“Held-to-maturity” is a phrase that has been thrown around a lot in the days following Silicon Valley Bank’s implosion. Here’s what it means, why it matters, and how you might avoid SVB‘sVB fatal mistakes in your own personal financial planning.

SVB received an enormous amount of deposits from enterprising venture capital firms in the post-pandemic boom of late 2020 through 2021. At the time, the Fed Funds rate was a lofty zilch, zero, nada. So, in order to earn something—anything—SVB invested in high(ish)-quality debt instruments with longer maturities, like mortgage-backed securities, and placed them in their “held-to-maturity” book of investments.

They knew that if interest rates rose, those debt securities would lose value on paper, but if they waited for them to mature, they should still receive a return of their principal and some interest along the way. But, as the Fed raised rates, SVB’s banking customers—mostly large institutions—started to demand their money back, forcing the bank to take meaningful losses in those “held-to-maturity” instruments well before their maturity.

As losses compounded and withdrawals accelerated to an It’s A Wonderful Life pace, the collective freak out resulted in a straight-up failure of the bank before you could even finish filling out your March Madness bracket for the office pool.

The fundamental failure here was that Silicon Valley Bank misaligned its assets and liabilities with its timeframes. They invested for the long term with money that might be needed in the short term, and the end result was a high-profile failure.

While your personal financial situation might not be as likely to garner national headlines, it could be much more painful for you if your investments and your timelines are mismatched.

For example, most investors know that stocks are long-term investments, unsuitable for money that you might need in the immediate term. In fact, it’s reasonable to suggest that money you need to access within the next five, or maybe even 10, years shouldn’t be invested in the stock market.

Fewer investors are aware that bonds can also lose money. Or, at least, many weren’t aware until looking at their 2022 year-end investment statements, when the average, run-of-the-mill bond holdings posted double-digit losses. Sure, it’s less likely with diversified bonds than it is with stocks that you’d run into a decade-long slide, but especially in retirement—when portfolio losses can be compounded by income distributions—the risk of mismatching your investments with your goals is very real.

Yet, what are the instruments that comprise most portfolios designed to create income for retirees? Stocks and bonds.

And what has been the financial industry’s predominant response to this dilemma? Trust us; it’ll all work out.

And indeed, it may. Statistically speaking, a standard 60/40 portfolio is likely to survive a host of market scenarios, assuming a reasonable withdrawal rate of – say – 4% or 5%. But statistics don’t put food on the table, and anything is possible, especially if retirees’ lack of confidence in the direst of times results in a personal run on the portfolio—moving to cash and missing out on the next market move upward.

That’s why some propose a more creative approach that translates portfolio construction into more real-life language and matches investment objectives with the appropriate timeframes.

For example, one could argue that there are really only four different things you can do with your money:

You can 1) grow it for the future; 2) protect it in the case of emergencies; 3) give it to heirs, causes, or the tax man; or, perhaps most importantly, 4) you can use it to live off of through the creation of income.

And while it may be possible for a single, diversified portfolio of stocks and bonds to be deployed in pursuit of all of these, it may be optimal to have dedicated strategies for each of these four spending categories, each with its own appropriate risk exposure and time horizon.

“Portfolios have historically been designed more for portfolio managers than for the consumers who are invested,” says Tony Welch, Chief Investment Officer for the Atlanta-based wealth management firm, SignatureFD. “The industry has focused so much on risk-adjusted return that we’ve neglected the anxiety-adjusted return.”

Indeed, no matter how well conceived a portfolio may be conceptually, if an investor bails at the worst time, all the effort is for naught. Welch further explained that when he talks to real people about portfolio construction that focuses as much on their well-being as their wealth, “You sense this overwhelming exhale, and you realize that their chances of sticking with the strategy are likely to be much higher.”

This practice blends the mathematics of investment theory with behavioral finance, and the notion of “bucketing” investment dollars to address more specific investor needs is called “mental accounting.” For example, let’s look at just two of the above objectives and how a strategy like this might be applied: Live and grow.

Because of the volatility inherent in stock investing, an investor who is in retirement might wisely set aside up to 10 years of income generation in a “live” bucket, invested conservatively enough that it would inspire abject boredom. Depending on the client’s risk tolerance and situation, it could be populated by short-term Treasuries, FDIC-insured certificates of deposit, or even fixed or indexed annuities with principal protection.

The objective of this purposeful portfolio might even be to spend down principal [gasp], but that’s ok because it frees the investor up to be even more aggressive with his or her “grow” portfolio, knowing that it doesn’t need to be touched for at least a decade.

With a simple strategy like this, an investor is more likely to ignore the headlines screaming about the next financial crisis, pandemic scare, or bank debacle, relying on their unsexy live portfolio for all their income needs instead in the present.

The challenge for heady portfolio managers and well-intentioned financial advisors is that they may want to create beautifully constructed portfolios to maximize the risk-adjusted rate of return. But they don’t hand out Oscars for portfolios.

Ironically, the best portfolio isn’t necessarily even the one with the highest rate of return, but the one that an investor can better understand and stick with. Therefore, we must consider applying behavioral science in portfolio construction as much as the science of investing to ensure the best possible outcome for investors.

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