February 2018

Everyone’s Talking about the Market

The stock market had another great year in 2017. The S&P 500 was up over 19% for the year and markets across the globe had generally strong performance as well. 2018 is off to an interesting start, solid performance to start the year was followed by a volatile end to January and beginning of February.

While the bull market continues to march on, the question we are frequently asked is, when will this end? In my opinion, bull markets don’t have a set time for which they last. Yes, this is a long bull market, but that does not, in my opinion, mean it will end sooner than later. I believe bull markets are ended by a catalyst other than time. Additionally, most of the economist and asset managers I listen to acknowledge the length of the current bull market and address potential risks in the market, but most do not anticipate major issues in the near term.

Even though the market has been cruising along (with the exception of some recent volatility), the portfolios we manage and those handled by third party managers continue to tactically allocate. Generally, the managers we work with are allocated more heavily toward growth vs. value and they are leaning more into risk; i.e., a greater weighting toward equity vs. fixed income. This year we’re also starting to see a larger allocation toward international and emerging markets.

As we move into the spring of 2018, some of the economic data we will be watching closely are:

• Individual savings rate – this number had been high coming out of the recession, but moved back to near the historical average during 2017.
• Federal reserve rate – the Fed has suggested that they are targeting 3 moves this year, and the market is likely priced accordingly.
• Corporate earnings – over the last year and through Q4 2017 corporate earnings have generally been strong and continue to move the market. We will want to see that continue.
• Interest rates – this is, in my opinion, the biggest question mark. Interest rates did move up last year and have moved up some more again in 2018. So far, the increases to the 10-year treasure yield have been modest, but there are some signs that indicate a potential for a sharp rise, which would almost certainly impact the market.

As much as we all would like the bull market to continue indefinitely, we must accept at some point there will be a pullback. This is why we stress financial planning and investing with a level of risk that it is prudent to reaching your goals.

Please also important to remember that not all recessions and market corrections are equal to the experience of 2007/2008, which was hopefully a once-in-a-lifetime experience.

It is difficult to write about the market and keep current as the narrative is changing every moment. This article was, for the most part, completed prior to the most recent sell off and then bounce. As outlined in our comments from February 6 regarding the recent volatility, I still believe the fundamentals of the economy are sound and that, as mentioned above, interest rates moving in response to anticipated inflation is currently our number one concern.

If you’d like to discuss, review, or begin the financial planning process, please don’t hesitate to call or email us.

Best,
Nathan
President, Kuhn Wealth Management

What is Bitcoin?

Disclaimer: this information is NOT a suggestion to buy or not buy Bitcoin.

Rather, for those who are not familiar, I hope to shed some light on Bitcoin, cryptocurrency, and blockchain. Please know that I am far from an expert in these topics. I have done substantial research, watched documentaries on the subject, and continue to read articles in order to educate myself. I am still a long way from being an expert, and find the deeper I dig, the more questions I have than answers. I do believe, no matter where Bitcoin ends up going, it’s a fascinating delve into economics that stretches and bends the norms that economist and scholars have historically used to evaluate valuations.
You know something is complicated when its explanation is likely to make you more confused then you previously were.
Bitcoin is, at this point, arguably the most well known cryptocurrency. In essence, it’s software that allows for a peer-to-peer payment system with no centralized authority. The ledger of balances of who owns what Bitcoin is stored on many computer systems all over the world, and this decentralized digital ledger is blockchain technology.

At their core, Bitcoin and cryptocurrencies are, in general (and in theory), a type of currency that can be used to purchase goods and services. Completing transactions in Bitcoin has many appealing advantages. To outline a few:

First, when viewed as global currency, Bitcoin does not have exchange rate risk. In other words, a Bitcoin in the US is worth the same as a Bitcoin in France. So, if you were to travel to France, assuming the French merchant accepted Bitcoin, you could pay in Bitcoin and not be concerned about converting dollars to Euros. Certainly, this would be convenient and eliminate what is referred to as currency risk (the value of one currency to another).

Second, Bitcoin could, in theory, make it easier for people to transfer money to individuals in other countries. (Though it really wouldn’t even be a transfer of money but rather a re-assignment of the Bitcoin; personally, I still find it easier to reference terms we are familiar with.) This is important because it’s common for an individual to work in a country like the United States and send money to family and friends in another country. This process today is time-consuming and costly. Bitcoin and blockchain technology empower this to be done, in theory, virtually instantly and at no cost.

Cryptocurrencies can also provide users a level of anonymity; however, this feature continues to evolve as more regulations are put in place. Though some believe that Bitcoin is where it is today because of its use on illicit sites, I believe that thought is overblown (though with so much secrecy, it’s inevitable individuals have used these currencies for illegal transactions).

In some parts of the world, the use of cryptocurrencies could, theoretically, become more stable than local currency. For example, in a country such as Venezuela—where inflation has consistently been over 20% and in some years over 100%—a more stable cryptocurrency, if available, could be more appealing than the local currency.

On the other hand, Bitcoin faces challenges.

Bitcoin has soared, tumbled, and continues to fluctuate with very high volatility—while grabbing headlines in the process. Currently, I feel that Bitcoin is very speculative. It’s becoming more main stream, with more and more people putting money into Bitcoin and other cryptocurrencies, but they’re doing it without really understanding what a cryptocurrency is and how it’s valued. To further complicate the issue, even investment professionals and economist don’t know how to properly value the currencies. While at its core Bitcoin is a currency—and as such is dependent on people being willing to complete transactions in Bitcoin—it is true that the amount of merchants accepting Bitcoin has increased, but it is still far from the norm.

