly in the rankings over the last ten-year period. Over the last ten years, the Vanguard fund has captured most of the excess of junk bond returns over good quality bond returns—meeting my expectation.  I continue to believe that, for tax-deferred accounts, this fund is a reasonable, additional diversification and comprises some of my personal bond holdings.

If you have questions about your investment asset allocation, please contact me.

Jack Bogle Was Not Entirely Wrong About ETFs:

From an Apple News article of the same name by John Rekenthaler of Morningstar (the leading mutual fund data reporting service):

“Jack Bogle [Vanguard’s founder], infamously, detested exchange-traded funds. In 2012, for example, he thundered that ETFs were ‘what happens when you have marketing people instead of investment fiduciaries running money. The ETF is the magic word of the day, the greatest marketing innovation of the 21st century [Hey, he was on a roll.] They are absolutely speculation, and they have hurt a lot of people.’

I write ‘infamously,’ because even those who typically agreed with Bogle shunned his attack on ETFs. Vanguard itself had no such qualms about the new fund structure, launching its first exchange-traded shares in 2001. The firm has since become the industry’s second-largest ETF provider, slightly trailing IShares. Nor were any other index-fund proponents fazed by the invention. The marketplace concurs that Bogle was wrong. Last year U.S. ETFs received $600 billion of new new assets, while conventional mutual fund endured almost $1 trillion in net redemptions. As my colleague Syl Flood reminds me, that latter figure can be interpreted positively, as it includes withdrawals from retirees who profited massively from their mutual fund accounts over the years. Still, there’s no doubt that ETFs have become the nation’s investment of choice.

Bogle’s error was understandable. When ETFs were launched, promoters touted their liquidity. Unlike mutual funds, which price daily, after the markets close, ETFs can be constantly traded, as with individual stocks. Bogle countered that this benefit was merely putative. Nothing good happens after 2 a.m., or with fund transactions made by those who can’t wait until the day’s end.

True enough. What Bogle missed, however, was that retail investors would refuse the bait. Most investors bought ETFs not for their liquidity (or transparency, another ETF feature that received early attention), but for their convenience and tax efficiency. ETFs could be purchased from any brokerage firm, as opposed to only those that had relationships with the fund sponsor, and they made even fewer capital gains distributions than did indexed mutual funds.

Risky Businesses

But Bogle was correct in his secondary attack on ETFs: Their taste for high volatility strategies. In the same interview [which began this column], Bogle also criticized ETFs’ investment strategies which, he argued, provoked shareholders’ baser instincts. By indexing specific segments of the stock market, or even—God forbid—owning commodities, ETFs tempted investors to speculate.

The attraction of specialized ETFs is obvious. When the sun shines, they can make a whole lot of hay. In 2022 the best performing U.S. funds, headed by the suitable esoterically names MicroSectors U.S. Big Oil Leveragd Exchange-Traded Note NRGU, were all either ETFs or their relatives, exchange traded notes…

Going to Zero

Such highly volatile funds pose two problems. One is that shareholders use them badly. They buy high, sell low. Consequently, specialized funds consistently record poor investor returns…

The other is that performance does not always revert to the mean [e.g. gains and losses do not tend to average out in the long-run]. Sometimes—especially with leveraged funds—returns keep spiraling downward until they descend too far to ever recover. Since 1980, 78 funds have posted cumulative total returns of less than negative 99%. (Yes, really.) Most of them have been ETFs. Indeed, 1% of all ETFs that ever existed have suffered that fate. Ouch!


There’s no question that ETFs are a happy invention. They have assisted in the index fund revolution, which has benefited investors (although not fund companies) by reducing costs, minimizing taxable distributions, and encouraging shareholder patience. Most ETF owners use their investment appropriately.

That said, ETFs also qualify for a less prestigious honor: the home of the industry’s riskiest funds. Mutual funds occasionally hit walls that ETFs cannot, by owning, private-placement securities that are off limits to ETFs (because of their pricing mechanisms). In general, though, speculators prefer ETFs, as Bogle feared. Fortunately, there also [have] been far fewer speculators than he anticipated. In this case, he surely would be pleased by his mistake.”