Why I Don't Invest in Crypto

Written by Rob Copeland | 17 December 2021

Cryptocurrencies have taken off. Just 12 years since the debut of Bitcoin, the first crypto, the total value of all cryptocurrencies has soared to more than $2 billion globally. That's more than twice the value of U.S dollars in circulation.

Lots of investors have jumped on the crypto bandwagon, including celebrity billionaires like Elon Musk. I'm steering clear. In the short term, Bitcoin and other cryptocurrencies are wildly volatile. In the longer term, they carry heavy regulatory risk—governments around the world very well might pull the rug out from under crypto.

First, let's look at crypto's volatility. Bitcoin, the flagship cryptocurrency, is billed by many as a store of value akin to gold, but its price has gyrated wildly since its inception. Bitcoin's price has fallen by 32% since it hit a high of $69,000 in November, for example.

Why is crypto so volatile? It doesn't have inherent value like gold, which can be made into jewelry or put to other uses, or stocks, which represent shares of real-life companies. It's not widely used in legitimate commerce—you can't buy groceries with it, for example, nor does the IRS accept tax payments in Bitcoin. The value of crypto is based simply on what people are willing to pay for it, and there's no reason it couldn't go to a fraction of today's price. Could its price go through the roof? It's possible, but I see crypto as a very expensive lottery ticket.

The biggest risk to crypto's viability, however, is that it represents a challenge to governments around the world. As an anonymous currency, crypto is beloved by criminals, including the hackers who breached Colonial Pipeline Co. earlier this year, disrupting energy supplies in several states, and demanded Bitcoin as ransom. Its fans also include drug dealers and others engaged in illegal commerce. The most infamous example of crimes involving crypto was the Silk Road case.

So crypto is a direct challenge to governments' ability to fight crime. But more importantly, it's a challenge to governments' ability to control the value of their currencies and the strength of their economies. Central banks like the U.S. Federal Reserve increase and decrease the amount of money in circulation in order to influence interest rates, control inflation and support the economy. A competing currency would undercut the authority that governments derive from controlling their currencies.

Even though governments around the world are still deciding how to regulate crypto, crackdowns have already occurred. For instance, the Chinese government has banned businesses from making crypto transactions. In the U.S., the House of Representatives recently passed a bill to create a working group of regulators, industry executives and others to start looking at how crypto regulation might work. Not surprisingly, crypto-industry lobbying groups are springing up to try to minimize regulations. I take it as a sign that industry players are scared. Back in May, Perianne Boring, the head of the Chamber of Digital Commerce, one of the crypto lobbying groups, warned the industry: "If we don't start planning and taking action soon, we have everything to risk."

One reason so many people are passionate about cryptocurrencies is the libertarian idea that they are free from government control. If that changes, how much luster will crypto lose? If U.S. and other governments take a heavy hand, will people flood back to the dollar?

While no one can predict the future, we can certainly gauge risks, and the risks involved with crypto are too great for the average investor to take. In my opinion, investors should heed the words of Bill Gates: "My general thought would be that if you have less money than Elon Musk, you should probably watch out."

Higher Interest Rates Could Hammer Stocks

Written by Rob Copeland | 18 November 2021

Inflation is back. U.S. consumer prices rose 6.2% year-over-year in October, the steepest increase in more than 30 years, as a flood of cheap money surging met consumer demand and supply chain bottlenecks.

Should that pattern continue, it would likely prompt the Federal Reserve to raise short-term interest rates. Tightening the money supply—or in plain English, making money more expensive—could cool the overheated economy and start to bring prices of goods and services back down. But what effect would rate hikes have on stocks? While there are many variables, it's quite conceivable that stock prices could suffer.

The current inflation spike can be traced to the Covid pandemic, which destroyed millions of jobs and disrupted global supply chains, and U.S. policymakers' fears of an ensuing recession. To insulate the economy, Washington unleashed waves of stimulus spending, and the Federal Reserve kept interest rates low while buying up assets such as real estate loans.

Whether rising prices are a temporary phenomenon, driven mostly by shortages of supplies and labor, or a deeper problem rooted in too much money printing, is the subject of debate among economists. But even if the inflation we're seeing now is not deeply rooted, it could still do real damage to the economy. How? By influencing expectations: If businesses assume inflation will keep rising, they'll plan to raise employee salaries, and they'll raise prices to pay for those increases, setting a cycle in motion.

So will the Fed raise interest rates? And if so, when? The agency is currently in something of a bind, because it is tasked both with controlling inflation and maximizing employment. Right now the unemployment rate stands at 4.8%, well about the 3.5% rate of just before the pandemic. By raising rates too soon or too sharply, the Fed could reverse the employment recovery.
The markets' actions reflect a belief that the Fed will indeed start raising rates by the middle of 2022. That's a long way off, and a lot could change. But it's worth looking at the potential impact on markets. The effect of rising interest rates on bonds is fairly straightforward: Rising rates make existing bonds less valuable, since newly issued ones will pay more.

