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In Celebration of International Women’s Day: A Look at Financial Milestones in Women’s Lives

International Women’s Day started over 100 years ago as a labor movement in New York City.

Women workers in the needle trades began to demand fair wages and workplace limits and protections. Women did not have the right to vote, so to effect change and call attention to the cause, they organized a march through New York City’s Lower East Side.

From the beginning, women’s day has focused on economic equality across every dimension of life, education, and work.

There is excellent news on increasing women’s participation in traditionally higher-paid, male-dominated professions. The now decades-long focus on encouraging STEM education for girls and women has dramatically increased participation in related vocations.

The U.S. Census Bureau reports that while overall women’s workforce participation is up slightly in the 20 years between 2000 and 2019, certain careers have seen tremendous inflows of women. The number of women becoming veterinarians has doubled. Women are becoming chemists and other scientists, mathematicians, and dentists at impressive growth rates. 

As women enter higher-paid professions at increasing numbers, they lower the gap between male and female salaries. And as women are creating their wealth, they are doing it in ways that reflect their lifelong needs, habits, and goals. These are – and should be – different from men at every life stage.

Here’s our round-up of some things women should consider as they work to create lasting wealth at every stage of their financial journey.

The Early Stage of Your Career

Income has likely increased substantially, but debt is often still significant at this stage. One other danger is “lifestyle inflation” – being careful to live within your means and save for the future is the foundation of wealth. Your goal in this stage is to create financial security as a baseline and then work to build flexibility. You may want to change careers, go back to school, even take time off. Saving and investing can make those choices possible.

  • Lower Debt. Strategies to lower debt quickly include refinancing to a lower interest rate, paying more than the minimum every month, and automating your payments.
  • Create a Cash Flow Plan. This isn’t about budgeting – it’s about lining up your money with your short- and long-term goals. Especially if you have lumpy income from bonuses or variable work hours, you’ll want to map out a strategy to put your money to work. Hint: open separate bank accounts to align with goals.
  • Take Advantage of Employee Benefits. Employee benefits are where it’s at to increase income and reduce taxes. Contribute at least enough to a 401(k) to get the employer match and strive for 15% of salary. Take advantage of healthcare and commuter benefits.
  • Begin Saving. Saving into an emergency fund is critical. Automate the process until you have 3-6 months of saved income.

The Mid-Career Stage

For most women, mid-career is the busiest stage. You’re focused on work, but you’re also likely getting married, having kids, buying a home, etc. Besides being the mainstay of your partner’s and kid’s lives, you need to be the CEO of your career to be sure you get paid what you deserve and that you can have the career flexibility you want.

  • Love and marriage (and finances). Yours, mine, and ours is how you create trust and set a precedent for open, honest conversations about money and goals. Begin the conversation before you get married.
  • Maximize retirement savings as soon as possible. Women have longer retirements. If you’ve left the workforce and your spouse is still working, contribute to a spousal IRA annually to keep retirement saving on track.
  • Put Investing on a Schedule. Open a taxable investment account and set up an automatic contribution schedule. Be thoughtful and understand your risk parameters – but get invested.
  • Proactively Advance your Career. Benchmark your career every year. Don’t wait to get promoted or get a raise. You can hire a consultant, build a relationship with a good recruiter, or use Linkedin effectively.

Retirement Planning

It’s finally here! You’ve built a solid retirement savings account; now you’re ready to enjoy your new life. Setting up income in retirement looks different for women than for men, because of their longer life expectancy. Think through:

  • Social Security Income. Delay claiming social security if possible. This can provide a much larger lifetime benefit.
  • Consider working for a few years. Social security bases your benefits on your 35 highest-earning years, so replacing an early career year with a much more highly paid later year can bump up your payments.
  • Life Insurance. If you’re married, think about a spousal life insurance policy.
  • Long Term Care Insurance. Get a long-term care policy in place.
  • Estate Planning. Update your estate plan and talk through everyone’s wishes for what will happen as you age. Doing it now while you’re healthy and creating a funding source will help ensure a graceful, happy older stage.

The Bottom Line

Women continue to make tremendous progress on all fronts while guiding and leading us towards a more inclusive world. Taking time to take care of your finances at every stage can put you on the path to lasting wealth.

This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Ukraine War: Market Update

There is a LOT happening in markets this week. As we said in our email on Monday, this may be the most important week since the 2008 financial crisis.

Today we’ll discuss a few of the major issues we’re watching:

  • Sanctions against Russia (the Financial War)
  • S&P 500
  • The Fed

As a note, we’ve put together a series of resources that we have been tracking, which you can reference here:

Ukraine War: Informational Resources

Let’s get started.

Sanctions against Russia (aka, the Financial War)

Once Russia invaded Ukraine last Thursday, the U.S. and the European Union announced a series of initial sanctions against Russia and various Russian companies. These sanctions were quick and were very coordinated among nations.

This immediately caused Putin to fight three separate wars: a military one in Ukraine, a financial war with the global financial system, and a war of perception at home.

Let’s focus on the financial war.

Frankly, once the initial sanctions were announced last week, we perceived them as basically useless.

Nearly every one allowed the entities and individuals sanctioned a 30-day window to comply with the sanctions. This meant that they weren’t going to take effect until potentially AFTER the war was over.

