A Potential Pay Raise

With all the talk lately about the negatives associated with inflation I knew eventually folks would start asking about something positive, such as a potential bump to Social Security benefits. Inflation can’t be all bad, right?

As you may be aware, Social Security benefits are eligible for a cost-of-living adjustment (or COLA) every year based on how inflation looks during the third quarter compared with the third quarter of the prior year. If it’s positive, even by a small amount, Social Security checks get an equivalent bump during the next year. Fortunately, if it’s negative, or deflationary, there’s no reduction in benefits. In recent years the increases have been small, maybe 1-2%. Last year it was 1.3%. And in some years, such as 2009, 2010, and again in 2015, there wasn’t a COLA because there wasn’t any inflation, or at least not quarter-over-quarter.

This year is poised to be different, however. Inflation through July was running at 5.4%, much higher than typical. And this flare up of inflation is expected to linger for a little while, perhaps through September. Average inflation during the third quarter of 2020 was about 1.25%, so the spread over that should be the approximate COLA for next year’s payments. Maybe 4% or more? It’s anyone’s guess at this point and we’ll find out this Fall. Whatever the number ends up being, Social Security beneficiaries are looking at an increase not seen since 2008 (when the COLA was 5.8%) or perhaps even longer. This is a good thing for retirees who have been getting absolutely hammered for years by low interest rates on income-producing investments like bonds and CDs. Every little bit helps in the fight to at least keep pace with inflation.

But does this mean you should rush to file early at age 62 to capitalize on this potential pay raise? The short answer is no, but the slightly longer answer is addressed in the article linked to below from Mary Beth Franklin, a noted expert on all-things Social Security (there are some annoying videos and pop-ups on the Investment News site, but I think the information is helpful nonetheless). Beyond that, stay tuned to inflation numbers in the weeks ahead. I’m not suggesting you root for inflation, of course, but those on Social Security can perhaps ironically expect some relief from it, because of it.

https://www.investmentnews.com/how-cola-affects-social-security-benefits-209981?NLID=IN-Daily-Pulse&NL_issueDate=20210810&utm_source=IN-Daily-Pulse-20210810&utm_medium=email&utm_campaign=investmentnews&utm_visit=486643&msdynttrid=0s4JJxHAE4W8W3z6DlLPU1r8ZMlTGN_-p1lpkqJSsFg

Have questions? Ask me. I can help.

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What to do About Bitcoin?

Maybe bitcoin grows up to rule the world someday. Possible but unlikely. Whatever its future, it’s not going away, so the question is what to do about it. Should you own bitcoin? If so, why? FOMO is a real and powerful force and is also not a good enough reason. There needs to be more.

As I mentioned some time back, I’ve been delving deeper into the emerging digital assets space trying to answer these questions. My research led to some interesting and novel places, including to a new certificate program for planners like me. The program brought together information surrounding blockchain technology, bitcoin and the various other digital assets, as well as the evolving regulatory and tax landscape.

After many hours of reading, watching, discussing, and pondering, I’ve gotten comfortable with how to think about the fundamental question of what to do about digital assets, and bitcoin specifically.

The bottom line is that, yes, most people should consider investing in bitcoin. And there’s no reason to rush or to wait, so interested folks should start soon.

You’ll note that I’m italicizing “most” and “should” because not everyone needs this kind of exposure. Digital assets are an emerging investment category with major upside potential but also tons of risk. Frankly, if you’re investing for retirement (or are currently retired) and want to keep things simpler but get more growth potential, an argument can be made for just increasing your exposure to traditional stock investments. At least these cannot go to zero if you’re well-diversified, whereas bitcoin absolutely can. But a variety of research indicates that adding a relatively small amount of bitcoin can increase your return potential while also decreasing your portfolio risk. (I’m including a link below to a paper from the CFA Institute that details this.)

From my perspective, the combination of those two forces (growth potential and risk reduction) should be the main goal here. In other words, buying bitcoin to “get rich” shouldn’t be your only reason. Yes, there can be lots of reasons why people say they buy bitcoin and other digital assets, but it’s best to be reasonable about your goals when considering adding something new to your portfolio. There hasn’t been anything new like this since the creation of exchange traded funds almost 30 years ago, so let’s just agree to be careful.

Along those lines, it’s important to discuss some of the details about how you’d go about getting this done.

There are lots of different ways to add bitcoin, or at least something like it, to your portfolio. You can buy common stock in companies that mine it, such as Riot Blockchain. Some see this as an easy way to get exposure to bitcoin, albeit indirectly, since you can buy within your current investment account. There are also public and private funds that buy these types of stocks, and sometimes even bitcoin itself, for you. But at this point there isn’t something straightforward like an ETF (such as from Vanguard or Schwab) that holds bitcoin. There’s one up in Canada but not yet here. Should that change, and it very well could sometime soon, this would be a viable option assuming it’s structured the right way.

Until then, if you’re going to do this at all you should simply own bitcoin directly and not overcomplicate your life with the added fees and complexity of owning shares of a fund.

