The poor risk management at Silicon Valley Bank is stunning. But what went wrong is actually pretty common. There is often confusion about what makes a safe asset versus a risky one, and guessing wrong is often at the core of financial blow-ups. Safe assets, as we properly define them, are the backbone of financial markets; they are how we price and measure risk.
But knowing what makes an asset safe is not always so simple, and it will differ based on circumstances. Odds are you have the wrong safe asset in your retirement portfolio right now.
We tend to think of government bonds as safe. They are liquid, meaning you can sell them pretty easily and quickly. Debt-ceiling theatrics aside, it’s a safe bet the US government won’t default on them. This is why bank regulation considers these assets to be low-risk. But depending on your financial situation, not all bonds — even US government ones — will be safe.
