Crypto-Currency: The Next Tulip Craze?

Imagine transacting business or buying goods and services one day without using a single dollar bill or other country currency.  Imagine further that no one country or organization controls the currency and no one can create further units to dilute the value of your buying power. That's the promise of crypto-currencies, which, since the first one was introduced in 2009, have been gaining much attention and buying.

In fact, one candidate for the greatest bull market run (uptrend) in financial history is the recent run-up in price of the Bitcoin—the crypto-currency favored by international arms dealers and drug cartels, but also gaining acceptance at some retail locations. The so-called “internet of money” is not backed by any government, which its promoters say is a good thing, because the currency is not subject to quantitative easing, better known as the over-caffeinated money printing presses in Washington, the U.K., Brussels or Tokyo. Ironically, to acquire bitcoins, you'll have to exchange your dollars, pounds, euros or yen.

Of course, these are not actual coins; the currency exists in “wallets” that are tracked through a global system that updates everyone’s holdings; your “wallet” is on your computer, and sophisticated computers can “mine” new “coins” by solving complex algorithms that also help keep the money tracked. In the early days, there were lurid stories of peoples’ wallets getting hacked, but the crypto-processing seems to be safer now.

As recently as 2011, you could have bought any number of bitcoins for practically $0. In fact, seven years ago, a programmer spent 10,000 bitcoins to purchase two Papa John’s pizzas. Today, a single “coin” is selling for about $2,513, no doubt causing the programmer to wish that he’d held onto his coins for a few more years. But as you can see on the chart, the ride for bitcoin holders has been bumpy, and much of the price run-up has been recent. If you’ve ever experienced a market bubble, you know this is what they look like (and two inquiries about buying bitcoin at my office in the last two weeks tells me that a "correction" in the price is likely not too far off).

But why would the price ever drop? For one thing, the Bitcoin currency now has crypto-currency rivals, among them a similar technology and market system called Ethereum. For the first time, Bitcoins actually make up less than 50% of the crypto-marketplace. For another, costs per transaction—which are supposed to be zero—have risen to an average of $4.75, and it sometimes takes a month for the transaction to settle.

Beyond that, there’s a long-running dispute between the developers of Bitcoin who process transactions, and the “miners” who create the coins, which doesn’t look likely to be settled any time soon. It’s been speculated that Bitcoin will split into two factions, which users will have to choose between. A possible glimpse into the future happened when a new startup called Coinbase was touted as the marketplace that would finally bring Bitcoin to the mainstream. Coinbase was backed by the New York Stock Exchange. After considering its options, Coinbase decided to create a new currency alternative to Bitcoin, called Token—which will be built on Ethereum technology.

The conclusion: This is not a bandwagon you want to jump on at current prices. While prices might work their way higher in the short term, you'll want to wait for more clarity on which ones will survive, and how governments will respond and attempt to regulate the exchanges. Our traditional currencies aren't going anywhere anytime soon.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

sources:

http://www.coindesk.com/price/

http://www.cnbc.com/2017/05/22/bitcoin-price-hits-fresh-record-high-above-2100.html

https://www.forbes.com/sites/laurashin/2017/06/07/bitcoin-is-at-an-all-time-high-but-is-it-about-to-self-destruct/?utm_source=TWITTER&utm_medium=social&utm_content=929485744&utm_campaign=sprinklrForbesMainTwitter#4fa5a25dcb31

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Second Quarter 2017 YDFS Market Review

The doom and gloom crowd will have to re-up their calls for an economic and market crash until next quarter. As is their MO, "early and often" calls of demise, until they ultimately get it right, will continue. Much to their dismay, the 2nd quarter of 2017 was a good one for markets worldwide.

The U.S. stock market has more than tripled in value during the runup that started in March 2009, and the most recent quarter somehow managed to accelerate the upward trend. We have just experienced the 3rd best first half, in terms of U.S. market returns, of the 2000s.

The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 2.95% for the quarter, finishing the first half of the year up 8.73%. The comparable Russell 3000 index is up 8.93% for the year so far.

Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 3.08% in the second quarter, to stand at a 9.27% gain for the first two quarters. The Russell 1000 large-cap index finished the first half of the year with a similar 9.27% gain, while the widely-quoted S&P 500 index of large company stocks gained 2.41% for the quarter and is up 8.08% in the first half of 2017.

Meanwhile, the Russell Midcap Index gained 7.99% in the first two quarters of the year.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a relatively modest 1.65% gain over the second three months of the year, to stand at a 3.95% return for 2017 so far. The comparable Russell 2000 Small-Cap Index finished the first half of the year up 4.99%, while the technology-heavy Nasdaq Composite Index broke the 6,000 barrier in April, rose 4.18% for the quarter and is up 14.14% in the first half of the year.

International investments are finally delivering returns to our portfolios. The broad-based EAFE index of companies in developed foreign economies gained 5.03% in the recent quarter, and is now up 11.83% for the first half of calendar 2017. In aggregate, European stocks have gone up 14.49% so far this year, while EAFE’s Far East Index has gained 10.45%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 5.47% in the second quarter, giving these very small components of most investment portfolios a remarkable 17.22% gain for the year so far.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, gained 1.78% gain during the year’s second quarter, posting a meager 1.82% rise for the year so far. The S&P GSCI index, which measures commodities returns, lost 7.25% for the quarter and is now down 11.94% for the year, in part due to a 20.43% drop in the S&P petroleum index. Gold prices are up 7.69% for the year, and silver has gained 3.28%.

In the bond markets, longer-term Treasury rates haven’t budged, despite what you might have heard about the Fed tightening efforts. Coupon rates on 10-year Treasury bond rates have dropped a bit to stand at 2.30% a year, while 30-year government bond yields have dropped in the last three months from 3.01% to 2.83%.

By any measure, this represents a strong first half of the year, driven (as you can see by the graph) by the S&P 500 tech sector, biotech firms and information technology companies generally. What is interesting is that investors appear to be flooding into these business categories because they are the ones most likely to grow their sales even if the economic environment were to turn sour—which suggests a growing bedrock of pessimism about future economic growth among seasoned investors.

Is that justified? Economic growth was admittedly meager in the first quarter—U.S. GDP (gross domestic product) grew just 1.4% from the beginning of January to the end of March, a figure that was actually revised upwards from initial estimates of 0.7%. That represents a slowdown from the 2.1% growth in the fourth quarter of last year, when the country was being managed by a different Presidential Administration. It might be helpful to note that the budget proposals floating around Washington, D.C. make the optimistic assumption of an economic growth rate of 3.0%. If the economy fails to achieve that rate, then watch out for a significant rise in the federal deficit. I suspect economic growth will come in closer to 2.4%

There is room for hope. The Atlanta Federal Reserve recently forecasted that the U.S. economy will grow at a 2.9% rate for the year’s third quarter. We won’t have definitive evidence of that until sometime in October, but our fingers are crossed. More good news: the unemployment rate is at a near-record low of 4.7%, and wages grew at a 2.9% rate in December, the best increase since 2009. The underemployment rate, which combines the unemployment rate with part-time workers who would like to work full-time, has fallen to 9.2%--the lowest rate since 2008.

Meanwhile, the energy sector, which was a big winner last year, has dragged down returns in 2017. This proves once again the value of diversification; just when you start to question the value of holding a certain investment, or wonder why the entire portfolio isn’t crowded into one that is outperforming, the tide turns and the rabbit becomes the hare and the hare becomes the rabbit. If only this were predictable. I like to say that the only problem with consistently accurate market timing is getting the timing right :-).

There are many uncertainties to watch in the days ahead. The U.S. Congress is still debating a health care package, and has promised to revise our corporate and individual income tax code later this year. There’s an infrastructure package somewhere on the horizon, and perhaps a round or two of tariffs on imported goods. Inflation often follows when the Fed raises rates, but we don’t know if or when the Fed will do that, or by how much.

