What’s Your Investment Theme?

Well, we appear to be approaching the end of the pandemic tunnel. Perhaps it is better stated as the beginning of the end. The world as a whole is clearly not out of the woods yet but the United States and much of the developed world has made impressive progress in vaccinating their respective populations. Economic data, while still far from great is coming off the pandemic lows and some data points are producing their best readings on record (see ISM Non-manufacturing Index for March). There is a strong consensus that we will see a robust uptick in economic activity this year. How long it will last is a much more difficult question. The developed world has seen government debt balloon, has an aging population and the techonological frontier may disrupt long standing economic norms. When and how these forces may exert their influence is unknown but they must be acknowledged. The past five quarters have presented numerous events that underscore the foundation of our investment approach – whether it be taking advantage of tax-loss harvesting when opportunities present themselves or the importance of having a plan and a well diversified portfolio that will allow you to ride out times of market stress, much of our approach was tested and reaffirmed.

YOLO, Meme, and EMH: What’s Your Investment Approach?[1]

You only live once (“YOLO”)! Social media investors have banded together on unconventional platforms to drive up the prices of a handful of “meme stocks,” seemingly without traditional evaluation of investing risks and rewards. They made headlines with their “short squeeze” of GameStop (GME), and, as they garnered media attention, their tactics continued. While it’s not the intended victim of the YOLO traders, will the efficient market hypothesis be a casualty of these events? The answer depends a lot on your definition of efficient markets. Perhaps long-term investors would be better served questioning the potential impact on their investment philosophy.

Nobel Laureate Eugene Fama (1970) defines the efficient market hypothesis (EMH) to be the simple statement that prices reflect all available information. The rub is that it doesn’t say how investors should use this information. EMH is silent on the “correct” ways investors should use information and prices should be set. To be testable, EMH needs a companion model: a hypothesis for how markets and investors should behave. This leaves a lot of room for interpretation. Should asset prices be set by rational investors whose only concerns are systematic risk[2] and expected returns? It seems implausible to link recent meme-stock price movements to economic risks. Rather, they seem fueled by investor demand to be part of a social movement, hopes to strike it rich with a lucky stock pick, or plain old schadenfreude.

There is a vast ecosystem of investors, from individuals investing in their own accounts to governments and corporations who invest on behalf of thousands. Ask investors why they invest the way they do, and you’ll likely get a range of goals and approaches just as diverse. It’s this complex system that generates the demand for stocks. Another complex system fuels the supply of stocks. Supply and demand meet at the market price. People may contend that the market is not always efficient, or rational, but the stock market is always in equilibrium. Every trade has two sides, with a seller for every buyer and a profit for every loss.

There are plenty of well-studied examples that show supply and demand at work. The huge increase in demand for stocks added to a well-tracked index often creates a run-up in the stock price. Some of this price increase can be temporary and reversed once the tremendous liquidity demands at index reconstitution[3] are met. Index reconstitution is just one example; instances of liquidity-driven price movements happen all the time. It is well documented that liquidity demands can produce temporary price movements.[4] Investors may wonder if temporary price dislocations motivated by users of r/WallStreetBets differ from those caused by changes to an index. Lots of buying puts temporary upward pressure on prices, which later fall back to “fundamental value”–it sounds familiar. The more relevant observation may be that markets are complex systems well adapted to facilitate the supply and demand of numerous market participants.

There are numerous reasons people may be willing to hold different stocks at different expected returns. Can all those differences be explained by risks? Doubtful. To quote Professor Fama, “The point is not that markets are efficient. They’re not. It’s just a model.”[5] EMH can be a very useful model to inform how investors should behave. We believe investing as if markets reflect fundamental value over the long-term is a good philosophy for building long-term wealth. Trying to time markets over the short-term might be a quick way to destroy wealth.

It’s true, you only live once. The good news is that investors can look to market prices and fundamentals, not internet fads, to implement a sound investment strategy. Theoretical and empirical research indicate higher expected future returns come from lower relative prices and higher future cash flows to investors. Long-run investors can be better served by using these tried and true methods, rather than chatrooms, to pursue a better investment experience.

Market Update – A Brief Around the World Tour of Markets

The first quarter of 2021 marked the one year anniversary of the pandemic infecting the markets and the aptly named COVID-crash. Market environments like we are living in provide no shortage of extraordinary statistics. We certainly saw our fair share last year and fast forward to the present we have a new one – through the end of March the S&P 500 had its best 12 month period since 1936! And has continued to notch new record highs as well. Overall, stock markets around the world were positive over the last 3 months. Bonds have had a much harder time after a stellar 2020. Why? The common refrain is that inflation fears and an improving economic outlook are driving interest rates higher, which is a negative for bond prices.

