Making the Best of a Black Eye

Not every investment will pay off. But in the vast majority of cases, there’s no permanent damage, and no long-term harm done. In fact, if you know about the benefits of tax loss harvesting, losses can be an opportunity in disguise.Many of you know that I love playing basketball. I played from youth league through college, and now that I’m an adult, it gives me a great way to exercise, clear my head, and indulge my competitive streak.

Long-time readers may also remember that the women’s pick-up game I play in is not without risk. Last summer I busted my chin open.Well, ugly facial injuries are now a pattern. Last month during a game I caught an elbow square in the face while going for a rebound. The whole game stopped and I slowly made my way to the sideline to assess the damage. As I felt my face with my hands, I was cautiously optimistic that I hadn’t broken my nose. Turned out I was right, but over the next few days I developed a pretty serious shiner, as you can see below.So, what’s a professional, forty-year-old lady to do? Hang up her high tops? Avoid high-impact sports forever?I thought about it that night. It seems like a lot of folks have figured out how to exercise in a way that doesn’t cause quite so many facial injuries.

But I really don’t love other kinds of exercise. I’ll run or do yoga if I’m desperate, but it’s always been difficult for me to make a habit of it. Plus, basketball is… my thing! I’m even coaching my daughter’s youth team now. (I’ll keep you posted.)After doing a cost-benefit analysis, I decided that I’m willing to accept the risks of playing basketball in exchange for the rewards. And I don’t have to be reckless about it. I can learn from the experience and change my strategy to reflect the reality of my day-to-day life. Maybe I don’t need to be in the lane with women who are twenty years younger and twenty times stronger than me.And my black eye turned out to be manageable. A little makeup got me through the first week, and then it was practically gone. No permanent damage, no long-term harm done.For many people, the investing equivalent of a black eye is the stock or fund that goes down instead of up. It can look bad, and it can cause you to re-think your entire financial strategy.

Tax Loss Harvesting

From month-to-month or year-to-year, not every investment will work out as planned. Losses happen. But in the vast majority of cases, there’s no permanent damage, and no long-term harm done.In fact, if you use the right strategy, losses can be an opportunity in disguise.In your non-retirement brokerage accounts, you can actually offset investment losses against investment gains, which can save you a bundle on your tax bill. Even better, once you offset your gains, any additional losses up to $3,000 ($1,500 if you are married and file separately) can be used to reduce your taxable income.This strategy is called tax loss harvesting and it's especially valuable in this era of limited tax deductions. It can be done any time during the year, but it is most popular during the fall, right before the end of the tax year.Watch Out for Wash Sales: The Wash Sale rule states that if you want to harvest a tax loss, you can’t buy the same or a "substantially identical" investment 30 days before or 30 days after the sale.

The 30-day rule also applies to retirement accounts. If you violate it, your loss will be disallowed. For instance, you are not allowed to sell an investment in your taxable account and immediately buy the identical investment in your IRA account. You also can't buy the investment in an IRA account less than 30 days before you sell it from your taxable account. So the 30 day rule applies both before -- and after -- you harvest your tax loss.

The Recession Question

As you probably know, I’m on the receiving end of a lot of questions about the economy. People are anxious. The headlines aren’t good. This probably won’t surprise you, but the #1 question asked by volume is, “Will there be a recession?” For this month’s blog, I’m going to share an actual response I sent to a client last week regarding the recession question.

Since most of my time is spent talking to people in person, (and not necessarily writing my answers down in detail) I thought this would be a great opportunity to push out my thoughts to all of you struggling with the same questions.Before I launch into it, I’d like to point out that this particular client had emailed me a 116-page slide deck prepped by another financial professional, and they were asking whether or not I agreed.

The slide deck isn’t important for the purposes of this response, but I’m telling you this because my response is a little more technical than the way I usually write in this newsletter. Even so, many of you might find it helpful to get a peek inside my brain as I try to navigate the same issues you’re navigating.One final note: I list several actions to take, but they are not intended to be individualized investment advice.

Will There Be a Recession?As I'm thinking through the short-term, I keep coming back to the U.S. consumer. If U.S. GDP is something like 70% consumer-driven, and consumers have jobs, then I think that recession in the U.S. is unlikely without some sort of shock. If it does happen, it's probably mild. If there's a run-of-the-mill recession, where GDP goes negative for a few quarters and some people lose their jobs and assets are repriced accordingly (to the downside), it will not be the end of the world and prices will eventually recover. When you zoom way out, risky assets will be repriced constantly from now until the day you sell them, so if you assume that you'll hold stocks in your portfolio for 30-50 years, the next downturn is just a blip on the radar. One positive sign in the stock market is that mini-bubbles keep popping (crypto in 2018, pot stocks in early 2019, unicorn IPOs in 2019), without doing damage to everyday people. If little bubbles release some of the pressure without totally wiping out consumers, then big bubbles will have a hard time forming. The last two recessions were accompanied by 1) a stock bubble and 2) a real estate bubble, both of which were very much tied to the normal, everyday consumer. I can't find an example of a scary bubble today, and everyone and their mother is looking for one.