Meanwhile, the current bull market is aging, and as you can see from the accompanying chart, the runup has lasted for longer than anybody would have expected when we came out of the gloomy period after the 2008 crisis. However, bull markets don't die of old age; they die of overexuberance, something we don't currently have in the current market environment, as many are still quite pessimistic on the market and our economic prospects, and are therefore still on the sidelines or woefully underinvested. What I can say is that stock valuations are a bit stretched by some traditional measures, but I could have said that for the last 2-3 years. Market (over)valuation is not a very good market timing tool.

Nonetheless, we are moving ever closer to a period when stock prices will inevitably go down. That day cannot be predicted in advance, but it is always good to spend a moment and ponder how much of a downturn you would be comfortable with when markets finally turn against us. If your answer is less than 20%, or close to that figure (which is the definition of a bear market), this might be a good time to revisit your stock and bond allocations. It never hurts to take some profits off the table during the good times, to have some cash to re-deploy after a protracted downturn. On the other hand, if you’re not fearful of a downturn, then the next bear market will be a terrific buying opportunity for all of us.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.ftse.com/products/indices/russell-us

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Nasdaq index data:

http://quotes.morningstar.com/indexquote/quote.html?t=COMP

http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

International indices: https://www.msci.com/end-of-day-data-search

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Bond rates:

http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

General:

https://www.ft.com/content/cb5b1156-5d9e-11e7-b553-e2df1b0c3220

https://wdef.com/2017/06/29/economy-grew-1-4-in-first-quarter-higher-than-previous-estimates/

http://money.cnn.com/2017/01/06/news/economy/december-jobs-report-2016/index.html?iid=EL

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Why Short-term Investment Performance Doesn't Matter

The phone rings from a prospect looking for a new advisor and, after exchanging a bit of information on how financial planning and investment planning are long term endeavors that go hand in hand, the prospect inevitably asks about performance. Do we beat the S&P 500 index? What kind of returns can he expect as a client? What have been my historical rates of return? How often will I report on portfolio performance?

After explaining that every client is unique, and past performance has no bearing on the future, the prospect persists in pursuing performance information. I then emphasize the perils of a focus on short-term performance, the superior benefits of a focus on goals & dreams, risk tolerance, asset allocation and time frame.  Mostly I then get a thank you and don't hear from the prospect ever again.

If you're a client of a financial planner, you probably receive portfolio reports every three months—a form of transparency that financial planning professionals introduced at a time when the typical brokerage statement was impossible to decipher. But it might surprise you to know that most professionals think there is actually little value to any quarterly reporting or performance information, other than to reassure you that you actually do own a diversified portfolio of investments. It’s very difficult to know if you’re staying abreast of the market, and for most of us, that’s not really relevant anyway.

Why?

The only way to know if your investments are “beating the market” is to compare their performance to “the market,” which is not easy. You can compare your return to the Dow Jones Industrial Average, but that index represents only 30 stocks, all of them large companies. Most people's investment portfolios include a much larger variety of assets: U.S. stocks and bonds, foreign stocks and bonds, both including stocks of large companies (large cap), companies that are medium-sized (midcap) and smaller firms (small cap). There may be stocks from companies in emerging market countries like Sri Lanka and Mexico. There may be real estate investments in the form of REITs and investment exposure to shifting commodities prices, like wheat, gold, oil and live cattle.

In order to know for sure that your particular batch of investments out-performed or under-performed “the market,” you would need to assemble a “benchmark” portfolio made up of index funds in each of these asset categories, in the exact mix that is in your own portfolio. Even if you could do that precisely, daily, weekly and monthly, market movements would distort the original portfolio mix by causing some of your investments to gain value (and become larger pieces of the overall mix) and others to lose value (and become smaller pieces), and those movements could be different from the movements inside the benchmark. After a month, your portfolio would be less comparable to the benchmark you so painstakingly created and would be rendered virtually useless.