On Stocks

US Stocks lead global markets followed by non-US developed markets and emerging markets, earning 6.35%, 4.04% and 2.29%, respectively. Global real estate, one of the hardest hit sectors in the pandemic, experienced a strong quarter with a return just shy of 6.25%. From a sector perspective, the rotation into smaller companies and so-called value stocks continued – stocks categorized as small and value companies returned 21.17% while large growth stocks (think big tech) returned 0.94%. This trend was true across countries driven by investors renewed appetite for risk and the search for better valued opportunities after the significant run-up in large tech companies in 2020. Valuations (or price paid for some measure of cash flow or profitability) increased with the renewed economic optimism. However, they are at very high levels, especially in the US. Levels in some cases that have not been seen since the dot-com era.

On Bonds

Longer-term interest rates (rates for loans 5 yrs or greater) jumped higher throughout the developed world to begin the year which caused bonds prices to drop and thus returns fell as well. US bonds fared worse than the broad non-US bond market. The Barclays Bloomberg US Aggregate index dropped -3.37% and the Barclays Bloomberg Global Aggregate ex-US (hedged) index dropped -1.9%. The 10 year and 30 year US Treasury bond rate rose by 0.81% and 0.75%, respectively. Intermediate corporate bonds (those coming due in approximately 5-10 years) managed a slightly positive return of 2.19% as investors bought up the assets in a search for yield.

On the Economy

The global economy is on the mend and a rather quick recovery is expected for most of the developed world. The jury is still out for emerging markets given the lack of access to vaccines however many emerging markets have a better balance sheet than the developed markets. As mentioned in our opening, the economy is bouncing back from the pandemic lows and in some cases the data is showing incredible statistics. However, as most economists will tell you, data can be noisy in environments like this and some critical areas are not showing the same strength yet (e.g. unemployment in the US). Arguably the greatest question we face at the moment is whether inflation will increase? The answer is likely yes however determining whether it will be temporary or the start of a longer trend is what really matters. Most economists seem to be in the camp that there will be short-term increase in inflation that will then subside. Central bankers acted in unprecedented fashion in reaction to the economic destruction caused by pandemic related lock-downs and so far the results speak for themselves. And they are continuing their accommodative and simulative polices for the foreseeable future. These policies have certainly contributed to an excessive amount of liquidity (i. money) around the world but it seems as though the powers that be are accepting this side-effect as necessary to fend of greater economic damage in other areas.

[1] Adapted from “YOLO, Meme, and EMH: What’s Your Investment Style?” from Dimensional Fund Advisors LP.
[2] Systematic risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets in which he or she is involved.
[3] Reconstitution involves the re-evaluation of a market index. The process involves sorting, adding, and removing stocks to ensure that the index reflects up-to-date market capitalization and style.
[4] For example, see "Tesla’s Charge Reveals Weak Points of Indexing" (Dimensional, 2021)
[5] "Are markets efficient?" – Interview between Eugene Fama and Richard Thaler (June 30, 2016)

California proposition 19: Does it help you or hurt you?

California proposition 19 becomes effective on February 16, 2021 and allows homeowners over age 55, disabled or wildfire/natural disaster victims to transfer their primary residence tax base (assessed value for property taxes) to a new residence in California. It also creates a state fire protection services fund to help with the future costs of the large wildfires our state has been experiencing.

To help pay for these changes, proposition 19 changes the taxation of family property transfers. The result is many inheritors will pay significantly higher property taxes or be forced to sell the property.

Before Proposition 19, primary residence transfers between parent and child were excluded from property tax reassessment.  The state did not consider this type of transfer a change of ownership and had no dollar limitations or other restrictions. The transfers could also be from child to parent and between grandparent and grandchild if the parents were deceased.

For family property transfers not involving the primary residence, value reassessment only occurred on the amount above $1 million of assessed value or $2 million on community property.

This allowed many families to pass vacation homes, rental properties, and commercial properties valued at $2 million or less to their children without an increase in property taxes.

After Prop 19 (February 16th, 2021), primary residence transfers for the above family groups are not subject to value reassessment if the inheritor uses the property as their primary residence and the fair market value is not greater than $1 million of the assessed value.  If it is, value reassessment occurs on the amount over $1 million.

Transfers of all other property types are subject to value reassessment.

This means the family vacation home, rentals, and commercial property are subject to value reassessment.  After you pass, the inheritor will receive a “step up” on the property’s value to fair market value. If they sell the property immediately, they will likely be subject to little if any capital gains taxes on the sale. This assumes there is no change in the IRS inherited asset “step up” rules.

If they keep the property, they will have to pay property taxes at the new “assessed value” amount. For Los Angeles County, the rate is 1.25% of assessed value or $12,500 annually per million.

Proposition 19 applies to all family property transfers including property titled under a Revocable Trust, Qualified Personal Residence Trust (QPRT) or Revocable Transfer on Death.

There are options available which can reduce the negative impact of proposition 19. After February 15th, 2021 several of the options below will be less attractive. In addition, new state legislation is required to answer questions created by the Proposition 19 changes which could impact your decision. Each option has advantages and disadvantages and should be thoroughly reviewed with a qualified Trust attorney.