You’ll want to consider what role bitcoin will have in your financial life. Is it something you’ll want to see in the portfolio reports you get from someone like me, with all the transparency and tracking that comes with it? Or do you want to keep it off grid, so to speak? If the latter, you’ll want to research what’s referred to as cold storage (the link below is a good place to start), where you keep your digital assets offline. Otherwise, we’ll assume the online route for the rest of this post. Online, by the way, is how I suggest you hold your bitcoin. It’s simpler and less risky.

You’ll then need to decide which firm to use to buy and hold your bitcoin. Major brokerages like Schwab and TD Ameritrade don’t/can’t hold your bitcoin for a variety of reasons, so you’ll need to open an account with a firm like Coinbase. They’re publicly traded and the largest digital asset exchange in the country. Another provider is Swan Bitcoin.

(A quick aside here just to confirm that I receive $0 from these companies. There are others to choose from as well, but these are two that I’ve researched and use personally.)

Next, you’ll need to decide how much to buy. My suggestion is to start slowly and have reasonable assumptions. Again, the best reasons to own bitcoin have to do with growth potential and adding diversification to your portfolio. You don’t need a lot of bitcoin to do this, perhaps 2-3% of your allocation is sufficient.

The price of bitcoin is extremely volatile, dropping from a high of almost $65,000 per coin in April to about $30,000 last month. Now it’s back in the high-$30,000’s. That kind of volatility is perfect for incremental purchases, something called dollar cost averaging. Consider getting to your 2-3% goal that way. Take your time. You can link to your bank account for automatic funding as well. Pretty simple.

Once you’ve set this up a key question is how you’ll keep track of it. If I’m managing your investments, I’ll use my tech to link your Coinbase account to your existing portfolio. That way your bitcoin will show up in your reports, we can track performance, and I can drive the rebalancing process. If you’re an hourly client, you’ll need to do this on your own with my help if needed.

In either case it’s important to remember that the IRS and others will also be keeping track. It used to be possible to skirt the system and avoid paying taxes on bitcoin gains, but the authorities here and abroad are now paying closer attention to digital asset transactions. This is ultimately a good thing and will help bitcoin continue to mature.

That leads me to my final thought for today. Governments around the world, ours included, and a wide variety of companies, are leveraging the power of blockchain technology to build their own digital currencies that will likely steal that role from bitcoin. The latter is simply too volatile and too slow to be workable as an everyday payment system. But that’s not a bad thing, by the way. Bitcoin can continue to evolve as a viable store of value and be useful in portfolio design, making it more like gold but with greater long-term potential.

Here’s the link to the CFA Institute’s paper:

https://www.cfainstitute.org/-/media/documents/article/rf-brief/rfbr-cryptoassets.ashx

Some information on cold storage if you want to go that route:

https://www.bitcoin.com/get-started/setting-up-your-own-cold-storage-bitcoin-wallet/

Have questions? Ask me. I can help.

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Quarterly Update

Market performance was solid during the second quarter (Q2) of 2021. US stocks completed their 5th quarter in a row of 5+% returns and even the bond market staged a bit of a comeback after lagging during the first quarter. The economy continued to rebound from the pandemic and Q2 ended with just about all states being fully open for business. Concern grew during the quarter, however, about high stock market valuations, a spike in inflation, and how long the recovery boom might last.

Here’s a roundup of how major markets performed during the second quarter and year-to-date, respectively:

  • US Large Cap Stocks: up 8.4%, up 15.3%
  • US Small Cap Stocks: up 4%, up 17.4%
  • US Core Bonds: up 1.9%, down 1.8%
  • Developed Foreign Markets: up 5.4%, up 9.6%
  • Emerging Markets: up 3.8%, up 7.2%

The stock market performed well during Q2 without much drama. There was a brief pullback of about 4% for the S&P 500 in May, but otherwise stocks mostly moved higher. All sectors were positive except for Utilities which was down only half a percent. Top performing sectors were Technology and Communication Services, up 11.4% and 10.9%, respectively. Energy was also up 10.6% during Q2, mostly driven by rising oil prices. The sector was also the best performer year-to-date, up 45%. As has been the trend for some months, the worst-performing sectors of last year turned out to be the best during Q2 and year-to-date. Small company stocks, which performed horribly for much of early-2020, have outperformed so far this year. And the US continued to outperform foreign markets, but the latter picked up some slack and crossed an important technical threshold as Q2 ended, potentially indicating stronger performance to come.

As most of our economy reopened millions of consumers rushed to spend what’s reported to be an abundance of cash. This, coupled with vast pandemic-driven supply chain issues, created a surge of inflation during April and May. According to the Bureau of Labor Statistics, the Consumer Price Index hit an annualized 5% in May after an extended period of less than half that. With inflation concerns mounting, the Fed reassured investors that this was expected coming out of the pandemic and shouldn’t be a problem. The messaging didn’t appease investors and led to the modest downward move for stocks alluded to previously.

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Realizing Gains

It’s been said that the decision to sell is far harder than the decision to buy. This is true and makes all the sense in the world if you consider investing from a purely psychological perspective.

Think about it this way. Investing seems analytical but for most people tends to be highly emotional. Deciding to buy might make you nervous, anxious, maybe even a bit queasy, but it’s ultimately an optimistic act. Being optimistic feels good and typically comes at a time when others are optimistic and buying too, so it’s also easy to feel validated. In short, buying is usually a positive experience once you’ve made the decision.

