What We're Thinking: Inspiration Struck

    

It was 2:56am this morning. I had just read some updated information on stroke prevention. Get good sleep was a part of it! The phrase, "healthy, wealthy, and wise" ran through my head. I texted the article to the family. 

Then I got to thinking about all the other people I know. People like you. Would they find commentary on health, wealth, and wisdom useful?

Then I realized that these Considerations have been focused on the wealth part. I thought we might make it better by including health and wisdom. So, starting here and now, each issue will include something on Health, Wealth, and Wisdom.

Let's roll.

Health

I mentioned the updated stroke prevention information. The emphasis is on regular screening for stroke risk factors like high blood pressure, high cholesterol, diabetes, and obesity. The guidelines also include lifestyle changes such as eating a nutritious diet, staying physically active, and getting healthy sleep.

If you're younger and the possibility of a stroke is not on your screen, it's still not too early to establish a healthy lifestyle. Small actions taken consistently over long periods of time can produce amazing results. It's like saving a little bit each payday. In 20 years you'll be astonished.

You can read the full article here.

Wealth

Goldman Sachs recently published a 37-page research piece suggesting that US stock market returns for the next 10 years are expected to be a paltry 3%. That's far below both recent and historical returns. They cite market concentration and high valuations as the main culprits.

Ben Carlson and Barry Ritholtz, both of Ritholtz Wealth Management, countered that 3% would imply a financial debacle of some kind. Like the stock market crash at the front end of the Great Depression, the stagflation of the 1970's, or the Great Financial Collapse (GFC) of 2007-08.

They contend (here and here) that while a financial debacle is always possible, the probability is low, and such a debacle is impossible to forecast ahead of time anyway.

We align with Ben and Barry on this.

Wisdom

Morgan Housel is one of our favorite up and coming writers. His two books, The Psychology of Money: Timeless lessons on wealth, greed, and happiness (2020), and Same as Ever: A guide to what never changes (2023), will have long and useful lives. He also publishes in a blog at the Collaborative Fund.

In a recent post, he wrote of a Russian proverb that goes, “The past is more unpredictable than the future.” 

It’s common for our memories of the past to become disconnected from how we actually felt at the time. Hence, there are "the good old days."

But we sanitize the past because we now know how the story ends. In retrospect, we think nothing was uncertain and there was nothing to worry about. In fact, our past selves had no idea how things would end up and we had a lot to worry about. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.

The current moment that might feel risky and uncertain is often bursting with opportunity. The past isn't as good as you remember. The present isn’t as bad as you think. The future will be better than you anticipate.

Today happens to be election day. We'll begin remembering more of the past, assessing the present, and gauging the future. 

 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

There you are. Feedback is the breakfast of champions (wisdom). Let us know what you think. Is this a good direction for us to take? Or should we just stick to wealth? If you like, feel free to forward this to your family and friends. And as usual, if there's something you'd like to talk about, here's our contact information.

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.

 

What We're Thinking: Interest Rates Are Falling-- What Should You Do?

 

The worst bear (down) market ever, in fixed income (bonds), unfolded from August, 2020, to October, 2023. You lived through it. Maybe you didn't even know it happened. During that time, bond investments like what most of us own in our IRA's and 401k's, fell by about 24%. This gave rise to hand-wringing and worrisome chatter about the usefulness of the classic 60/40 portfolio, where bonds occupy the 40 part.

But like a bear market in stocks, the worse things get, the better the outlook becomes for patient, long-term investors like us. For the past year, bonds have risen by about 17%. Money market fund yields have risen from near zero to over 5%. What's not to like?

What's not to like is the probability that 5ish money market yields could shrink into the 4's over the next year. The chart below shows current expectations for the Fed Funds Rate. By the way, that's the only rate the Fed controls. All other rates, like for loans and other credits, are the result of global bond trading, most of which is done by computers.

Relax. This is nowhere near apocalyptic. Bonds in long-term portfolios should do just fine. The current yield of a bond is a good indicator for its future return. The current yield on widely-held bonds is around 4%. With inflation headed toward 3%, bonds are offering decent compensation.

So, let's net this out for most portfolios.

👉If you have a reserve, an emergency fund, or money earmarked to buy something within the next 3-5 years, holding it in a money market fund, CDs, or a short-term bond fund will be fine. Just expect the rates to gradually work lower.

👉If you have bond funds in retirement plans like an IRA, 401k, or in taxable accounts, chances are they are part of an intentional asset allocation strategy. There's no reason to abandon that. Stay the course.

Everyone's situation is a little different. Your life path is not like anyone else's. If you'd like to have a conversation about this, here's how to reach us:

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.

What We're Thinking: Cryptocurrency and Blockchain Update

 

In October of 2021, we posted comments on “Cryptocurrencies and Blockchain.” It began with a 1994 quote from Peter Lynch, the legendary manager of Fidelity Magellan Fund. He said, “If you can’t explain to a 10-year-old in two minutes or less why you own a stock, you shouldn’t own it.”

This is an update to that post.