1. Gift or sell the property to your children before you pass.

   1. Add your child to your deed as tenants in common or joint tenancy.

   2. Gift or sell the property to a Trust (IDGT) Intentionally Defective Grantors Trust with or without a leaseback.

   3. Transfer at least 50% interest in the property to a Trust (IDGT) and create an LLC.

Consideration of the impact to the new assessed value (step up) must be weighed against the value of maintaining a low property tax amount for your children. In addition, Federal gift tax, estate tax and income tax should be considered.

All information is meant to be educational and correct as of the date of this article.  This article is limited to proposition 19 and its impact. Please contact your Trust attorney for your unique circumstances. If you do not have a Trust attorney, please contact us.

This article was adapted from a presentation by Kevin J. Moore, LLM, Kevin J. Moore & Associates, 301 E. Colorado Blvd., Suite 600 Pasadena, CA 91101 (626) 568-9300 kmoore@kjmlaw.com and a presentation by the San Francisco Assessors Office on January 5, 2021.

CARES Act - Reacting to COVID-19 and Stimulus Payments

We don’t need to recite the obvious. You all know by now that COVID-19 has impacted our lives in many ways. Whatever disruption it has caused in your daily lives, we certainly hope you and your loved ones are healthy.

This letter is long but has vital information about the new legislation recently passed, IRS relief and property taxes.

I. What We Know - CARES Act is now Law
After a lot of talk, Congress did something. The Coronavirus Aid, Relief, and Economic Security Act, (CARES Act), a $2 trillion stimulus package to mitigate the impact of the Coronavirus pandemic was signed into law on Friday March 27, 2020. CARES has relief for individuals and businesses. Below is a brief digest of provisions affecting businesses and individuals.

Individuals
The CARES Act includes stimulus payments of $1,200 for each individual and $500 for each dependent child, defined by the child tax credit rules as under age 17. Below is a brief digest of its provisions.

Who and How Much?

• Individuals with adjusted gross income (AGI) up to $75,000 a year are eligible for the full $1,200 payment. The payment is reduced by $5 for every $100 in income above $75,000. The payment amount is entirely phased out at an AGI of $99,000.

• Married filing joint couples with AGIs up to $150,000 a year are eligible for a $2,400 payment. The payment is reduced by $5 for every $100 in income above $150,000. The payment amount is entirely phased out at an AGI of $198,000 (if the taxpayers have no dependent children). Married couples also will receive an additional $500 for every dependent child under 17.

• Example: MFJ with no children. Keith and Norma are married filing joint. They have no dependent children. If they have AGI of $150,000 or less, they are eligible for a $2,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out at an AGI of $198,000.

• Example: MFJ with two children. Chris and Pat are married filing joint. They have two dependent children under age 17. If they have AGI of $150,000 or less, they are eligible for a $3,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out if their income hits the top of the threshold amount.

• Head of household filers with AGIs up $112,500 a year are eligible for the full $1,200 payment and an additional payment of $500 for each dependent child under age 17. The payment is reduced by $5 for every $100 in income above $112,500. Head of household taxpayers will also receive an additional $500 per dependent child under age 17. With no eligible children, a head of household filer is phased out at AGI of $137,000. With one eligible dependent child, a head of household filer is entirely phased out of the rebate payment at AGI of $146,400.

• Example: Head of Household - no children under 17. Heather has an 18-year-old high school senior living with her and qualifies as a head of household filer. If her AGI is $100,000, Heather’s payment is $1,200. Her dependent child does not qualify her for the additional $500 payment because the child is not under age 17. If Heather’s dependent child is under age 17, her payment is $1,700.

• Phase-out of the rebate. If your income is above the threshold amounts, a reduced payment will result. The reduced amount using your own income (AGI) can easily be calculated using the Washington Post calculator.

What needs to be done to get the Stimulus Rebate?

Nothing.
The IRS will deposit the calculated amount directly into your bank account, using the AGI and the bank information on your 2019 tax return. If your 2019 return hasn’t been filed, the IRS will use the AGI and the bank information from your 2018 tax return. If there’s no bank information on the return, the IRS will mail a check.

When Will the Payments Arrive?
The IRS says that a direct deposit should be in your bank account in about three weeks. Checks should start arriving in six to eight weeks.

2020 Required Minimum Distributions
Required Minimum Distributions (RMDs) are waived for 2020 and individuals that have already taken their RMDs for 2020 can return those if they so desire. This is specific to defined contribution plans and IRA accounts (including Inherited IRAs) but not defined benefit plans at the moment. The provision includes RMDs for individuals who turned 70½ during 2019 and had not taken their distribution prior to January 1, 2020.  Beginning January 1, 2020, the new age at which one must start taking RMDs is 72.

2020 Tax Return
Technically the stimulus rebate is a 2020 refundable tax credit. The payment received in the next few weeks is an IRS advance. If you have less income in 2020 than in 2019 because of layoffs, reduced hours and closed businesses, and your rebate payment was reduced by the income threshold, you’ll receive a credit for the difference on your 2020 return. If for some reason, you receive too much of an advanced payment, you do not have to pay back the excess.