However, over the weekend, the sanctions became much more punitive.

They were also universally approved by the US, European Union, and the UK. Other countries such as Switzerland, Australia, Japan, New Zealand and Taiwan have all made their own sanctions against Russia as well.

There are essentially four types of sanctions being imposed:

  • Financial
  • Trade-Related
  • Sanctions on Individuals
  • Travel

Here’s our overview of these sanctions:

All of these sanctions have two goals:

  1. Punish Russia financially by freezing financial resources and removing them from the global financial system.
  2. Turn global and Russian sentiment against Putin.

So far these are working well in the short time they have been in effect.

Russia has $640 billion in foreign reserves that have now been frozen. The war is costing them approximately $20 billion per day. By most estimates, Russia has $200 billion of unencumbered assets within Russia that have not been frozen by sanctions.

That means that financially, Russia could possibly run out of money in 10 days.

We shall see, but the initial response is that the sanctions have indeed put Putin in a tough situation.

But what impact has the war had on the stock market?

S&P 500 Index

Historically, when wars begin, the stock market tends to bottom near the time of the initial invasion. This has been true for every major war since the Germans invaded Poland at the start of World War II.

So far, markets have responded to the Russian/Ukraine war as markets historically have done…by rallying higher against almost every ounce of common sense any of us possess.

As of today (March 2nd), the low point of the market happened on Thursday, February 24th. This was the day that Russia invaded Ukraine.

Since then, the S&P 500 is UP nearly 7%.

The chart below shows the S&P 500 Index since last June.

The first thing we notice is that the low point of the market thus far was immediately following the invasion. Despite the onset of this war, markets are essentially the same place they were in mid-January.

The second thing we notice is that the market was down “only” 2% the morning of the invasion.

That sounds like a lot, but relative to the volatility that occurred during the COVID crash, when markets moved nearly 10% any given day, a 2% move isn’t overwhelmingly bad. Especially given the fact that many people think this could lead to a nuclear war.

However, during the COVID crash, and also during the bear market of late 2018, markets regularly moved 2% a day.

But this pullback feels worse, doesn’t it?

That could be because we have been lulled to sleep by a very calm market in the past couple of years. It also could be that the risk of nuclear war seems like a reality for the first time in decades, which is obviously nothing to ignore.

Either way, people in general seem to have a more negative feeling towards these developments.

While the invasion itself didn’t cause much volatility, markets definitely anticipated volatility prior to the onset of this unnecessary war.

In fact, the S&P 500 was down 14% from peak-to-trough intraday in 2022, while the Nasdaq and Russell 2000 were both down over 20% peak-to-trough.

Does the fact that we didn’t see much volatility since war began mean we’re in the clear?

The answer is both “maybe” and “absolutely not”.

There are a number of positives that could result in a strong market if the Ukraine war comes to a peaceful and quick resolution:

  • The economy is strong.
  • The consumer is strong.
  • The Fed is now likely to slow down their pace of interest rate increases, resulting in continued support of financial markets.
  • The world is unified against Russia, making a coordinated effort to overcome the fallout from sanctions more economically and politically realistic. (Supplying Europe with gas from the US, for example.)

So if we get a peaceful resolution, there are reasons to be optimistic.

However, the elephant in the room is Putin. More accurately, he is the wild animal who is cornered and scared.

Dictators have one goal: to remain in power.

And Putin’s reputation has been greatly diminished both globally and domestically.

If he can’t get out of this situation peacefully, save face, and retain power all at the same time, there is no telling what he might do. And this is the risk we all fear.

Let’s refocus on the financial markets.

Prior to the Ukraine mess, the markets were selling off because concerns on inflation and the speed at which the Fed might act.

What should we expect from the Federal Reserve now?

The Fed

What might the fed do now?

The easiest way to look at this is what the anticipation of Federal Reserve rate hikes might be.

The next chart, from Bianco Research, shows the probability of Fed rate hikes at each upcoming Fed meeting.

Here’s how to read this table.

On the top left, the FOMC Meeting on 16-Mar-22 shows (from left to right across the table) a 100% probability of a hike of 0.25-0.50%, a 21% probability of a 0.50-0.75% hike, and so on. (FOMC stands for “Federal Open Market Committee”)

This tells us that the market is now pricing a 0.25% hike in March, and a total of four rate hikes this year.

Three weeks ago, there was a probability of over 90% of a 0.50% rate hike in March, with 6-7 hikes likely this year.

So the Ukraine situation is causing the Fed to pause slightly, at least for now.

That could create a tailwind for stocks as well.

But they are definitely behind the curve.

For the past 30 years, the Fed Funds rate has essentially mirrored the 2-year US Treasury yield, as shown in the next chart.

But if we zoom in to the recent rise in the 2-year Treasury yield, we see just how far the Fed needs to go to catch up.

Six months ago, these rates were the same.

Now, the Fed would need to hike 6 times to catch up to the 2-year yield.

This is their dilemma.

The other thing to note on the chart above is that the 2-year Treasury yield barely moved in response to the Ukraine war.

Globally, investors have not been moving into safe havens like we would normally expect.