But higher rates can also hurt stocks, by making it more expensive for businesses to borrow money. Costlier credit raises the cost of doing business, potentially lowering corporations' earnings and ability to grow, and thus impacting their stock prices. Fed rate increases also affect market psychology; when rate hikes are announced, traders might quickly sell off stocks, sending the market down sharply. It's possible that we could see significant drops in certain stocks, while others will prove more durable.

How should investors prepare for the possibility of rate hikes? First, know what you own. Some investments are more vulnerable to rising rates than others. And bear in mind that market dips can be buying opportunities: It's always a good idea to have a "shopping list" of stocks that you can snap up when their prices are attractive. Please don't hesitate to get in touch with us if you'd like to discuss your investments.

Time to Make a Shopping List

Written by Rob Copeland | 13 October 2021

The stock market has been choppy for several weeks now, with the S&P 500 index down about 4% since the beginning of September. And with rising inflation, supply-chain disruptions and the fate of the infrastructure bill all weighing on investors' minds, there's no immediate turnaround in sight.

But the best thing long-term investors can do right now is to stay positive. Stocks' ups and downs are part of the reason they can be so much more profitable than bonds over extended periods. To collect what we call stocks' risk premium, we have to be patient: Over the long term, the market's rise has always made its reversals look like small road bumps.

It's human nature to get lost in short term trading. But it's long-term investing that can really make you wealthy. If you invested $100,000 in 1999 in a conservative portfolio of 60% S&P 500 stocks and 40% bonds, and you rebalanced regularly, you would have about $390,000 by 2021. That's an average compound annual growth rate of about 8%. And that's with you investing right at the top of the market, and going through the dot-com crash and the 2008-2009 housing meltdown.

If back in 1999 you invested only in 100% S&P stocks, with no bonds, you'd have more than $500,000 by 2021. I'm not suggesting that you invest only in stocks—they're so volatile that you would lose an untold amount of sleep. But the point is that long-term gains tend to obliterate short-term setbacks. "Time heals all wounds" is an apt saying not just for our emotions but also for the stock market.

The fact that the market rewards the patient doesn't mean you should ignore your investment portfolio, though. It's important to manage risk by rebalancing when one asset class grows too dominant. And we should keep our eyes peeled for the opportunities that market volatility can provide.

No one can say with certainty where the market will go from here. But stocks have gone more than 13 years without a major correction, so a pullback of 10% or more would not be surprising. But rather than panic selling, which is the worst thing you can do, long-term investors should make a shopping list of stocks with great 10-year outlooks. When the market drops, those stocks will be available at a discount. That allows you to buy more shares, which will amplify future returns.

Especially during tricky periods like this, it pays to have the guidance of an experienced advisor, one who's been through numerous corrections and crashes. Such an advisor can help you avoid self-sabotaging decisions and point you toward promising opportunities. Don't hesitate to reach out if you'd like to discuss your investments with us.

How to Handle the Market’s Volatility

Written by Rob Copeland | 20 September 2021

If it seems like the stock market has been more volatile than usual lately, it's not your imagination.

On September 9, the S&P 500 closed at 4,459, down 1.7% from the day before. Four days later it was down another .36%, before climbing by .86% the following day. Two days later, the index had dropped 1.1% from the previous level. In two weeks, the S&P fell a total of 2.25%.

It's not unusual for stocks to decline during the fall, but it's starting a little earlier this year. I expect the bumpy ride to continue, possibly for a few more quarters. There are always multiple factors in market disruptions; two of investors' current concerns are the financial troubles of the giant Chinese property company Evergrande and the fear that capital gains tax rates will rise next year.

But my longer-term concern is Covid-19 and its rampaging Delta variant. Supply chain disruptions due to Covid are making it difficult for companies to obtain components for their products. That in turn is making it harder to meet demand, which is threatening earnings. Ford Motors is a prime example of the problem: In August, sales of new Ford vehicles dropped 33% from a year earlier because of a persistent shortage of semiconductor chips. Ford isn't alone in having this issue: Chip shortages is expected to cost the global automotive industry $110 billion in revenue in 2021.

I think there's a strong possibility that companies will be unable to meet projected earnings in the next few quarters, not due to a lack of consumer demand, but an inability to fulfill orders because of supply chain issues. As a result, volatility could be with us for a while. So what does that mean for you as an investor? There are a couple of things to bear in mind.

First, the negative headwinds could affect the value of your investment portfolio. But losses are only paper losses until you sell and make them permanent. It's important that you stay patient and focus on the long-term picture: Consumer demand remains strong, supply chains will eventually get repaired, and revenues and earnings will recover. In order words, avoid panic selling, which only serves to lock in losses.

Second, be on the lookout for buying opportunities. Stocks tend to rise and fall as a whole, leaving strong businesses undervalued. The biggest gainers over the past many months could sell off hardest as investors take profits. Be on the lookout for bargains among companies that still have strong earnings prospects.

The market will likely get worse before it gets better. A 10% correction in stocks is possible. But it should be short lived: Americans are still flush with cash and eager to spend it. Supply chain snags will be cleared, revenue will be recognized in later quarters, and valuations will rebound.

The key for now is to keep a strong stomach and a cool head. Hang on to good investments unless there's a compelling reason to sell, and look for opportunities to buy future winners. Please give us a call if you'd like to discuss your investments.