Businesses
The U.S. Chamber of Commerce is an invaluable resource for business owners. They have pulled together a significant amount of information that summarizes your eligibility and options under the CARES Act. We recommend visiting their website for more information.

Our accounting firm partner, The Accountancy, has also compiled a wealth of information for businesses. Here are some links to various topics:

Forgivable SBA Loan Program
Business Tax Relief
Employee Retention Credits
Payroll Tax Deferral
Net Operating Losses
Business Interest Deductions
Suspension of Non-Corporate Loss Limitation
Alternative Minimum Tax (“AMT”) Credits
Individual Relief and Assistance
Unemployment Compensation Benefits
Student Loans
Credit Reporting
Federally Backed Mortgages
Retirement and Other Employee Benefit Plans Relief

II. IRS People First Initiative
The IRS has provided significant relief in the form of filing extensions (covered in our last communication), dispute resolution and deferring payment on installment loans. If you owed money to the IRS and entered into a payment arrangement, you are allowed to not make payments until July 15, 2020. If this applies to you, see a more complete explanation by clicking on this link: IRS Newsroom

If you owe taxes from prior years, now may be a good time to file Offers in Compromise to reduce the amounts owed in your favor.

III. Property Taxes
In case you are wondering about property taxes, county assessors have indicated that there is no reprieve from the payment of your property taxes due on April 10. However, some counties have also stated they will waive penalties if you do pay after that date if you request a waiver. Since not all counties are handling this the same way, we suggest you visit the county's property tax website for more information.

We want to help our clients understand how this Act impacts them. Any change in tax laws presents planning opportunities that should be considered and discussed. As we learn more about the CARES act in the coming days and weeks, we will continue to update you.

A Year in Sport 2018

What an amazing year!  I had another phenomenal year with my family, with my work and with my bike.  While October, November and December had me hit with unforeseen medical scares… I can now report that I am healthy and feeling great again.  I spent proud to have spent 200 days this year being active… riding, hiking, running.  Spending over 300 hours pushing myself and getting moving.  Most of all I am humbled to have taught over 100 spin classes this year; providing over 1,500 activities to my students that come seeking their own personal fitness goals.  This meant so much to me this year, and I cannot wait for another great year teaching and motivating in 2019.

I met so many new people shared some of the hardest rides of my life with true athletes and friends.  Living life to the fullest, adventuring, exploring… these are the things I appreciate most about life.  Thank you to my friends and family that supported all this activity in 2018.  With out this network of support I could not have accomplished any of this.  Sport and being active outside has always been my way of getting myself balanced and feeling good.  Enjoying the outdoors and breathing fresh mountain air has a profound impact on my soul. 

I cannot wait for more adventures in 2019, and I hope I get to ride with you, hike with you, or simply enjoy the world we live in together.  Cheers!

The Power of Fear

Government shut down, erratic tweets, broken trade deals, fed policy, inverted yield curve, recession… there is no shortage of articles out there that will give you a reason to make a selling decision right now!  Fear is an extremely powerful emotion in our society, in fact, the millennials have even created a acronym around it… “FOMO” or fear of missing out.  A condition that is rampant in the market now.  Investors are heading for the exists and not stopping to ask, why or is this the right decision for me? 

It is well studied that decisions made while experiencing the condition of fear violates your minds normal decision-making process, thus clouding our judgement.

While the ‘behavioral attack’ reigns down on us from the media, we wanted to take a quick moment to highlight a few conditions that have taken place in the market place many times when we have experienced such declines.

At one point this move was called a ‘correction’, however, we have now moved into what is referred to as a ‘bear market’.  Typically, a ‘correction’ is defined by a 10% decline, while a ‘bear market’ is defined as a 20% decline.  Let us highlight market behavior during past market sell-offs:

Average Market Recovery after Initial Downturn – US Large Cap Equity – January 1926-December 2015

As you can see from the charts above, more often than not, moves like this present opportunity in the markets place as opposed to exit points.

This is not only true in a ‘correction’ or ‘bear market’ but seemingly during our past crises, as illustrated below:

The Market’s Response to Crisis - Performance of a Balanced Strategy: 60% Stocks, 40% Bonds
Cumulative Total Return

Since our founding we have always been focused prudent diversified investing for our clients, focusing on long term outcomes.  While Santa has decided to leave the markets holding a lump of coal this year please take this time to celebrate with your family and loved ones.  Be excited for the new opportunities and challenges the New Year will bring.  And finally, remember, this too shall pass.

"Tariffgate" and Tuning Out the Noise

US markets bounced back in the 2nd quarter and shrugged off global concerns from “Tariffgate”. However, while the US markets faired well, overseas volatility picked up and led to a weaker quarter. Part of this could be due to the perception that the US is less vulnerable to tariffs than some of our international partners. This is not to say that an all out “trade war” would not have an impact. Market prognosticators always need something to worry about, and the current trade dispute is no exception. Drawing a conclusion as to how tariffs will impact economic growth is pure conjecture at this time.