Bottom line, we are not seeing the type of volatility that we would probably expect in a conflict with the implications of this one.

That leads us to believe one of two things will happen:

  1. Markets are correct. This implies that the Ukraine conflict will come to a conclusion within a week or two.
  2. Markets are unprepared. This implies that the real volatility is yet to come.

We don’t like to think about what happens in scenario 2.

But we must think through it and be prepared for any scenario, for that is our job as fiduciaries of your capital.

On Friday, we will give you a portfolio update and look at the specific levels on the markets that we are watching.

Invest wisely!

Thinking Through “Life-Changing” Wealth

my new life chapter one. planning considerations when selling a business, receiving an inheritance or a successful investment.

Incorporating a large lump sum of money into a financial plan requires thinking through a series of impacts that happen over time.

There are financial, emotional, tax, legacy, employment and a host of other issues to be addressed.

Whether the influx is due to an inheritance, an asset sale, or an IPO, taking some time to adjust before making any decisions is a good idea.

We get into some immediate implications, and then some further down the road.

Take Time to Breathe

Before you address the changes a large sum of money will bring, you may want to process the events that led to the inflow.

The loss of someone you care about, the sale of a business you’ve built, the monetization of the work you’ve put into a career are all emotional events.

The cardinal rule of investing is to remove as much emotion as possible. So taking time to work through the underlying feelings before you think about the ongoing changes to your life is a healthy approach.

Prioritize

By far the most important part of this process is to prioritize your actions.

There are some issues that require your immediate attention:

Following the death of a loved one, for example, there is the ugly “business” of processing and settling the estate. Good planning can help make this transition a smooth one, but there are still steps you must take those first few weeks and months.

Selling a business or having a large inflow of stock options require careful tax analysis, which we discuss below.

With any inflow of wealth, you’ll need to address these immediate deadlines.

However, you shouldn’t feel that you need to develop an investing plan right away. Yes, there may be opportunity costs of not immediately getting funds invested, but it is far more prudent to develop a disciplined investment plan to avoid making costly investment mistakes with large sums of money. And the volatility you may be used to with your portfolio takes on a different meaning when you add a zero or two to the end of the values.

Also, if possible, you should avoid any large amounts of spending right away. Your needs, wants, goals, etc. may change as you get used to your new reality, and you don’t want to do anything that can’t be undone.

By prioritizing what decisions you need to make first, you can more easily process the inflow of wealth to help you avoid costly mistakes.

Understand the Cost of Taxes

The money may be yours – but the government most likely has a claim on some of it.

Having a very clear accounting of how much tax is due and when, and how you are going to pay it, is the first step. The taxes due may come out of the lump sum, or it may be more advantageous to pay the taxes from other sources of funds. You’ll need a plan to understand the right choice for you.

For example:

  • An inheritance may include very low-basis stocks that you do not want to sell. But it could have a step-up in cost basis that may warrant selling them first. Tax laws change over time, and understanding what you need to do to is critical.
  • You may choose to structure the sale of a business in a deferred sales trust, so that you can minimize taxes. You’ll need to set up and implement that structure, and plan for gaining access to the funds over time.
  • Post-IPO, you’ll be subject to taxes on your shares, and you’ll have some timelines you need to be aware of and taxes you’ll need to pay, whether you hold on to the stock or not.

Be sure to identify all tax strategies with a tax professional, because there may be ways to reduce your overall tax bill in the year that the event happens.

For example, if you have charitable inclinations, you might want to consider a gift in the year you received the lump sum. One example is via a Donor Advised Fund. Learn more HERE.

The ideal situation is to discuss potential tax implications prior to a large liquidity event when possible.

Rethink Your Approach to Risk Management – Both Investment Risk and Asset Risk

Adding a large sum to your overall financial picture will change how you think about risk.

You’ll need to assess your liability and protect your overall assets. This may mean an umbrella policy, structuring or titling assets differently, or in the case of an inheritance, it may mean a different insurance strategy.

Your investment goals may also change with time.

If you’ve sold a business and this is your retirement fund, your risk profile will look different than it did when you had a business creating income.

With an inheritance, an IPO, or other lump sum, you may decide to change, cut down, or stop work. This will create different time horizons for investing and different risk tolerances.

It may take time to understand what you want to do and put a plan in place.

Keeping assets as flexible as possible is the key to giving yourself choices as you move forward. You’ll want to minimize risk and avoid locking up funds until you have a clear understanding of your new goals.

Create a New Path Forward

Once you get used to your new situation, many people decide to make big changes.

These could include creating a legacy, actively gifting to help others, or using your funds to provide income for yourself so that you can devote your most valuable resource – your time – to causes you care about.

Or it may mean making a big purchase you’ve always wanted, travel, or just taking time to spend with family.

Most likely it is a combination of these dreams.

In the case of a business owner, you worked hard to get to where you are. You most likely made sacrifices that no one sees or knows about.

It is okay to enjoy your new wealth while still using it to positively impact others in whatever way you choose.

The Bottom Line

Thinking through your options means working carefully to create a financial plan that maximizes your assets, minimizes your taxes and provides for you and your loved ones.

The new plan may be bigger and more complicated, but the basic principles will still apply. You’ll still need to take the time to work with your team to set out what you want, and then put it into action.

