Traders,

The collapse of crypto bank Silvergate provides a lesson on diversification.

Let me give you four round numbers: -42%, -8%, -4%, -2%

The first is how far SilverGate (SI) shares fell on Thursday. The second is how far the regional bank ETF (KRE) fell. The third is how far the financial sector ETF (XLF) fell. And the fourth is how far the S&P 500 (SPY) fell.

What does this teach us?  

Buying an individual company is the least diversified. It carries the highest potential reward, yes, but also the largest risk. Purchasing an industry ETF like KRE is slightly more diversified but still super sensitive to a single industry’s fate. Acquire a sector ETF like XLF, and you get diversification outside of a single industry, but you’re still banking on the entire financial sector. Finally, buy the S&P 500, and you’re getting ultimate diversification – a piece of every industry and sector.

Thursday was brutal for everyone, but the pain of the blow was proportional to your portfolio diversification.

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Chart of the Day: SVB Financial Group (SIVB)

There’s never one cockroach. Silvergate was the first domino to fall. Wall Street fears SIVB is next. Its share price is trading down another 60%, and shares are halted.

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