Future global market performance expectations should be tempered not so much because of the concern around tariffs but because the U.S. is now more than nine years into the latest economic expansion ‐‐ the second‐longest peacetime expansion in the economy on record ‐‐ and because of tightening financial conditions, including Fed rate hikes.

For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as impactful to your financial well‐being can evoke strong emotional responses from even the most experienced investors. Headlines from the ”lost decade”1 can help illustrate several periods that may have led market participants to question their approach.

May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time

March 2000: Nasdaq Stock Exchange Index Reaches an All‐Time High of 5,048

April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates

October 2002: Nasdaq Hits a Bear‐Market Low of 1,114

September 2005: Home Prices Post Record Gains

September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now a decade or more behind us, they can still serve as an important reminder for investors today. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. Throughout these ups and downs, however, if one had hypothetically invested $10,000 in US stocks in May 1999 and stayed invested, that investment would be worth approximately $28,000 today.2

When faced with short‐term noise, it is easy to lose sight of the potential long‐term benefits of staying invested. While no one has a crystal ball, adopting a long‐term perspective can help change how investors view market volatility and help them look beyond the headlines.

The Value of a Trusted Advisor                         

Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.

However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A recent survey of investors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor.

Having a relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes.

1. For the US stock market, this is generally understood as the period inclusive of 1999–2009.

2. As measured by the S&P 500 Index. A hypothetical portfolio of $10,000 invested on April 30, 1999, and tracking the S&P 500 Index, would have grown to$28,408 on March 31, 2018. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.

To Bit or Not To Bit...

Bitcoin and other cryptocurrencies are receiving intense media coverage, prompting many investors to wonder whether these
new types of electronic money deserve a place in their portfolios.

Cryptocurrencies such as bitcoin emerged only in the past decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and no regulator or nation state stands behind it.

Instead, cryptocurrencies are a form of code made by computers and stored in a digital wallet. In the case of bitcoin, there is a finite supply of
21 million1, of which more than 16 million are in circulation2. Transactions are recorded on a public ledger called blockchain.

People can earn bitcoins in several ways, including buying them using traditional fiat currencies3 or by “mining” them—receiving newly created bitcoins for the service of using powerful computers to compile recent transactions into new blocks of the transaction chain through solving a highly complex mathematical puzzle.

For much of the past decade, cryptocurrencies were the preserve of digital enthusiasts and people who believe the age of fiat currencies is coming to an end. This niche appeal is reflected in their market value. For example, at a market value of $16,000 per bitcoin4, the total value of bitcoin in circulation is less than one tenth of 1% of the aggregate value of global stocks and bonds. Despite this, the sharp rise in the market value of

bitcoins over the past weeks and months have contributed to intense media attention.

What are investors to make of all this media attention? What place, if any, should bitcoin play in a diversified portfolio? Recently, the value of bitcoin has risen sharply, but that is the past. What about its future value?

You can approach these questions in several ways. A good place to begin is by examining the roles that stocks, bonds, and cash play in your portfolio.

EXPECTED RETURNS

Companies often seek external sources of capital to finance projects they believe will generate profits in the future. When a company issues stock, it offers investors a residual claim on its future profits. When a company issues a bond, it offers investors a promised stream of future cash flows, including the repayment of principal when the bond matures. The price of a stock or bond reflects the return investors demand to exchange their cash today for an uncertain but greater amount of expected cash in the future. One important role these securities play in a portfolio is to provide positive expected returns by allowing investors to share in the future profits earned by corporations globally. By investing in stocks and bonds today, you expect to grow your wealth and enable greater consumption tomorrow.

Government bonds often provide a more certain repayment of promised cash flows than corporate bonds. Thus, besides the potential for providing positive expected returns, another reason to hold government bonds is to reduce the uncertainty of future wealth. And inflation-linked government bonds reduce the uncertainty of future inflation-adjusted wealth.

Holding cash does not provide an expected stream of future cash flow. One US dollar in your wallet today does not entitle you to more dollars in the future. The same logic applies to holding other fiat currencies — and holding bitcoins in a digital wallet. So we should not expect a positive return from holding cash in one or more currencies unless we can predict when one currency will appreciate or depreciate relative to others.

The academic literature overwhelmingly suggests that short-term currency movements are unpredictable, implying there is no reliable and systematic way to earn a positive return just by holding cash, regardless of its currency. So why should investors hold cash in one or more currencies? One reason is because it provides a store of value that can be used to manage near-term known expenditures in those currencies.

With this framework in mind, it might be argued that holding bitcoins is like holding cash; it can be used to pay for some goods and services. However, most goods and services are not priced in bitcoins.