We’re always here to talk it through with you.

Houdini’s Hole

The Paramount Theatre in Austin, Texas is a city treasure. It has an amazing variety of shows, and the list of notable performers is unmatched. It was built in 1915, and began mostly as a vaudeville house.

Just a few of the notable performers in its history are Miles Davis, the Marx Brothers, George Carlin, Ray Charles, Billy Joel, Don Rickles, Chuck Berry, Gladys Knight…the list goes on. Learn more about the Paramount Theatre: https://www.austintheatre.org/

Harry Houdini

One of the most famous performers to grace the Paramount stage was Harry Houdini. And his presence can literally be seen to this day.

Houdini performed there in 1916. At the time, he was one of the most famous people in the world. His slight-of-hand tricks mesmerized audiences worldwide.

One part of his performance was a suspended levitation trick.

He would dangle from the ceiling and escape a straightjacket or chains or some other kind of concoction.

He most likely performed this trick at the Paramount during his eight shows in Austin. To accomplish it, the theater operators drilled a hole in the ceiling of the Paramount and dangled the global superstar over the audience.

The hole they drilled is still in the ceiling today, over 100 years later, as shown in the picture below.

Houdini’s hole can be seen in the green area to the top-right of Saint Cecilia’s right hand. Photo courtesy of the Paramount Theatre website.

The details of Houdini’s trick that night are unknown.

But as with any kind of “magic” trick, it’s not about how the performer escapes. It’s all about distracting the audience to create an illusion of making the impossible possible.

This same type of “magic” is happening in financial markets today.

Suspended Levitation

Harry Houdini mastered the art of the suspended levitation tricks.

In today’s markets, there appear to be two Houdini’s: the Fed and the mega-cap tech stocks (such as Tesla, Facebook, Google, Amazon, Apple and Microsoft).

We’ve discussed the Fed a LOT in these reports.

But we came across a new chart that shows just how big of an impact the Fed may have had in market growth over the past decade.

Bank of America Global Research did some very interesting analysis.

What they did is look at how much of the market growth can be explained by earnings growth, and how much can be explained by the Fed’s balance sheet.

The first chart below shows how much of the returns of the S&P 500 can be explained by changes in the earnings of the companies within the index.

Earnings Contribution to changes in the S&P 500 Market Cap

This chart paints an interesting picture.

Traditional investors assume that when earnings increase, so should the stock price. That’s what we’re buying after all, right? Shares in a company whose business should grow?

But the chart above tells us that’s not quite the case.

It tells us is that from 1997 to 2009, only 48% of the changes in the index can be explained by earnings growth.

And after the 2008 Financial Crisis, earnings only accounted for 21% of the changes in the S&P 500!

That’s pretty amazing. Only 21% of the increase in the market over a decade-long period is due to earnings?

What would explain the rest of the growth?

There are a variety of things that impact stocks:

  • Earnings: Higher profits or revenue can lead to more valuable companies.
  • Flows: More money chasing stocks makes it go higher, less money makes it go lower.
  • Sentiment: Optimism creates more buyers, while pessimism means more sellers.
  • Investing Alternatives: When stocks have competition for returns, less money goes into the stock market.
  • Liquidity: When there is more money in the system, there is additional capital to put to work that is not tied up in other areas like inventories.

We could write dissertations about each of these categories.

But let’s focus on the last item, liquidity. This is the main avenue where the Fed has an impact.

Fed-Driven Market Growth

Bank of America also did the analysis on how much of the price changes can be explained by changes in the Federal Reserve balance sheet, which is shown in the next chart.

Fed Balance Sheet Contribution to changes in the S&P 500 Index

Here we really start to understand just how much impact the Fed has on markets.

From 1997 to 2009, literally zero percent of the return of the S&P 500 can be explained by changes in the Fed balance sheet.

Granted, the Fed’s balance sheet wasn’t that big before the financial crisis. But that’s kind of the point.

Since 2010, a whopping 52% of market performance can be attributed to the Fed. That’s even more of an impact than EARNINGS had in the 12 years leading up to it.

No wonder the Fed is nervous about what happens when they start to reduce the size of the balance sheet. (Read our article earlier this year The Fed is Stuck.)

They are creating an illusion, just like Houdini.

What started in 2009 as proper policy to keep the financial system operational, has since turned into a permanent juicing of the markets to keep them chugging higher.

The Fed starts to talk about tapering, and reverses course at the slightest whiff of risk.

Case in point…the Fed started to talk about tapering right before Thanksgiving. Markets fell a quick 5%, and next thing we know it’s off the table.

We’re not talking about the COVID Crash, where stocks plummeted 40% in a few short weeks. We’re talking about a normal 5% correction. They blamed the Omicron mutation, but that was just an excuse to postpone making tough decisions.

Our job as investors is to make money. So we appreciate what the Fed is doing.

And it may continue to work for a long time still. But we have to think about what happens next.

But the Fed isn’t the only one doing the heavy lifting. Tech stocks have helped tremendously this year.

Big Tech Stocks

The other market magician is the biggest-of-the-big tech stocks.

