The seven deadly sins, as described in Dante's epic poem The Divine Comedy, will send people on the down escalator to hell. Although Dante was no banker, the sins can provide general guideposts in the prudent management of bank investment portfolios. Here are some ways that those who manage a bank's bond portfolio can avoid falling into the financial inferno.
Pride. This can be defined as a banker's failure or refusal to seek help in managing the bank's investment portfolio when the portfolio gets complicated. The added complexities may be a result of the portfolio's size, the bank's changing interest rate risk exposure, liquidity risk, credit risk or other innumerable factors.
Envy. It's easy for bankers to fall into this trap when they see state and national reports listing bank metrics, including the occasional outsized returns on investment portfolios. They want that kind of return! But remember that higher yields tend to come at a cost. For example, some banks may go for longer-duration securities, which can result in such bonds going underwater when rates rise and thus expose the bank to interest rate risk and liquidity risk. Or the overall quality of their securities may be lower, resulting in a higher yield to compensate for the higher risk. Taking a long-term, holistic view of your bank's investment portfolio can help slay the green-eyed monster.
Wrath. Bankers can't let anger affect their judgment when making buy-sell decisions in banks' investment portfolios. Getting mad at chronically low interest rate levels or overly-burdensome bank regulations is no reason to make poor choices in your bank's investment portfolio.
Greed. Greed can cloud the judgment of even the most prudent banker. In challenging low-rate, low-loan demand times like these, bankers are tempted to reach for yield and/or step a few rungs down the quality ladder in order to juice investment portfolio returns. These moves can come back to haunt them when rates and loan demand rise. In the meantime, consider creating new sources of fee income such as offering wealth management, financial planning or investment advice to bank customers.
Sloth. Managing a bank investment portfolio does not benefit from the "set it and forget it" approach that can be useful in managing an individual's 401(k) plan. Banks must contend with interest rate risk, liquidity risk and a growing plethora of government regulations designed to minimize these and other dangers. As a result, laziness and procrastinating can get bankers in trouble with their banks' investment portfolios.
Gluttony. Like greed, gluttony is the father of many long-term investment failures. Focusing on the investment portfolio return to the exclusion of all else puts you on the road to ruin. Conversely, bankers should not park significant amounts of their capital in CDs or other very low-yielding securities for fear of rising rates when other options exist that can increase return while still adequately limiting risk. Exercising good judgment in the selection and monitoring of securities keeps gluttony at bay while ensuring your investment portfolio still has enough meat on its bones to help pull the bank's earnings wagon.
Lust. Ensure your investment portfolio's policy and goals are realistic and that they mesh with the loan portfolio so that you're not lusting after goals that are out of reach.
So, with a nod to Dante and Bruce W. Fraser, whose article "The Seven Deadly Sins of Retirement" inspired this post steer clear of these transgressions when managing your bank's investment portfolio and financial heaven can be within reach.
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