A lot of volatility has occurred in the exchange rates between bitcoins and traditional currencies. That volatility implies uncertainty, even in the near term, in the amount of future goods and services your bitcoins can purchase. This uncertainty, combined with possibly high transaction costs to convert bitcoins into usable currency, suggests that the cryptocurrency currently falls short as a store of value to manage near-term known expenses. Of course, that may change in the future if it becomes common practice to pay for all goods and services using bitcoins.

If bitcoin is not currently practical as a substitute for cash, should we expect its value to appreciate?

SUPPLY AND DEMAND

The price of a bitcoin is tied to supply and demand. Although the supply of bitcoins is slowly rising, it may reach an upper limit, which might imply limited future supply. The future supply of cryptocurrencies, however, may be very flexible as new types are developed and innovation in technology makes many cryptocurrencies close substitutes for one another, implying the quantity of future supply might be unlimited.

Regarding future demand for bitcoins, there is a non‑zero probability5 that nothing will come of it (no future demand) and a non-zero probability that it will be widely adopted (high future demand).

Future regulation adds to this uncertainty. While recent media attention has ensured bitcoin is more widely discussed today than in years past, it is still largely unused by most financial institutions. It has also been the subject of scrutiny by regulators. For example, in a note to investors in 2014, the US Securities and Exchange Commission warned that any new investment appearing to be exciting and cutting-edge has the potential to give rise to fraud and false “guarantees” of high investment returns6. Other entities around the world have issued similar warnings. It is unclear what impact future laws and regulations may have on bitcoin’s future supply and demand (or even its existence). This uncertainty is common with young investments.

All of these factors suggest that future supply and demand are highly uncertain. But the probabilities of high or low future supply or demand are an input in the price of bitcoins today. That price is fair, in that investors willingly transact at that price. One investor does not have an unfair advantage over another in determining if the true probability of future demand will be different from what is reflected in bitcoin’s price today.

WHAT TO EXPECT

So, should we expect the value of bitcoins to appreciate? Maybe. But just as with traditional currencies, there is no reliable way to predict by how much and when that appreciation will occur. We know, however, that we should not expect to receive more bitcoins in the future just by holding one bitcoin today. They don’t entitle holders to an expected stream of future bitcoins, and they don’t entitle the holder to a residual claim on the future profits of global corporations.

None of this is to deny the exciting potential of the underlying blockchain technology that enables the trading of bitcoins. It is an open, distributed ledger that can record transactions efficiently and in a verifiable and permanent way, which has significant implications for banking and other industries, although these effects may take some years to emerge.

When it comes to designing a portfolio, a good place to begin is with one’s goals. This approach, combined with an understanding of the characteristics of each eligible security type, provides a good framework to decide which securities deserve a place in a portfolio. For the securities that make the cut, their weight in the total market of all investable securities provides a baseline for deciding how much of a portfolio should be allocated to that security.

Unlike stocks or corporate bonds, it is not clear that bitcoins offer investors positive expected returns. Unlike government bonds, they don’t provide clarity about future wealth. And, unlike holding cash in fiat currencies, they don’t provide the means to plan for a wide range of near-term known expenditures. Because bitcoin does not help achieve these investment goals, we believe that it does not warrant a place in a portfolio designed to meet one or more of such goals.

If, however, one has a goal not contemplated herein, and you believe bitcoin is well suited to meet that goal, keep in mind the final piece of our asset allocation framework: What percentage of all eligible investments do the value of all bitcoins represent? When compared to global stocks, bonds, and traditional currency, their market value is tiny. So, if for some reason an investor decides bitcoins are a good investment, we believe their weight in a well-diversified portfolio should generally be tiny7.

Because bitcoin is being sold in some quarters as a paradigm shift in financial markets, this does not mean investors should rush to include it in their portfolios. When digesting the latest article on bitcoin, keep in mind that a goals-based approach based on stocks, bonds, and traditional currencies has been helping investors effectively pursue their goals for decades.

1. Source: Bitcoin.org.
2. As of December 14, 2017. Source: Coinmarketcap.com.
3. A currency declared by a government to be legal tender.
4. Per Bloomberg, the end-of-day market value of a bitcoin exceeded $16,000 USD for the first time on December 7, 2017.
5. Describes an outcome that is possible (or not impossible) to occur.
6. “Investor Alert: Bitcoin and Other Virtual Currency-Related Investments,” SEC, 7 May 2014.
7. Investors should discuss the risks and other attributes of any security or currency with their advisor prior to making any investment

Trump VS Clinton... who is better for stocks?

Will Hillary Clinton or Donald Trump Be Best For Investors?

How political parties affect the markets and the economy

Now that the two major political parties have finally selected their candidates, it’s time for investors to ask the important questions. Namely, does the party occupying the White House affect the U.S. stock market, gross domestic product (GDP), and other economic measurements? And how about whether the party controlling Congress affects the economy?