There have been increasing acronyms that represent these stocks:

  • First it was FANG. Facebook, Apple, Netflix and Google.
  • Then it became FAANG. Add Amazon to the mix.
  • Then it was FANMAG. Microsoft needs love too.
  • Now we can include Tesla and Nvidia. Who know what that will spell.

Whatever it spells, it’s yet another way the market is levitating.

We discussed the 5 largest stocks in our Strategic Growth Video Series, which you can view HERE.

To view just how much of an impact the 5 largest stocks have had this year, look at the following chart from S&P Global Research.

This chart is quite shocking.

As of December 6th, when this chart was published, the Nasdaq index was up almost 20% for the year.

Without the largest 5 stocks, the index is DOWN over 20%.

Let’s hear that again. The index goes from UP 20% to DOWN 20% by removing only 5 stocks.

(By the way, these 5 stocks are Amazon, Google, Tesla, Facebook and Nvidia.)

Jiminy Christmas, Houdini, that’s some trick.

We can interpret this two ways. And these two ways have extremely different outcomes.

On the one hand, this could be positive.

The fact that so much of the index has fallen means that a large majority of stocks have actually gone through a pretty tough stretch. Many have gone through outright bear markets when viewed individually.

Maybe these stocks are ready to begin to move higher.

That would provide excellent investment opportunities outside of these big tech stocks.

On the other hand, if these stocks do start to falter, watch out.

If these handful of stocks start to weaken, and there is NOT a rise in the majority of the other components of the index, we could start to see a market that shifts from slowly drifting higher to quickly falling.

Reality is probably somewhere in between.

If the magicians of the market stop rising, but a majority of the other stocks start to do better, we could see an environment where the overall indexes are choppy and flat, but without any major losses.

That seems like the likely outcome while the Fed remains accommodative.

So far, every little dip has been bought. The scary 5% correction that we saw a couple weeks ago really didn’t amount to anything.

So the slight of hand continues and the performance goes on.

The market Houdini’s have escaped harms way for quite some time now. But if the Fed doesn’t continue to escape, they could leave a hole that we will be able to see for generations to come.

Invest wisely!

Safeguarding and Passing on Your Digital Assets

cryptocurrency theft concept on smart phone screen. Big red hacked message and empty wallet. Phone on a laptop computer.

Google searches for “cryptocurrency” hit all-time highs in May. A survey from CNBC found that 1 in 10 people now invest in crypto. Of that group, 65% got in the crypto market within the past year.2

As crypto becomes a more significant part of the financial picture, it’s essential to ensure that the assets are safely and appropriately stored and that you have a plan for the eventual transfer of them – but this process doesn’t work the same way as for traditional assets.

Taking Careful Inventory

One of the first steps to safeguarding your digital assets is taking inventory of what you have. With how many ways there are to purchase and store crypto, it’s easy to forget where all of them are located and since the space is still new, there isn’t really an easy way to keep track of them all.

Taking inventory looks different for everyone, but one of the most common ways is using a simple Excel or Google spreadsheet. You would want to include a few things: the name of the asset (bitcoin, ether, etc.), how much of it you own, your original purchase price(s), and where it’s located. This information will help you keep everything in order and makes the information easily accessible for when tax time rolls around.

There is software out there, such as CoinTracker, that can help keep track of your digital assets, but not every software integrates well with others. Right now, it may be easiest to keep it simple and stick to manual input until more sophisticated solutions exist.

Storing Crypto in Your (Digital) Wallet

There are two different kinds of wallets. Hot wallets (also known as ‘soft’ wallets) live online and are usually an extension in your web browser or an app. These would be brands such as MetaMask, Rainbow, or Strike.  The other kind is a cold wallet (also known as a ‘hard’ wallet). These exist offline, and are like a USB drive. A hard wallet plugs into your computer and because it’s not always connected to the internet, it’s generally considered to be more secure than a hot wallet. Some common hard wallet providers are Ledger and Trezor.

Secure your crypto in three ways; private keys, public keys and a seed phrase

Public keys

Every wallet comes with a set of private & public keys and a seed phrase. Wallet keys are a long string of random numbers and letters assigned to your wallet, and your public keys are like your home address. Just like how you would give out your address to someone if they wanted to send you a package, you give out your public address if someone wants to send you crypto.

Private keys

Your private keys are like the keys that unlock your home. You never give them out to anyone, and their primary purpose is to allow you to complete a transaction. So, if someone had both your public and private keys, they could drain your wallet of all funds.

Seed phrase

Finally, your seed phrase is a 12-word phrase generated from the private keys to make it easier to remember, and its purpose is to serve as a backup if you were to misplace or forget your wallet credentials. If you have the seed phrase but lost the keys, all the assets in that wallet can typically be restored.

Custodial wallets

With both hot and cold wallets, you’re in control of the private and public keys, giving you full access to the funds. This is important to note because the last type of wallet does not grant that same ability.

Custodial wallets are provided by exchanges, such as Gemini and Coinbase, and the key distinction between custodial wallets and non-custodial wallets is that with custodial wallets, you generally do not have access to the private keys. The exchange keeps them private, and because of this, some investors prefer not to store large amounts of crypto on their custodial wallet after purchasing.