My hunch is that negative interest rates in Europe and Japan are here to stay. Their populations are aging, and it's sucking the life out of their economies. Unless they figure out a way to increase productivity and grow GDP using that lever, then it's probably a slow-mo train wreck. I'd avoid the debt and equity markets in those areas. Relative to Japan & Europe, the U.S. is demographically stable over the long run, though the next 10 years will be a challenge as Baby Boomers hit peak retirement years. If they are getting more conservative and rolling into bonds, that will put upward pressure on prices and downward pressure on yields even in the face of growing issuance by the Treasury to fund deficits. The cost to re-route all the supply chains is not a terribly productive use of capital in the short-term, but eventually it will be done and then it's done. All sorts of political stuff is probably going to happen. So the next 10 years will probably be tougher than the last 10.All that said, general advice for individuals trying to weather the uncertainty is:

1. U.S. stocks for the long run. Add to them every year, but put them in a time capsule and come back in 30 years. Don't think about them in the meantime.

2. U.S. bonds are probably fine in the short-term. You can stay in short maturities and on the high quality end of the spectrum if you're worried about defaults (which tend to spike during recessions).

3. Rental real estate in ATX is good if you can get a property to cash flow in the short term.

4. Make sure you have enough liquidity to fund personal/business expenses for 1-3 years if something very bad happens. Sources include cash/money markets, high quality bond funds, etc. Also, get a HELOC against your home and line up as many business LOCs as you can. Better to buy umbrellas before it starts raining.

I hope this has been helpful, and as always, please call or email me if you’d like to meet about your own unique circumstances.

The Bull, the Bear... and the Possum?

When prices start falling or talk of a looming recession grows louder, investors often feel the need to take action to avoid incurring losses. But sometimes in investing, doing nothing is the best strategy.It’s interesting how fascinated people are with animal symbolism. From the 12th century King Richard “the Lionheart” to modern-day sports team mascots, people just love associating themselves with certain animals. For people of a certain age, we know that boxers can only win if they have the “Eye of the Tiger.”

Naturally, people mainly associate themselves with aggressive and intimidating animals, like lions, tigers, hawks and hornets.Investing has its own brand of aggressive animal symbolism. The terms “bull” and “bear” were supposedly chosen to represent upward and downward trending markets because of the way the animals attack their opponents. A bull thrusts its horns upward while a bear swipes its paw downward.But recent fears about a forecasted recession have me thinking about an animal that few people want to associate themselves with: The possum.

Playing (Mostly) Dead During a Turbulent MarketRecessions are scary for everyone, from DIY investors to seasoned pros. When investors get scared, the first impulse is to do something. Anything. Sell a stock. Sell all your stocks, just do something, because even the prospect of selling at a loss may be less terrifying than not doing anything and watching prices continue to fall.But in some cases, it’s best to just play possum.Back in 2015, there was a news item that got a lot of attention at the time. The investment firm Fidelity conducted an internal performance review of its clients' accounts to determine which investors did best between 2003 and 2013.

This ten-year span, of course, included the worst market period in most of our lifetimes.In a surprising discovery, Fidelity supposedly found that the best investors were either dead or inactive. The accounts that did best were those that were left untouched during the market crash. This included old 401(k) accounts people had forgotten about when they switched jobs and accounts that had been frozen by an estate in the aftermath of a death.In other words, the best investors were those who didn't react to the crash -- even if it was because they forgot to or couldn't.It's one more reminder that panicking is not an effective investment strategy. When the market is volatile, caution and objectivity are friends. Fear is the enemy.There are, however, useful actions to consider during turbulent or correcting markets.

• Stick with your overall plan, but objectively re-evaluate your holdings. If -- and only if -- you think the long-term outlook of an individual holding has changed for the worse because of market or economic conditions, go ahead and sell it and replace it with something more suitable.

• Don't blindly buy the dip. But do start a shopping list. Put a list together of all those stocks and funds you wished you had bought at lower prices. Buy strategically when and if prices tumble. (This is something you should start doing before things go way south. Like, right now.)

• Add cash to your investment accounts if you can. Consider making your IRA or Roth IRA contributions earlier this year. Add more money to your regular brokerage accounts. This will give you dry powder to pick up bargains from your shopping list when prices drop.

And whenever the market takes a 10% drop, take a deep breath and remember that market volatility is normal.

Invest Beyond What You Know

Many DIY investors feel most comfortable investing in companies that they understand, such as those within their own field of expertise. Research shows that this is not always the best strategy.Have you ever tried your hand at creative writing? I haven’t done much of it, but I know that one of the first things you hear on the subject is to “write what you know.” Unfortunately, if I just write about what I know, it usually isn’t all that interesting!

Let’s face it, most of our lives are not as exciting as the lives of characters in great literature and films. There may be a few folks out there who really want to read about a financial advisor who goes to work, makes some investment decisions, then picks up her kids, tries to get them to sleep, and triumphantly makes one cold margarita for herself before bed. But I’m not convinced that would be a best seller.

