Baylor Finance Expert Offers Advice on Surviving Economic Changes
High-profile banks failed because they concentrated on high-risk industries, which greatly increased their vulnerability. So how should investors react to the catastrophic headlines?
WACO, Texas (March 21, 2023) – The banking industry was rocked this month by the second and third largest bank failures in U.S. history, beginning with the collapse of Silicon Valley Bank 48 hours after announcing a loss from the sale of US Treasury bonds, quickly followed by the closure of Signature Bank. The financial “contagion” spread to regional lenders Silvergate Bank and First Republic Bank and most recently Swiss investment bank Credit Suisse, which was bought by UBS to save the institution from rapidly falling stock prices.
Erik Davidson, DBA., clinical assistant professor of finance at Baylor University’s Hankamer School of Business, said both Silicon Valley Bank and Signature had billions of dollars in assets, but both were highly concentrated on high-risk industries, which increased their vulnerability. So how should investors react to the catastrophic headlines?
Throughout his 35-year career in financial services, including his role as chief investment officer for Wells Fargo Private Bank, Davidson has witnessed the ups and downs of the economy and provides some advice to average investors on how to ride this current wave of financial uncertainty.
Simple but not easy
“The banking business is very simple, but it’s not easy,” Davidson said.
As the financial institutions work to correct course to prevent further failures, it is important for average investors to keep steady.
“It is easy to be an alarmist, but over the long run, optimists win.”
Diversify, diversify, diversify
Investing starts with having a well-diversified financial strategy. Davidson compares developing a strong portfolio to choosing tires. All-weather tires are the best way to be prepared for ever changing weather conditions.
“You don’t know what the weather will be. You must be ready for all of it,” Davidson said.
This “be prepared” strategy works for developing a resilient investment portfolio. Don’t exclusively focus on one sector but include investments that can withstand different economic conditions.
Focus on the end goal
According to Davidson, it is easy to get fixated on day-to-day market movements. The economy is always fluctuating, so it’s important that investors don’t get caught up in the excitement of a bull market or the panic of bear market and steer them off course from their long-term goals.
Control your emotions
Finally, don’t overreact when the economic landscape becomes volatile. Despite feeling powerless against the actions of the banking industry, you do have some control.
“We have control over our own emotions,” Davidson said. “If we can control our emotions, that’s a game changer.”
Ultimately, investing is not for the faint of heart. It takes patience, focus and an overall understanding the investing will always have its ups and downs.
“People who believe in the future – who invest for the future – who see the future, win. Pessimists lose.”
ABOUT ERIK H. DAVIDSON
Erik Davidson, DBA., CFA, CTFA, is a clinical assistant professor of finance at Baylor University. Additionally, he serves as the chief economic advisor for Inspire Investing as well as an instructor and curriculum consultant for the American Bankers Association and provides consulting services on wealth and investment management and behavioral finance matters.
Davidson’s academic research and much of his teaching has focused on topics in the growing field of behavioral finance. His doctoral dissertation was “Investment Choice Architecture in the Age of Robo-Advisors.” He has authored two books and numerous investment-related articles, presented at hundreds of investor events and has been a regularly featured commentator in the media, including television (CNBC, Bloomberg, Fox Business and others), radio and podcast (Bloomberg, Wharton Business and others), and print (Wall Street Journal, New York Times, Barron’s, Bloomberg, Reuters, Associated Pres and others).
Prior to embarking on his second career in academia, Davidson had a 35-year career in financial services. In 2019, he retired from Wells Fargo Private Bank as chief investment officer, where he led an investment team of more than 400 professionals who managed more than $200 billion. Prior to Wells Fargo, Davidson was the co-Founder and co-CEO of Separate Account Solutions Inc., a fintech company that provided separately managed account tools and operational services to investment firms. Earlier in his career, he led the portfolio management team for Franklin Templeton Private Client Services and was a bond trading manager for Credit Suisse First Boston in both New York City and Tokyo. Davidson is a Mensa member, an Eagle Scout, a foster care provider and an active volunteer in his local church and community.
ABOUT BAYLOR UNIVERSITY
Baylor University is a private Christian University and a nationally ranked Research 1 institution. The University provides a vibrant campus community for more than 20,000 students by blending interdisciplinary research with an international reputation for educational excellence and a faculty commitment to teaching and scholarship. Chartered in 1845 by the Republic of Texas through the efforts of Baptist pioneers, Baylor is the oldest continually operating University in Texas. Located in Waco, Baylor welcomes students from all 50 states and more than 100 countries to study a broad range of degrees among its 12 nationally recognized academic divisions.
ABOUT THE HANKAMER SCHOOL OF BUSINESS
Baylor University’s Hankamer School of Business strives to further God’s kingdom through the realm of business, using God-given gifts and academic talents to do so. Faculty and students conduct purposeful research and participate in experiential learning opportunities, all while operating in a Christ-centered mission. Undergraduate students can choose from 13 major areas of study. Graduate students can earn their MBA on their terms, either through the full-time, online or a Dallas-based executive program. The Business School also offers three Ph.D. programs in Information Systems, Entrepreneurship or Health Services Research. The School’s top-ranked programs make up approximately 25% of the University’s total enrollment. Visit the Hankamer School of Business website for more information.