Using a custodial wallet comes with less responsibility than a non-custodial wallet, but the tradeoff here is security. With a custodial wallet, in the event of a hack or data breach of the custodian, your crypto would be unsecured and vulnerable. With non-custodial wallets, you’re the only one who has access to the private keys and data (unless you were to give them out mistakenly). However, one positive attribute that custodial wallets hold over non-custodial wallets is that they are generally FDIC insured up to $250,000.

Whatever route you decide to take with wallets and storage, the main thing to remember is never to give out your private keys or seed phrase. Doing this can make all the cryptocurrency you hold in that wallet accessible to whoever gets ahold of them.

Planning to Transfer Assets

Suppose you’ve thought about investing in crypto or you currently own some. In that case, you may be wondering how these assets can be passed down since there are no standard legal procedures and holding crypto and moving it around looks different than the traditional finance framework.

The main issue in passing down digital assets and cryptocurrencies is the storage and transfer of the private key. Since it must be stored in a private location, it’s not recommended to write the private phrase in a will as it can become public record after death. In certain situations, the contents of safety deposit boxes may also become part of the public probate record, so storing the keys there may not work either.

So, how can you store the private key and ensure that the assets are passed on securely? Luckily, technology solutions have been built and are constantly being developed.

One of the best solutions currently available is using a multi-signature (or multi-sig) wallet. These wallets have multiple sets of keys and the wallet requires several of those signatures to complete a transaction. For example, if a wallet had 5 keys, two of them could be given to your attorney and the issuing company, and the remaining three could be held by you, your spouse, and your child. Then upon death, the assets in that wallet could be accessed by using a combination of 3 of the 5 keys. This allows for more security and helps mitigate the risk of someone inappropriately distributing or accessing the assets.

If you are holding your crypto assets in a non-custodial wallet, your estate planning may be better accomplished with a trust. This avoids probate and can allow the original owner to maintain control. And depending on the type of trust, the original owner may also set certain rules for how the assets are managed after death.

Custodial wallets (those provided by exchanges) generally don’t have trust support, meaning that the assets held in those wallets would be subject to probate. This is another reason why some investors prefer to hold their larger amounts of crypto in their private, non-custodial wallets.

The Takeaway

It’s estimated that 20% of bitcoin is lost forever due to forgotten or misplaced seed phrases or simply not keeping inventory and forgetting it was owned in the first place. As cryptocurrency and digital assets make their way into more investing conversations, the need for education and proper asset management is becoming more important.  This is because cryptocurrencies are managed from a security and estate planning aspect is different from their traditional finance counterparts.

Keeping track of your holdings, ensuring the cryptocurrency you hold is in a secure wallet, and beginning to think about estate planning solutions are a few ways you can begin safeguarding and building a plan to pass down your digital assets.

  1. Manoylov, MK. Google Search Volume for Cryptocurrency Topics Break All-Time High. The Block. May 20, 2021.
  2. Reinicke, Carmen. One in Ten People Currently Invest in Cryptocurrencies. CNBC. August 24, 2021.

This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here. The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation.

Be a Mercenary: 3 Ways to Improve Your Investment Process

Photo of a soldier in camouflage and tactical gloves putting money in pocket.

When investing, listening to common wisdom can be very productive. But not all “wisdom” is worth listening to.

Here are three philosophies that can help you improve your investment results.

1. You Don’t Have to Own Stocks Forever

There is a lot of potential risk in markets right now.

But guess what? There always is.

We’ve been trained to think that if you buy stocks, you must own them forever or else you’re doing it wrong.

Don’t buy into that kind of thinking.

It’s okay to get out. It’s okay to have stop losses. It’s okay to allocate capital to stocks right now, as long as you have the proper risk management strategies in place. In our opinion, that means having rules to move out of stocks and back into cash.

In fact, we think that you should intentionally be thinking shorter-term when it comes to stocks right now. There are signs that the stove could get hot. But avoiding it means you may be passing up on solid investment returns in the meantime.

2. Separate your Emotions from your Actions

We believe in having rules. This allows you to not have a vested emotional interest in the outcome of the stock market.

When humans predict something will happen, they create both a confirmation bias to that prediction as well as an anchoring bias to the predicted outcome.

A confirmation bias is when we look for things that support our way of thinking. Politics and social media are the ultimate examples of confirmation bias today. People like to watch and read things that support their view.

Anchoring bias refers to how we view an array of information based on an initial assumption or data point. If we view the market as one that should be rising, we tend to subconsciously view that as the primary outcome we should expect. And we don’t only actively seek out confirmation of our theory, we interpret data points and events to be supportive of that belief, whether that is the accurate way to interpret it or not.

Both of these biases result in viewing markets without the objectivity and discipline needed to be successful investors.

3. Be a Mercenary

This means you want to fight for the side that both pays you the most money and avoids the most harm.

Tech is doing well? Great. Invest there.

Inflation is coming? Great. Invest in areas that are showing benefits to that inflation.

Markets are crashing? Great. Have more cash.

Bottom line: Don’t be dogmatic. Don’t be a permabull or permabear. Try to fight for the winning side. You won’t always be right, but you’ll be on the right side of the big trends when they happen.