First, if you’re suffering from periodic bouts of FOMO (fear of missing out), relax. When the 2021 post was written, Bitcoin was trading at about $61,000. About a month later it peaked at about $64,000. From there, it fell to about $17,000 by the end of 2022. That was a 73% loss. If that was the Dow-Jones Average, we'd be talking about a 29,000-point loss!

The good news is that the price has recovered to about $62,000. So, net net, holders are about even in nearly three years. In the meantime, your money market fund has served you well. Like I said, if FOMO tugs at you, relax.

But there's more to this story. An important change has occurred since 2021. Government regulators have approved the creation of cryptocurrency ETFs (exchange traded funds). This made it easier and safer for anyone with a brokerage account to own a crypto security. This is what the big asset management companies like Blackrock, Fidelity, and Schwab have been arguing for. And they have quickly followed up by offering a wide range of crypto products.

Vanguard is not playing. Their view is that "Crypto is more of a speculation than an investment. This is at the root of our decision to not offer crypto products. With stocks, you own a share of a company that produces goods or services, and may also pay dividends. With bonds, you get a stream of interest payments. Crypto is an immature asset class with no inherent economic value, no cash flow, and extreme price volatility.”

Let’s be clear. We’re not morally opposed to betting, speculation, or lotteries. They’re fun. Entertaining. There’s a remote chance of a big payoff. Want to speculate? Fine. It’s your money. Just don’t kid yourself about it being an investment.

Blockchain
Blockchain is the database technology that enables decentralized management, anonymity, authentication, forgery resistance, record-keeping, and verified exchange of assets among mutually suspicious individuals. Now we’re talking. There are a lot of mutually suspicious people walking around.

Blockchain is the underlying technology that supports the creation of cryptocurrencies like Bitcoin. But it has many other applications. It's already being used in contracts, medicine, finance, real estate, travel, insurance, entertainment, supply chain management, and AI (artificial intelligence) applications.

No one owns blockchain. It’s like no one owns the 'https' in a browser address. But anyone can use it. Again, from Vanguard, “We have a lot of interest in blockchain. We believe its application will make capital markets more efficient, and we’ve been actively involved in research to use it."

Summary
Cryptocurrencies are a high-risk, speculative game. That has not changed in three years. But we’ll continue to monitor it.

Blockchain is about building more complex and efficient databases, some of which support the creation of cryptocurrencies. In the meantime, Apple processes 285 million transactions every day on its blockchain. JP Morgan has launched its own blockchain called Onyx. Nvidia is a supplier of chips that help build blockchains. And there's an obvious link to AI tools.

So, if you hold a total stock market index fund, the S&P 500, or an international stock index fund, you already have an ownership stake in the creation and use of blockchain technology. Banish FOMO.

This is great news for people of any age who just want to save and invest for future goals. You don’t need to do anything except save aggressively, invest in low cost, broadly-diversified global index funds, and stay the course. 

That can be explained to a 10-year-old in less than two minutes. You’re not 10. We have more than two minutes. We’re here. All-in. Let’s talk.

 

 James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262

 Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.

What We're Thinking: Daniel Kahneman (1934-2024). What Did We Learn?

 

Nobel Prize winning behavioral scientist, Daniel Kahneman, passed on recently. Regrettably, as is often the case, widespread recognition and accolades for great work comes post-posthumously. We learned a lot. Several points are highlighted below. You'll be able to use them in most areas of your life as well as personal finance.

👉Nope. We're not rational.

Kahneman and his partner, Amos Tversky, illustrated that our default behavior is not rational. You've heard the phrase "all things being equal?" Stop! All things are never equal. Our default behaviors are shaped by our experience, peer influences, social media, and the desire to fit in. How does this impact you? The better question is, how doesn’t it?!

👉Take a broad view.

Business, economics, and life itself is an organic, complex, adaptive, paradoxical process. That said, there are a few things that never seem to change: fear, greed, tribal affiliations, risk, jealousy, overconfidence, and shortsightedness to name a few.

We make plans anyway, usually with best-case assumptions. Then we assume the outcome will follow the plan. We should know better. A plan is just a process map. Whether you're going on a cruise, piloting an airliner, or investing for retirement, plans must be reviewed and updated frequently with new information or updated assumptions. A plan is never one-and-done.

👉Use rules.

Rules help neutralize the distractions that show up as hunches, intuition, biases, the excitement of a moment, pundit predictions, and the temptations of market timing. Examples of rules are selecting an asset allocation, naming the kinds of investments you will or won't own, deciding on the size of a cash reserve. Once those rules are set, it's a lot easier to ignore the inevitable distractions. Rules help us be indistractable.

👉Test for regret.

Kahneman found that losses are twice as painful than the joy of equivalent gains. Read that sentence again. Losses hurt more. But dwelling on a bad quarter or even a bad year can divert us from staying focused on long-term goals. Understand the possible downside and adjust accordingly, before it happens. You'll avoid absurd and costly fixes.

We believe that behavior is the key to meeting goals. There is plenty of reliable information and evidence at our fingertips. What we do with that information is what matters. Our job is help you define what's best for you and talk you out of doing things you'll likely regret.

 

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.