Many professionals believe that there are several keys to evaluating portfolio performance in a meaningful way—and the approach is very different from comparing your returns with the Dow’s.

1) Take a long view: What your investments did last month or last quarter is purely the result of random movements in the market, what professionals call “white noise.” But you might be surprised to know that even one-year returns fall into the “white noise” category. It’s better to look at your performance over five years or more; better still to evaluate through a full market cycle, from, say, the start of a bull (up-trending) market, through a bear (down-trending) market, and to the start of a new bull market. However, you should remember that there are no clear markers on the roadside that say: “This line marks the start of a new bull market.”

2) Compare your performance to your goals, not to your friends' portfolio: Let's suppose that our financial plan indicated that your investments needed to generate 5% returns above the rate of inflation in order for you to have a great chance of affording a long, comfortable retirement. If that’s your goal, then chances are, your portfolio is not designed to beat the market; it represents a best guess as to which investments have the best chance of achieving that target return, through all the inevitable market ups and downs between now and your retirement date. If your returns are negative over three to five years, that means you’re probably falling behind on your goals—and you might be taking too much risk in your portfolio.

3) Recognize that some of your investments will go down, even in strong bull markets:  The concept of diversification means that some of your holdings will inevitably move in opposite directions, return-wise, from others (believe it or not, this is a good thing!). If all of your investments are going up in a strong market, chances are they will all be going down in a weak one. Ideally, the overall trend will be upward—the investments are participating in the growth of the global economy, but not all at the same rate and with a variety of setbacks along the way. If you see some negative returns, understand that those are the investments you’re counting on to give you positive returns if/when other parts of your investment mix are suddenly, probably unexpectedly, turning downward.

A focus on under-performing funds or stocks in the short-term can cause you to make short-term detrimental moves with your portfolio. If the underlying fundamentals of the stock or fund are intact, just perhaps out-of-favor in the short term (1-3 years), you shouldn't tinker with them (assuming your reason for buying hasn't changed). Treat your portfolio as a combination of ingredients that individually come together to make a tasty treat. Removing or focusing on one or more individual ingredients (say because it's too salty or sour) can turn a tasty treat into a bland dish.

Too often I see clients focus on individual funds or sectors that are under-performing in the short term, and they want to sell them at what may turn out to be the bottom.  This is one reason why numerous Dalbar studies of individual investor behavior show that most of them under-perform even the funds they own (let alone the markets overall).  I try to explain that markets, industries and sectors are cyclical. They come in and out of favor as large portfolio managers make decisions based on their perception of the stage of the economic cycle. You shouldn't try and emulate them.

That doesn’t mean you shouldn’t look at your portfolio statement when it comes out. Make sure the investments listed are what you expected them to be, and let your eye drift toward the longer time periods. Notice which investments rose the most and which were down and you’ll have an indication of the overall economic climate. And if your overall portfolio beat the Dow this quarter, or over longer periods of time, well, that probably only represents "white noise".

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post.

10 Investment Mistakes to Avoid

There are many ways to lose money while investing your money. Here's a look at 10 proven ways to manage your stock portfolio into the ground in no time.

The temptation to sell is always highest when the market drops the furthest.

Who needs a pyramid scheme or a crooked money manager when you can lose money in the stock market all by yourself? If you want to help curb your loss potential, avoid these 10 strategies:

1. Go with the herd. If everyone else is buying it, it must be good, right? Wrong. Investors tend to do what everyone else is doing and are overly optimistic when the market goes up and overly pessimistic when the market goes down. For instance, in 2008, the largest monthly outflow of U.S. domestic equity funds occurred after the market had fallen over 25% from its peak. And in 2011, the only time net inflows were recorded was before the market had slid over 10%.
2. Put all of your bets on one high-flying stock. If only you had invested all your money in Apple ten years ago, you'd be a millionaire today. Perhaps, but what if, instead, you had invested in Enron, Conseco, CIT, WorldCom, Washington Mutual, or Lehman Brothers? All were high flyers at one point, yet all have since filed for bankruptcy, making them perfect candidates for the downwardly mobile investor.
3. Buy only when the market is up. If the market is on a tear, how can you lose? Just ask the hordes of investors who flocked to stocks in 1999 and early 2000—and then lost their shirts in the ensuing bear market.
4. Sell when the market is down. The temptation to sell is always highest when the market drops the furthest. And it's what many inexperienced investors tend to do, locking in losses and precluding future recoveries.
5. Stay on the sidelines until markets calm down. Since markets almost never "calm down," this is the perfect rationale to never get in. In today's world, that means settling for a miniscule return that may not even keep pace with inflation.
6. Buy on tips from friends. Who needs professional advice when your new buddy from the gym can give you some great tips? If his stock suggestions are as good as his abs workout tips, you can't go wrong.
7. Rely on the pundits for advice. With all the experts out there crowding the airwaves with their recommendations, why not take their advice? But which advice should you follow? Jim Cramer may say buy, while Warren Buffett says sell. Does their time frame and risk tolerance even come close to yours? How would you know? Remember that what pundits sell best is themselves.
8. Go with your gut. Fundamental research may be OK for the pros, but it's much easier to buy or sell based on what your gut tells you. Had problems with your laptop lately? Maybe you should sell that Hewlett Packard stock. When it comes to hunches, irrationality rules.
9. React frequently to market volatility. Responding to the market's daily ups and downs is a surefire way to lock in losses. Even professional traders have a poor track record of guessing the market's bigger shifts, let alone daily fluctuations. Market volatility is a good teacher of bad short-term investing habits. Refuse to be a student.
10. Set it and forget it. Ignoring your portfolio until you're ready to cash it in gives it the perfect opportunity to go completely out of balance, with past winners dominating. It also makes for a major misalignment of original investing goals and shifting life-stage priorities. Instead, re-balance your portfolio on a regular basis and keep cash available so you can buy when others are panicking.  Ignoring your quarterly statements definitely won't improve your investment performance.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

ICI; Standard & Poor's. The stock market is represented by the S&P 500, an unmanaged index considered representative of large-cap U.S. stocks. These hypothetical examples are for illustrative purposes only, and are not intended as investment advice.

What's the Government Buying with your Money?

Tax time is over for another year for millions of Americans (who didn't ask for an extension), and as you look over your tax payments for calendar 2016, you’re undoubtedly wondering where those dollars are being spent by Uncle Sam.

The Wall Street Journal recently published a chart which breaks down spending for every $100 of tax receipts—and concludes that the U.S. government is actually a very large insurance company, that also happens to have an army. Chances are, the check or checks that you wrote for the year barely keep the government running for a fraction of a second.

For every $100 you pay in taxes, $23.61 goes to Social Security payments and administration—basically old age insurance for retirees.  Another $15.26 goes to Medicare, the government health insurance program.  Medicaid, the health insurance program for the poor, accounts for another $9.55 of that $100 tax bill—bringing the total costs for various civilian insurance programs to 48% of the total budget.  And that army?  It costs $15.24 of every $100 the government collects in taxes, not counting veterans benefits.

In all, the 2016 federal budget fell $15.24 out of every $100 short of revenues equaling expenses.  Where would you cut?

Things like federal expenditures and grants for education ($2.08), food stamps ($1.89), affordable housing ($1.27) and foreign aid ($1.14) actually make up a very small part of the budget, smaller than interest payments on the national debt ($6.25).

There has been talk about helping reduce the budget by lowering expenditures on the National Endowments for the Arts and Humanities, which together represent eight tenths of one cent of that $100 tax bill.  This would be comparable to someone trying to pay off his mortgage by looking for coins under the sofa cushions.

As for us, we're just glad that we survived another very busy tax season, with more compliance requirements imposed on preparers and taxpayers than ever before. Tax simplification? Doesn't seem to ever be in the cards.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source:

https://www.wsj.com/articles/how-100-of-your-taxes-are-spent-8-cents-on-national-parks-and-15-on-medicare-1492175921

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post