Having a process will help tremendously when markets get confusing. Remembering these three

We’re All Cats on a Hot Stove

Waiting for a correction in the stock market? It may have already happened.

If a cat sits on a hot stove, that cat won’t sit on a hot stove again. That cat won’t sit on a cold stove either. That cat just don’t like stoves.

mark twain

It’s hard to believe, but the COVID market crash ended 16 months ago.

It was truly a black swan event. Something that came out of nowhere and was unlike anything the global financial markets have seen in over 100 years.

One of the most common questions we receive is, “When is the next crash going to occur?”

This is a good question, and a very logical one. And one we think about quite often.

After all, we are seeing a rise in the Delta variant, many cities are re-instituting mask policies, and there is discussion of additional lock-downs. Sounds like February and March 2020, right?

On top of that, we have the random 1,000-point decline that happened on July 19th. Read our comments in our article “Are the Dog Days of Summer Over?“

So there are valid reasons to be expecting a sharp market decline.

But we have been receiving this question for well over a year now.

In the past year, there has been a great deal of hesitation to put cash to work in the stock market. Granted, some people were very quick to put cash to work, but most were very hesitant. And many remain so to this day.

Why?

To fully answer both the question “Why?”, and the question of whether we should expect another market crash soon, we need to understand the human behavior factors at play.

We’re All Cats That Sat on a Hot Stove

As humans, we don’t arrive at skepticism by accident.

In fact, being skeptical is an extremely valuable survival tool. Especially when we see conditions that were similar to past experiences that caused us pain or harm.

The are three basic components of skepticism:

  1. You perform an action.
  2. You experience pain.
  3. You learn to avoid the conditions that caused the pain.

It isn’t rocket science. In fact, we can probably just file this alongside the long list of other things we’ve said that won’t win us a Nobel prize.

In the quote that we referenced at the beginning of this report, Mark Twain presents the ultimate completion of this three-step cycle:

  1. A cat sits on a stove.
  2. The cat burns his you-know-what.
  3. The cat never sits on a stove again, regardless of whether it is hot or cold. Because every stove now looks like a hot stove to the cat.

Pretty simple, right?

Sort of.

Most problems in life arise when we forget to do Step 3: Learn from past experiences.

We have all experienced situations that may have caused us pain that we ended up right back in for no good reason.

Substance addiction, bad relationships, a bad job…there are all sorts of examples of people forgetting about Step 3.

Many times we’re cats who sit right back on top of that stove. And many times we are once again burned.

But what happens if learning from past experiences is the REASON we are harmed in the future?

What if we perform Step 3 beautifully, learn to avoid the situation that caused harm, only to then be harmed MORE by the fact that we avoided the situation that previously caused us pain?

This is what happens in financial markets.

When you lose money in the stock market, you have to go back on the same exact stove that burned you if you want to get back in.

This is where the complexity starts to set in.

In markets, you have to think about Step 3 differently.

The lesson learned cannot be one of complete avoidance.

You must have the cognitive ability to reshape HOW you learn lessons about what got you in trouble in the first place.

After losing money in a big market decline, most of us think that the lesson should be to NOT get back onto the market stove. After all, it looks pretty hot, right? Delta variant, super high valuations, a massive rally from last March and an out-of-control Fed all make us think the temperature on the stove is pretty darn hot.

But just because these things are happening doesn’t mean you should avoid it altogether.

Don’t Avoid the Stove, Just Start to Use a Thermometer

Instead of avoidance, you must begin to use tools that can assess both the current temperature of the stove (markets), as well as the direction and rate of temperature change of that stove.

It is a rational response to avoid the stock market after getting walloped by it. In fact, it is the exact response that would help you avoid that pain in the future.

Many investors go through a big decline and turn into real estate investors. Or private equity investors. And that’s okay.

Markets are not for everyone.

But don’t believe that getting burned on stove means that there is something inherently wrong with stoves.

There is an opportunity cost to avoiding the stove.

The public financial markets provide access to fantastic investment opportunities with a tremendously high degree of liquidity. The primary benefit of liquidity, or the ability to get out of your investment quickly at little to no cost, is that you don’t have to be right all the time. You can change your mind and you can easily get out of things that aren’t working.

You simply need to start using tools that allow you to assess the temperature of the market.

At Ironbridge, we use a wide variety of tools. We won’t get into the specifics, but we use momentum analysis, trend analysis, RSI, MACD, DeMark Signals, and many other data points that help direct our decision-making. We have then developed sets of rules that drive our actions.

The whole point is that it’s important to have some gauge of the temperature of that burner, and not not simply guess when we jump onto it.

So Is the Stove Hot or Cold Right Now?

Okay, enough of the long analogy about stoves. Let’s get to the market analysis.

Bottom line, while the S&P 500 has not seen a correction since last November, we have already seen a correction in many assets.

Let’s look at the following charts to show what we’re talking about:

  • Russell 2000 (Small Caps)
  • China Stocks
  • Emerging Market Stocks
  • Big Tech Names
  • S&P 500 Sectors
  • S&P 500 Index itself

Before we start, a brief note on stock corrections.

Corrections can take two forms. They can happen via TIME, or via PRICE.

