Market Overview
Forward thinking
“Time passed, which, basically, is its job.” – Terry Pratchett
When pondering which direction to take with your investment portfolio, consider how fortunate you are to have so many options. Time can only go one direction: forward. And while the future can’t unwrite the past, the past often has no bearing on where the future is heading.
Think about this for a second: There are financial advisors out there with almost 10 years’ experience who have never seen a bear market. They’ve seen rounds of profit taking, sure, and an occasional short-term correction, but never an out-and-out financial bloodbath that wiped out the life savings of a generation. As far as some of them are concerned, recessions and depressions existed sometime between wooly mammoths and the Spanish-American War.
But if there’s anything worse than a financial advisor who knows no history, it’s one who relies too heavily on it. Index funds were a brilliant innovation in 1974, and they remain a key component of most well-managed retirement portfolios today. But if that’s all your advisor knows, then maybe their golf game is better than their quant skills.
Not to oversimplify
We’re talking about absurd extremes here. No financial advisor is to be discounted just because they’re young or just because they’re old. The point here is to find one who can nod to the past but looks to the future.
Every year there are new investment vehicles. That’s because people never stop thinking. Sometimes these innovations pan out (exchange-traded funds) and sometimes they don’t (credit default swaps), but they’re not to be ignored.
One driver of new financial products is the tax code. The Tax Cuts and Jobs Act of 2017 was seen as a seismic shift because of the sheer number of individuals and businesses affected by it. But the laws change on an annual basis, often in subtle ways discernible only to those few who are focused on shielding their clients from unwarranted taxation.
There’s an apocryphal story about an accounting professor who tells his class at the start of every term: “I give the same test every year. You can find a copy of it in the reserve room of the library. I ask exactly the same questions each time, and yet half the class fails each time. That’s because every year Congress changes the answers.”
Tax codes are really just expressions of public policy, and hardly the only ones. Changes in how the culture values the environment or education or technology or any other element of our shared space could be just as impactful on how we manage our money. Carbon credits, how we pay for basic or college education or regulation of the newly risen tech giants all effect how we should rebalance our portfolios. In the feature article, we discussed a proposed universal basic income, which would be paid for by a levy against data miners. Whether or not it’s a good idea, if it happens it would have a profound impact on which sectors would be most advisable to invest in.
Is crypto your kryptonite?
One thing we’ve been keeping an eye on here is cryptocurrency. We haven’t jumped in with both feet, but it has definitely remained on our radar.
A lot of experienced financial professionals are suspicious of it because they’ve all been trained since the first day of business school that there are two classes of financial instruments: debt and equity. Sure, there are derivatives but they are derived – hence the name – from one or the other. Crypto, though, is an entirely new asset class, and nobody’s quite clear about how it should behave.
That includes the regulators. There’s a lot of daylight between what the Securities and Exchange Commission thinks is appropriate treatment for digital tokens and what the Commodity Futures Trading Commission thinks. And neither of these bodies are in synch with what other financial regulators in the rest of the world understand about the subject.
All we know for sure is that its price movement is exceptionally volatile. Bitcoin went from next to nothing at its 2009 inception to $100 in 2013 to $1,000 in early 2017 to $19,000 in late 2017 to $3,000 a year later to $8,000 last time we checked. Sorry, there’s one other thing that we know for certain: In all that time it never went to $0, which surprised a lot a people.
It isn’t our brief here to advise for or against investing a portion of your portfolio in this new asset class except to say that, if you do, we trust you have the fortitude to endure some wild swings.
You’re probably familiar with the tale about the guy who, when cryptocurrency was a new thing, bought some pizza for 10,000 bitcoins, an amount that was worth millions of dollars just a few years later.
Unlike our tweedy accounting prof, this guy is not apocryphal. His name is Laszlo Hanyecz and on May 22, 2010, he transferred 10,000 bitcoins to another fellow in his chatroom named Jeremy Studivant. This other crypto enthusiast then ordered Hanyecz two pies from a Jacksonville, Fla., Papa John’s. At the time, 10,000 bitcoins was – at least theoretically – worth about $30. While this might sound like a lot for 16 slices, some leeway is in order considering that this is the first known retail transaction conducted in cryptocurrency. Even so, those digital coins would be worth almost $80 million at the time of this writing, or around $150 million as of the December 2017 peak.
When selecting a financial advisor, it’s best not to get the guy who bought those pizzas. Nor do you necessarily want the Papa John’s order taker who got paid in dollars at the going rate for two pies. As for Studivant, maybe he just got lucky.
Instead, the ideal financial advisor would be somebody else in the chatroom asking, “Extra cheese? Want garlic knots with that?”
Chris
Chris Lott, CFP®, CPA is a Managing Partner at Smith Anglin Financial, and is a member of the firm’s Investment Committee. He regularly meets with prospective clients, counsels existing clients, leads investment portfolio analysis and develops materials for communicating with the firm’s clientele and target markets.