Comparing the Presidents by Party

Princeton economists Alan Binder and Mark Watson made a detailed study, “Presidents and the Economy: A Forensic Investigation,” analyzing the economy’s performance under presidents of the different parties. Measuring economic data from 1947 through 2nd quarter, 2013, they concluded the following:

• Democrats outperformed Republican presidents in terms of real GDP growth (4.35% to 2.54%)
• Democrats outperformed Republican presidents in unemployment (5.6% under Dems vs. 6% under Reps),
• Democrats outperformed Republicans in the stock market (8.1% for Dems vs. 2.7% for the GOP).

Despite this data, a prominent liberal economist, Blinder concluded that the differential between Democratic and Republican performance is due mostly to “good luck.” “Democratic presidents have experienced, on average, better oil shocks than Republicans, a better legacy of (utilization-adjusted) productivity shocks, and more optimistic consumer expectations.”

Other Comparative Studies

First term or second term of presidency – According to MarketWatch, from 1940-2008, the stock market rose 7.8% (before dividends) in a president’s first term and just 6.4% in the second term. However, only 5 of the 12 presidents had full/near full second terms in this time period. An interesting, additional finding is that stock markets rise, for whatever reason, in Year 3 of both the first and second presidential terms.

Lag in policy effects - If we assume a two-year lag before a president’s policies affect growth, there is virtually no difference between Republican and Democratic administrations, according to the Wall Street Journal. In the 1948-2008 period, applying this lag leads to 3.4% GDP growth under Republican presidents and 3.5% under Democrats.

Congress

What effect does the party controlling Congress have on the economy?

According to the Wall Street Journal, from 1948-2008, Republican-controlled Congresses averaged stock returns 7.1% higher than Democratic-controlled Congresses.  Real GDP grew 3.7% during Republican congresses and 3.2% during Democratic ones.

Democrat president and Republican Congress: The stock market has done best when we have a Democratic president, with Republicans controlling both the House and the Senate. On the other hand, it has done poorly with a Republican president is paired with Democrat control of both houses of Congress.

Gridlock: Stocks rally after mid-term elections, perhaps because the economy works better with gridlock. The party controlling the While House usually loses Congressional seats during mid-term elections.

Summary

The statistical evidence shows that the stock market performs better under Democratic presidents.

Assuming a two-year lag before a president’s policies affect the economy, Republicans and Democrats are virtually even.

Regardless of the party, the market performs better in the president’s first term and in the third years of both the first and second terms.

The stock market performs better under Republican congresses. In addition, stock values tend to increase after mid-term elections.

We might be sitting in a sweet spot at the moment. The stock market typically does best when we have a Democrat in the White House, along with Republicans controlling both House and Senate. Until January, 2017, we are led by a Democratic president and a Republican-controlled congress.

Caveats

A president’s influence is large but still limited. Congress, world economies, foreign governments, military affairs, the Federal Reserve, and many other factors outside of a president’s control influence the stock market and the economy.

Each party trumpets not only its candidates’ wisdom and skill, but also the party’s platform, policies, and goals. Nevertheless, Democrats and Republicans do not always behave as their parties wish: Presidents from both parties have raised or reduced taxes, supported or opposed free trade, increased or reduced regulatory burdens, etc. Some have argued that the economy prospers when a president adapts his policies to the needs of the country at that time, rather than staunchly sticking to party platform or economic theory.

So what does all this mean? Not much actually other than it sure is interesting stuff. But before you adjust your portfolio holdings this November, please be sure to consult your team of qualified tax, legal, and financial professionals for specific guidance.

Copyright © 2016 RSW Publishing. All rights reserved. Distributed by Financial MediaExchange.

Cycling is the new golf

Excellent Article from the Economist... feel free to tell your boss it is now OK to take a midday ride... IT'S GOOD FOR BIZ!!!

The shared experience of long-distance cycling is a great way to build working relationships

TRADITIONALLY, business associates would get to know each other over a round of golf. But road cycling is fast catching up as the preferred way of networking for the modern professional. A growing number of corporate-sponsored charity bike rides and city cycle clubs are providing an ideal opportunity to talk shop with like-minded colleagues and clients while discussing different bike frames and tricky headwinds. Many believe cycling is better than golf for building lasting working relationships, or landing a new job, because it is less competitive.

“When you play golf with somebody you have to decide if you’re going to beat them, or let them beat you,” says Peter Murray, a former architect, journalist and chairman of the NLA centre dedicated to London’s built environment. “If they’re a client and you don’t want to beat them you have to sort of cheat in order to lose. That seems to me not a good way of doing things.”

In 2005 Mr Murray, who is a keen long-distance rider, founded the annual Cycle to Cannes bike ride. This six-day charity event brings together architects and developers who want to cycle 1,500km from London to the MIPIM property fair in southern France each March. It now attracts around 90 riders and has raised £1.5m for a range of charities in Britain and abroad. This year Mr Murray has also founded a more ambitious ride called Portland to Portland. A team will depart Portland Oregon on April 27th and they are due to arrive in Portland Place, London, 76 days and 6575km later. Along the way they will visit cities to discuss the benefits of urban cycling and raise money for several architectural charities.