Finally, we must consider the fact that people are buying Bitcoin and treating it as an investment, similar to a commodity, rather then a currency. In reality, it’s probably a combination of both…which makes its sustainability as a currency questionable. To put this into context: remember the story of the programmer from Florida who, in 2010, convinced someone to take 10,000 Bitcoin he had mined in exchange for two pizzas? As of January 25, 2018, those two Bitcoin would be worth $111,798,250.

In the news more recently, rapper 50 Cent reported he accepted Bitcoin for his 2014 album “Animal Ambition.” At the time, he collected the equivalent of $400,000 Bitcoin. Today, his currency is worth around $8 million. In other words, someone who spent the equivalent of $10 worth of Bitcoin on the album in 2014 would have had $220 worth of Bitcoin today. In my opinion, this illustrates the problem of using a currency that fluctuates as much as Bitcoin has.

Perhaps Bitcoin will continue to grow in popularity and its value will become more stable – or maybe it will end up fading into our memories and end up as a question on Jeopardy. Honestly, I would not be surprised either way.

I personally have not bought any Bitcoin or any other cryptocurrency and do not plan on doing so. If you do want to get in on the trend, I caution you to invest only what you are able and willing to lose. Also, be sure to purchase any cryptocurrency through a reputable source and take care to keep your account secure.

While Bitcoin and cryptocurrencies are fascinating, I think that perhaps the bigger story is the technology that drives blockchain and the implications it can have when applied to various industries. But that is a story for another day.

Trust the Trust

Working with an attorney to create a trust is an important step in a family’s financial and estate planning process and, unfortunately, it’s too often overlooked. An attorney that is well versed in the estate planning process will work with individuals in a capacity that makes sense for their circumstances and needs, and be able to prepare legal documents accordingly.

It’s a common misconception that only wealthy, elderly individuals need a trust. While wealthy, elderly individuals should have a trust set up, it’s also extremely important for families with children and aging individuals with even a modest net worth to have a trust in place.

My wife Sara and I have gone through the process of setting up trusts. As parents to two young children (Kendall, 7, and Ryan, 3), we put a trust in place in case something was to happen to us. With the help of an attorney, we established a trust that outlined who would make the financial decisions for the assets left to the children, including what ages the children would have access to various amounts of money. Without a trust in place, these decisions would likely be left to a court, and most likely the children would have had access to all of the money at age 18. (If your kids are like mine, that probably means that money would be gone by 19.)

I know of many families who pay for life insurance on a regular basis to provide for their loved ones in case of a tragedy, yet do not have a trust in place to ensure the life insurance proceeds are used as they would like them to be.
Another key reason to establish a trust is to avoid probate. This in particular is why I believe it’s important for just about every client we work with to have a trust. I have experience working with individuals who inherited money that has had to go through the probate process. In some instances, it took over a year for the funds to go through probate and be released. These clients spent a great deal of their time, not to mention emotional energy, on the whole process.

Ask yourself: do I care what happens to my money if I were to die or become disabled? If the answer is yes, then, at the very least, you should have a conversation with an attorney. Need a referral? Call or email us and we’ll be happy to give you one.

An Eye on Alternatives

It has always been a part of my investment philosophy that, by appropriately utilizing “alternative” investments in conjunction with more traditional asset management strategies, we can better help our clients reach their financial goals. To me, an alternative investment is really any investment that does not fall in the typical stock, bond, or cash box.

When suitable, alternative investments can be an important part of an investment plan as they have the potential for returns that are not correlated to other investments; they may also have the potential to provide higher sustainable income and potentially out-sized investment returns.

I perform thorough due diligence on alternative investments. This includes reviewing offering documents, discussing various investments with their management team, and attending due diligence meetings and conferences. I believe that the quality of the alternative investments we can offer our clients has never been better, and we can provide access to opportunities in many alternative asset classes.

Real estate is the largest alternative asset class that we utilize with our clients. Investment opportunities include multifamily residential, senior housing development, land redevelopment and zoning, and distribution warehouse properties. In addition to real estate, we also utilize private equity and oil and gas investments.

These investments vary greatly in their objectives and risks. The minimum investment required in these opportunities ranges from 5K to 100K, typically the minimum is 25k. If you’re interested in investing in alternatives or have any questions, please call or email us.

A Little Family Fun

We enjoyed some family fun in Steamboat this weekend, and got the kids out on the mountains. Thought we’d share some snapshots and video!

As of 2/8/2018. The opinions expressed are those of the writer and does not necessarily represent the views of the presenting party, nor their affiliates. Past performance and predictions are not a guarantee of future results. The material contained hearin is obtained from sources believed to be reliable, but its authenticity, accuracy or completeness is not guaranteed. Projections are inherently limited and should not be relied upon as an indicator of future results. There are risks associated with investing in real estate properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. The S&P 500 Index is a widely recognized capitalization – weighted index that measures the performance of the large-capitilization sector of the U.S. stock market.  Direct investment in an index is not possible. Because investor’s situations and objectives vary, this information is not intended to indicate direct investment advice and suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), Member FINRA/SIPC. Advisory services offered through Kuhn Wealth Management, Inc., a state registered investment advisor. Kuhn Wealth Management, Inc. is independent of CIS and Concorde Asset Management, LLC, all of whom are unaffiliated with third party sites, and cannot verify the accuracy of nor assume responsibility for any content of linked third party sites. Information available on third-party sites is for informational purposes only.