A price correction is what we usually think of when we think about a market pullback. Stock prices were going up, then they fall anywhere from 5% to 30%. Then resume their move higher.

But markets can correct in TIME as well. This simply means that they go through an extended, multi-month period with little price movement up or down.

Both time and price corrections serve the same purpose: remove excesses from the markets and get the ratio of buyers and sellers more in balance.

Okay, on to the charts.

Russell 2000 (Small Caps)

First, let’s look at the Russell 2000. After a strong surge following the Presidential election, small caps have been little changed since February/March.

The Russell 2000 small cap stock Index has been in a sideways consolidation for most of 2021.

The blue box in the chart above is a classic correction in TIME. Small caps have been choppy with no direction for six months now. These patterns tend to resolve themselves higher, so we should expect that as the base case scenario.

However, a break below 208 in the chart above would be a more ominous signal. This could lead to selling pressure expanding across the market, and not just be isolated to small caps.

International Stocks

Next, let’s look at China and other international stocks.

The next chart is that of China Large Cap Stocks, using the ticker FXI.

China large cap stocks are down 25% from the 2021 highs. Ticker FXI.

This is a classic correction in PRICE. Stocks are down 25% since February. There is little doubt the direction of this trend.

The same is true of other, more broad international stock indices.

Emerging market stocks are down over 15%, as shown in the next chart. This is no real surprise since China is the largest component. But it is another example of a major global equity market component that is experiencing a correction right now.

International stocks have been weak. There is no question about that.

U.S. Stocks

What about some of the major U.S. stocks?

Well, here is when we start to see what is really happening in U.S. stocks right now.

The next chart shows four of the largest U.S. stocks: Amazon, Apple, Microsoft and Netflix.

These charts show us that each of these stocks went through some sort of TIME correction in the past year.

  • On the top left of the chart is Amazon (AMZN). It was in a sideways move for almost a year. It broke higher, but fell back into it’s chop zone last Friday after a 7% decline following earnings. This is called a “false breakout”. Meaning it may have longer to go before it breaks out of its sideways correction.
  • Apple (AAPL), on the top right, shows a classic break higher from a sideways correction. It also spent over a year in a TIME correction before resolving higher.
  • Microsoft (MSFT), on the bottom left, was in a TIME correction for the second half of last year. It has steadily been moving higher since the start of the year.
  • Finally, Netflix (NFLX) is shown on the bottom right. This was a darling of the COVID period, and remains in a TIME correction since this time last year.

Each of these stocks experienced a correction. And these are major components of the S&P 500.

The fact that these stocks are breaking higher suggests we should have a bullish tilt to our thinking.

S&P 500 Sectors

Looking some of the sectors in the S&P 500, we see a similar picture.

The next chart looks at the Energy, Industrials, Tech, Financials and Consumer Discretionary sectors. We could have chosen more, but the chart gets way too busy.

Each of these sectors have all seen some sort of correction in the past year. Most have been correcting in TIME.

Energy has been the biggest winner since the election. There is an excellent lesson here. The pundits on CNBC and elsewhere all predicted a Biden presidency would harm energy companies. That would make sense logically. But the market responded in exactly the opposite way. The lesson? Using the financial media for investment decisions is not a sound strategy.

This sideways movement of the major S&P sectors suggests that corrections are actually happening under the surface of the market.

But what about the overall market itself?

S&P 500 Index

But here’s the strange thing: Despite corrections happening in both the major stocks and major sectors within the index, the S&P 500 Index itself has been very strong.

Despite the underlying TIME corrections happening in various sectors, and despite the obvious PRICE correction in international markets, the S&P 500 is up. In a very, boring, beautiful pattern higher.

So What Does All of This Mean?

It means that if you’re expecting a stock correction, it may have already happened.

As strange as this sounds, the underlying components in the markets have all mostly corrected already. Without an overall market correction.

Chalk this up as a win for indexers.

This is also why at IronBridge we have both active and passive strategies in place.

In fact, we have had the highest exposure to the S&P Index in our four-year history. We could only go about 5% higher in our portfolio weighting to the S&P 500 Index based on our rules. At the high point, clients had exposure of anywhere from 25-35% of their portfolios, depending on the risk level.

While the S&P has been boring, it’s more interesting to look at the small caps and international stocks.

Earlier this year, our clients had exposure to both of these areas. And both were stopped out at relatively small losses.

For small caps, that wasn’t such a big deal. Prices are similar to where they were when we exited.

But for international stocks, they are down 15-20% lower than where we exited.

Such is the nature of risk management.

We don’t know when things will reverse higher, chop sideways, or continue lower. Guess what, no one else does either.

But was has been interesting about this year is that there has been both volatility and no volatility at the same time. The stove is both hot and cold.

So it would be completely logical to expect the S&P to experience some sort of correction, either in PRICE or TIME.

But the underlying components suggest that we shouldn’t bank on it either.

There is a chance we have already seen the correction via the underlying components and the selloff in other areas.

If this is the case, the second half of this year should be strong. And will likely extend into next year.

If the S&P 500 does start to experience a correction, the likelihood is that it is relatively mild and most likely happens via a TIME correction.

In the meantime, look for opportunities to put cash to work, and stick with a disciplined risk management process.

Invest wisely!