Group cycling, and especially long-distance riding, is a shared experience, Mr Murray says. Riders often collaborate and help each other out, taking turns to be at the front so that the riders in their slipstream can save almost a third of the effort needed to travel at the same speed. Some riders selflessly volunteer to stay in the front earning them the awe and gratitude of the entire group.

How someone rides a bike can give you a real insight into what a person is like, says Jean-Jacques Lorraine, founding director of Morrow+Lorraine, a young architecture practice in London, and a regular participant of Cycle to Cannes. “Some riders are very single-minded, others more collaborative; some are tactical, others an open book. Some don’t mind being soloists whilst others prefer alliance and allegiance.” A day in the saddle, racing uphill and downhill, creates a bonding experience that endures. “If I walk into a meeting and somebody says ‘I’ve done Cycle to Cannes’ it’s a done deal really,” says Mr Murray.

Mr Lorraine estimates that as much as 75% of the practice’s workload (around 45 projects) has come directly or indirectly from contacts made on the road while cycling, in particular on the Cycle to Cannes ride. Why does he think cycle rides lend themselves so well to networking and making professional contacts? “Grabbing a quick lunch or drink after work, whilst great for different reasons doesn’t give you long enough to get to know someone,” he says. Mr Murray believes long rides break down conventional hierarchical barriers. “A younger rider can be cycling along with a chief executive and take their wind or help them in some way and you get a reversal of the relationship. This changes the relationship when they are off the ride too.”

Many long-distance bike riders say cycling, especially over long distances, simply makes them feel good; it lifts their mood and concentrates things down to the essentials. “The pattern of fuelling, riding, fuelling, arriving, celebrating, sleeping and fuelling again puts all the focus on riding and the company of your fellow riders,” says Simon Mottram, chief executive of Rapha, a premium cycling-clothes brand. The simple repetitiveness eases the stresses and pressures of normal life, making it a powerful counterpoint to our sedentary lives, he adds.

Mr Mottram believes it is easier to get to know people while cycling than in other situations. “There is an easy rhythm about conversations on a bike.” Mr Lorraine makes the point even more strongly: “The adrenaline rushes, the serotonin pulses and the surges of endorphin create a kind of high, a sense of euphoria. I feel open, honest and generous to others. I often find I’m saying things on a bike which I wouldn’t normally say, and equally I’ve been confided in when I wasn’t expecting it.”

Perhaps the most compelling reason why cycling is a good way to network is because, for many professionals, it’s a passion and a way of life. “Getting out on the bike is what we’re all dreaming of doing whilst we’re sitting at our computers,” says Mr Mottram. And a shared passion is a fantastic way to start any relationship.

Shed Pounds and Get Faster

Of course the number one desire from all of my students, lose weight and get fast... the easiest and fastest way possible.  Unfortunately, there is no easy way, but below are four helpful workouts that will have you burning those extra calories, and adding serious power to your rides. 

The below is written by Selena Yeager, and shared from Bicycling Magazine.  Both great fitness resources, and interesting reads.

Don't diet, just pedal—these four workouts will help you get there.

By selene yeager

Illustration by Robin Boyden

Coffee-Fueled

Why it works: Before breakfast, your energy stores are only about a quarter to a third full, so your body is forced to burn primarily fat for fuel if you don’t eat.

How to do it: Once or twice a week, have only black coffee (it releases stored fats into your bloodstream for quicker access and makes your effort feel easier) then ride, says Gale Bernhardt, two-time US Olympic cycling coach. (We recommend Bicycling's own Puncheur brew.) Save breakfast for afterward. Out for longer than 90 minutes? Start fueling after 75 minutes to avoid bonking. 

Illustration by robin Boyden

Miracle Intervals

Why they work: Bernhardt calls max-intensity efforts “miracle intervals” because of how effectively they burn fat and boost muscle-building human growth hormone.

How to do it: Once or twice a week, warm up, then do 30 seconds all out followed by 4 minutes and 30 seconds of easy spinning; then 20 seconds all out, 4:40 easy; 10 seconds all out, 4:50 easy. Repeat two more times. Cool down.

Illustration by Robin Boyden

Spin-Ups

Why they work: One study found that when cyclists upped their cadence from 50 to 110 rpm, their energy demands increased tenfold, boosting calories burned. Spinning faster, rather than grinding a higher gear, also keeps your legs feeling fresh longer.

How to do it: Twice a week, as part of a longer ride, warm up for 15 minutes, then pedal just over your comfortable rate for five minutes—your heart rate should rise slightly. Reduce your cadence back to your comfort level for five minutes. Repeat two more times. Cool down.

Illustration by Robin Boyden

’Round Town

Why it works: Riding even 10 minutes here and there helps keep your metabolism humming so that when you’re back at a desk or on the couch, you burn more calories than if you hadn’t ridden. One study also found that participants reported feeling less hungry in the afternoon after doing intermittent bouts of exercise throughout the day.

How to do it: For trips under five miles, forgo your car or public transit and ride your bike.