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Leo Tolstoy once wrote that "everyone thinks of changing the world, but no one thinks of changing himself.” I'm not sure that's true, as New Year's resolutions generally fall into the bucket of changing yourself. You have to focus on yourself here, making New Year's resolutions for others just isn't polite!
Resolutions tend to sort into things we are going to add, and things we plan to remove. Both buckets can feel difficult to implement. But in finance One Day In July generally prefers removal.
As a young sprite growing up and interested in art, I would draw large scenes using a form of realism. And I would really try to fill the scene - white space meant I hadn't done something; the art wasn't complete. My works would get busy, ending up like a cross between a Richard Scarry children's book and Bruegel the Elder's The Fight Between Carnival and Lent.
Later, my art teachers told me, begged me, to breathe a bit, and give the subject space. The lack of activity on the page also had meaning. I could remove things, and the art would get better.
Your investing works the same way. A la Tolstoy, the first thing most non-indexers should do is consider changing something. They are often stuck at firms or in investments that are sub-optimal, and they need to reach the activation energy level to make a change. This is why New Year's resolutions are great: they help people get through that hurdle.
But the next step is realizing that the positive change could be a complexity subtraction. Most of the time this is the case for new clients at One Day In July. More complexity and activity do not necessarily equal better returns. Not to throw Bruegel the Elder under the bus1, but complexity results in something that can be difficult to understand. Sometimes you need a little less Carnival and a little more Lent.
This approach works as an investor because finance is a broad and complex field. Your investments react to the economy and the news cycle in myriad ways. By simplifying the problem set to fewer items, we understand them well, and the understanding leads to confidence. We want clients to share that confidence with us, because the benefit shows up in periods of deep fear in markets. If you don't understand what you own, your confidence will crack under stress, and if that happens you will struggle to do well as an investor.
Dan Cunningham
1. Ok, ok. He painted this on boards of an oak tree. Just for that I need to cut him some slack.
At least in the Dutch Tulip Mania, when it all came crashing down, you had a pretty flower. Granted, the bulb was no longer worth the price of a fashionable Amsterdam mansion (including carriage house and garden), but your spring would have been a little more beautiful.
The same cannot be said of the crypto bubble.
As this odd financial behavior plays out, let's review some keys points.
Keep in mind that one of the underlying premises, or fears, driving this bubble is well-founded. The United States government is trying to deal with an increasingly high debt load, and the way it has and likely will try to mitigate that liability is by inflating at least some of it away by debasing the dollar. But there are better ways to protect yourself as an investor (mainly by owning businesses) than resorting to coin-land.
One of the beautiful things about investing is that you do not need to swing at every pitch. This is not baseball. You can let pitches sail right through the strike zone, and there is no harm done. People make money all kinds of ways. In 2024, Bitcoin is up a lot. That's fine, and that's wonderful for Bitcoin holders, assuming their coin wasn't lost or stolen.1 But it does not mean you have to get on board.
So let's step through a few reasons why, when your nephew pontificates on the wonders of crypto at your holiday get-together, you are going to just let it roll.
1. Notice the currency used when everyone quotes coin prices. Do they quote it in Bitcoin? No. Do they quote it in Ethereum? No. They quote it in U.S. dollars, because U.S. dollars are the universal standard that everyone, well most people, trusts. Universality and trust are key elements of a currency. There is so much irony in the fact that they use dollars to quote their coins.
2. Don't be fooled by the tech nature of this bubble. What is happening here is the crypto promoters are acting as if the technology is some useful thing that sheds value onto the coin as an investment. Venture capitalists are actually decreasing their investments in blockchain and crypto, as after 15 years, use cases are just not showing up.2 The VCs had a period of time years ago where they couldn't find the next tech wave, and they blew oxygen onto the crypto fire, but now that they have found useful artificial intelligence, they are moving on. (To be fair, crypto does have some "use" in facilitating illicit transactions.)
3. So if you don't need the fancy veneer of software to market the underlying coin-which-has-almost-no-function, why are we using roughly 2% of the nation's energy to mine these things? If we are going to trade something around that is of fixed quantity (not all cryptocurrency is of fixed quantity), why not just, say, put 10,000 unique glass spheres in a box, start the trade at X value, and say "have at it folks, convince other people to pay you more for your unique glass sphere. The dollar might depreciate but we are not going to inflate away the 10,000 spheres."
I suspect over time a few of these coins will stay around, roughly serving a function similar to gold. The majority likely will fade away to zero. I could be wrong. I don't really care if I'm right or wrong though, because I believe there are better, more understandable opportunities in indexing.
Dan Cunningham
p.s. Get those financial New Year's resolutions ready! Unloading expensive financial products and managers is a great way for you to fight inflation.
1. NBC News 9/10/24: Crypto scams stole $5.6 billion from Americans last year.
2. Galaxy Research 10/15/24: Crypto & Blockchain Venture Capital Q3 2024
To their credit, iBonds do have a clever name. They have the "i" tucked on there for "inflation," and they are riding the coolness coattails of Apple products. So the naming team deserves credit!
For the most part we don't recommend iBonds, but they're not confined to the annuity-whole-life-insurance bin of despair either. They were popular in 2022 given their 9%+ rates of return. Let's look at them now, and also what can be learned from the past two years.
iBonds have a unique construction in that the rate changes every six months, largely in sync with inflation. So they accomplish a dedicated purpose - they are an inflation hedge. In our complex world, a simple product that serves a dedicated purpose gets kudos. They have the benefit that the counterparty is the United States government, and therefore doesn't have lots of other unstated motives. (This can be a problem in the corporate bond market.)
So did people make that juicy, risk-free 9%?
Yes sort of.. and then quickly no.
To parse that sentence, the "sort of" is because the interest rate is federally taxable if the product is held in a taxable account. So you have to take the 9% down by your federal tax rate. This is better than CDs or money markets held in taxable accounts; those products are federally and state taxable.
And the "quickly no?" That is because as inflation fell, after the first few payments the bond coupons reset to lower levels. The bonds that were bought in October 2022, while initially paying over 9%, are now paying 1.90%. Apparently that is above inflation, although don't tell anyone who actually goes to a grocery store.
This is called interest rate risk, and I was warning clients in 2022 and 2023 to take it seriously. It affects short-term bonds, CDs, and money markets in particular. It's important to recognize the collapse in payments from the October 2022 iBond just two years later. It was nothing like locking in a 30-year Treasury bond in September 1981 above a 15% rate.
Here is the full chart of iBond rates. The rate depends on the date the bond was purchased, as a portion of the coupon is fixed for the life of the bond:
https://www.treasurydirect.gov/files/savings-bonds/i-bond-rate-chart.pdf
Dan Cunningham
Sources: iBond 2022 rates and tables:
https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart
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