How to Protect Your Retirement Portfolio From a Banking Crisis

The US banking crisis has created a market sell-off. Know how safe your money is and protect your retirement portfolio by doing this.

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The second week of March started on a bearish note as many tech startups could not remove their deposits from the Silicon Valley Bank (SVB). SVB did not have sufficient liquidity to meet the withdrawal requests from its customers. Following one bank after another, three banks collapsed for the very same reason, a cash crunch. This triggered a sell-off in global bank stocks. Things moved fast, and by March 10, a California regulator took control of SVB.

Don’t let panic eat up your retirement portfolio. Relax, think, learn, understand your risk, and use hedges to protect your portfolio. 

How safe is your money? 

The US bank collapse has raised a question among Canadians, how safe is my money in the bank? 

While investors always face the institution’s credit risk, Canadians are well protected because of the stringent banking system. The Canada Deposit Insurance Corporation (CDIC) protects your deposits of up to $100,000 in the event the listed financial institution fails. The big six Canadian banks come under CDIC’s cover. 

The CDIC covers term deposits, checking and savings accounts, foreign currency accounts, and Guaranteed Investment Certificates (GICs), but not investment securities like stocks, bonds, ETFs, or mutual funds. However, Tax-Free Savings Accounts (TFSA) and registered retirement savings plans (RRSP) are covered. The $100,000 cover is for each of the above accounts. 

For instance, let’s say your portfolio is divided across three banks:

BankDepositsAmount depositedDeposit covered under CDIC
Toronto-Dominion BankSavings deposits$25,000$25,000
Toronto-Dominion BankRRSP$145,000$100,000
Bank of Nova ScotiaChecking account$5,000 $5,000 
Bank of Nova ScotiaGICs$32,000$32,000
Bank of MontrealTFSA$20,000$20,000
Bank of MontrealMutual Funds$18,000$0
What CDIC covers

The CDIC requires financial institutions to inform depositors if that deposit is not insured. 

How to protect your retirement portfolio from a banking crisis 

In the 2008 financial crisis, many investors lost a significant amount of their retirement portfolio because they panic-sold stocks, bonds, and mutual funds. A recession is psychological and breeds fear of losing money. And panic brings your fears to reality. If you are retiring this year, do not withdraw from your value stock investments. 

  • If possible, delay your retirement by a year or two. 
  • If you have income-generating securities like interest-paying bonds and dividend stocks, use the passive income from such securities to meet your daily expenses. 
  • Add more gold stocks to your portfolio before they surge more than 50%. 

One stock to protect your retirement portfolio from a market dip

Canada’s largest gold miner Barrick Gold’s (TSX:ABX) stock price moves in tandem with the gold price. Historical data shows that gold prices rise exorbitantly in a recession. The deeper the recession, the higher the jump in the gold price. Barrick Gold’s stock price zoomed 75% in less than two months after the March 2020 slump and 211% in eight months after the 2015 oil crisis slump. 

The 2023 recession is a fallout of the tech and crypto bubble burst, high inflation, and rising interest rates drying up liquidity in the market. In the 2008 crisis, Barrick Gold stock doubled in two years. You can invest in the stock now and sell in four tranches in the following manner. 

Barrick Gold SharesSelling PriceMoney Received
How to make money from Barrick Gold stock in a recession

Suppose you invest $2,000 in Barrick Gold for $24/share and buy 80-plus shares. The stock surges 130% throughout the recession, and you sell 20 shares in each of four sales at the above prices. You will cash in $3,680 from this investment. Why sell the stock in tranches and not in bulk? 

Gold stocks rise only for a short period. A 130% jump is an estimate that may or may not come true. Thus, not leaving the profit to chance, you sell the stock in a phased manner and are still in the money even if the stock jumps 80% or 100% and then falls. 

The diversification lesson 

Diversify your portfolio across stocks, deposits, and ETFs, and in different accounts like a TFSA or RRSP. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Bank of Nova Scotia. The Motley Fool has a disclosure policy.

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