Selling is ideally the opposite and that’s a big part of why it’s so hard. If you’re doing it right, or at least with any kind of discipline, you’re trimming back investments that are growing well, maybe even market darlings that have been generating big returns. You can get attached to these investments and start resetting your expectations. Think about what ABC stock can do in another year or two? How could I even contemplate of selling? Maybe I should buy more?

This kind of thinking can lead folks to load up on one or a few stocks, often bought at ever-higher prices. Then when markets turn as they always do because they’re cyclical, these same investors often won’t sell, preferring to ride it out and hope for the best. Yes, they could get lucky and be paid for their persistence, but the opposite is also possible. Which do you think is more likely?

Instead of guessing, try to never let things get that far. Traditional asset allocation and rebalancing is pretty boring, but it works well over time because it’s a process to follow that mostly bypasses the problems posed by investor psychology. An optimal mix is created, target weightings are set for each investment, and they’re allowed to float a bit around those weightings. Then the investments are trimmed as they grow too much or added to if they don’t. Investments are swapped out as needed but this isn’t often. Again, boring but effective.

But how do we make the rebalancing part of the process appealing so more people can break the yoke of investor psychology? We can start by trying to make gains real. This is a play on the tax-term of realizing gains, when you switch from paper profits to something that’s taxable. I’ve always been enamored with the term, as only a financial planner can be, because of how it helps make the process more accessible. In other words, realizing gains and giving them a purpose beyond mechanistic rebalancing; making the intangible more tangible.

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What is Money?

I hope you and yours are out there enjoying summer. As I’ve done in recent years, I’m taking a short break from writing my weekly blog posts to enjoy some extra time with family and friends. I’ll still be hard at work otherwise, so let me know how I can help.

In the meantime, amid all the discussions lately about inflation and the value of the dollar, here are two links to articles worth reading. Both, in their own way, get to the core concepts of what money is, why it is, and how we think about it in the modern era.

What is money if we can't (or simply don't) touch it. The first article looks at the psychology of personal spending as it relates to cash versus cards, e-payments, crypto, and so forth. 

https://www.wsj.com/articles/when-money-is-no-object-11625839202?mod=wsjhp_columnists_pos2

The second article summarizes an interview with Stephanie Kelton, an econ professor and key purveyor of Modern Monetary Theory. I did a short review of her work on the subject some months back and talked about how MMT would keep working it’s way into the national conversation about our debt and deficit. Some say the issue with MMT is that it lets the Feds perpetually overspend, but that’s an oversimplification. Check out the interview and consider doing some research on your own via the all-knowing Google. It's an important topic as we consider how to think about inflation amid massive amounts of government spending. 

https://www.advisorperspectives.com/articles/2021/06/04/stephanie-kelton-biden-has-adopted-mmt

Have questions? Ask me. I can help.

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The Trend is Your Friend

Now that summer is shifting into gear it’s great to see so many people out and about again. Signs of improving activity abound. The TSA recently reported crossing the 2 million mark for daily airport travelers. By this measure, air travel is back to around 82% of pre-pandemic levels, way up from about 4% of normal amid the broad shutdowns of April last year.

Also, as my son reminds me, our beloved Giants seem to be filling their stadium once again, and they currently have the best record in baseball. What a difference a year makes!

All this is happy news for the economy (even for a sports stadium – I’m sure they sell more concessions when the home team is winning), but what does it tell us about the direction of markets?

As with just about everyone and everything, the pandemic also interrupted how economists and market watchers do their jobs. Things changed so much so quickly, and the newness of shuttering the brick-and-mortar economy coupled with opening in fits and starts wreaked havoc on the collection of meaningful economic data. Consumers changed a lifetime of patterns overnight, so how can you predict what they’ll do next? People on “Wall Street” are paid lots of money to answer questions like that, and they live and die by the quality of their data. I imagine it as something like trying to read the tea leaves in a hurricane.

It’s been interesting to see the new kinds of data these folks are using to generate their analyses. Anonymized cell phone location data is popular in some circles. We saw this used last year when journalists (and others) were monitoring whether people in an area were abiding by stay-at-home orders. A little creepy perhaps, but useful if you want to monitor where people are actually going. Now some in finance use similar data to gauge traffic passing through truck stops across the country to get an idea of how the economy is picking up.

Another of these nontraditional data sources has been Google Search Trends. Anyone can leverage the company’s massive database to see what people are searching for and how these searches ebb and flow over time. Are people searching for boats more than RVs, or used cars more than new, or maybe restaurants but takeout is still popular? This is valuable information to analysts charged with figuring out how different industries are doing, even as consumer buying habits evolve.

My research partners at Bespoke Investment Group periodically turn to these search trends and I’m including some of their recent notes and charts below. It’s a good look at what folks were searching for mid-pandemic and what they’re looking for now.

And I’m including a link to the Google Search Trends page so you can play around with the tool if you like.

Also, a little ahead of time, but Happy Independence Day! I hope you enjoy it with family and friends.

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