This is the problem with cliched wisdom. It often leaves out a very important condition that is necessary for it to ring true.“Write what you know” is great advice… IF you have lived a really interesting life or know a lot about truly extraordinary things! Maya Angelou was wise to write about what she knew. She grew up in the South under segregation and was separated from her mother as a young child. I Know Why The Caged Bird Sings is a beautiful, poignant account of her childhood. Leo Tolstoy served as an artillery officer in the Crimean War. This gruesome experience transformed him from a casual patriot to a committed pacifist, and established the belief system and knowledge base that helped him write his first novel, War and Peace. With a life like that, writing about what you know is a great idea!

A similar concept is found in the investing world.The legendary fund manager Peter Lynch was known for his outstanding performance as head of Fidelity's Magellan Fund. "Invest in what you know," was one of his favorite investment tenets.But some research has found that investing in what you know best isn't such a great idea. One study looked at 10 years of stock transaction data and compared that to the jobs held by the investors. The expectation was that individuals’ investments related to their profession should outperform the market because of better access to information, and a superior ability to process that information. But that’s not what the study found.The study found those work-related investments underperformed over time.

People invested in what they were comfortable with -- but that wasn't the best investment strategy. In fact, investors' overconfidence in a single sector often resulted in added risk.Successful real estate brokers with large personal real estate holdings were in a world of hurt during the 2007-2008 housing collapse. If you were a tech-savvy software developer who predominantly invested in the internet's ground floor, your portfolio was probably devastated during the 1999 dot.com bust.Even if there isn't a cataclysmic crisis, almost all economic sectors go through cycles, whether it's energy, transportation, entertainment or retail. And as an investor, you can minimize the fallout in any one sector by holding a broader range of stocks -- especially those outside your own professional niche.

So maybe the phrase, “Invest in what you know,” is good advice… IF you are a legendary fund manager who spent a lifetime developing deep expertise in many sectors of the economy.If not, you might be better off sticking with unconditional investing clichés, like, “stay diversified.” And if you don’t know how, ETFs are an easy way to get started. 

IPOs: Lots of Hype, Lots of Risk

IPOs get a lot of attention in the news, but they are among the riskiest investments you can make.

Last month I wrote about how I'm generally pretty skeptical about the "next big thing" in investing. By the time the word gets out to the masses, the opportunity to get in on the ground floor is usually gone. All that's left is an echo chamber full of hype and some really high prices. Talking about hype and high prices reminds me of another area of investing where I generally encourage DIY investors to tread carefully: IPOs.

An IPO is an Initial Public Offering. It is when a private company offers shares of its stock on a public stock exchange for the first time. In the past, IPOs were a way for companies to generate capital, which they could use to grow their businesses. Lately, it has also been a way for founders, early investors, and venture capitalists to cash out of their investments.This year there has been a frenzy of IPOs. Some of the many companies that have IPO'd this year include the pet food delivery company Chewy, the ridesharing company Uber, and the social media image board site Pinterest. Some of the bigger technology IPOs this year include Zoom, which offers online video conferencing, and CrowdStrike, a cybersecurity company that uses artificial intelligence.IPOs garner lots of media attention, especially when the companies have huge name recognition like Uber.But here's the problem:It's hard for the average investor to buy an IPO at the price it is initially offered.The offering shares are usually reserved for institutions and ultra-high-net-worth brokerage clients. This can create pent up demand when shares first start to actively trade on an exchange. As a result, it's not unusual to see an IPO trade up double-digits in a stock's first day of trading. And when regular people see the price pop like that, it creates even more demand -- and so on and so on. And often, it is the individual retail investor who ends up paying a premium price.Let's take a look at the price charts for some of these companies.UberTwo weeks after its IPO, Uber (shown above) was viewed as a dud, although it has since climbed back up above its IPO price.Pinterest's stock (below) popped 28% on its first day of trading on April 18. Investors continued to chase up its price to $34.26 by April 29. In early June, it had dropped back to $24.06 -- or 30% off its highs. Less than three months since its IPO, it's probably still too early to say Pinterest has found its post-IPO trading range.PinterestIn some cases, a stock's price might settle well below where it traded in the heyday of its IPO.For instance, the company Groupon (below) had an IPO price of $20 per share when it went public in 2011. On its first day of trading, its price popped 31%. Less than 13 months later, shares were trading at roughly $5 per share, and the price has never really recovered.GrouponOne recently IPO'd stock that everyone is talking about is Beyond Meat (below).Beyond MeatThe company produces plant-based meat alternatives, and its stock has risen 147% since it went public in early May.Over time, a new stock becomes an established stock and its price may stabilize. In some cases, that price is substantially higher, making everyone who risked buying it during its volatile debut look like a genius.But it's very difficult to predict which new stocks will turn out winners, and you definitely can't make that prediction on name recognition alone. Everyone in the country had heard of Uber before it went public, and its stock is doing just OK. Practically no one except vegans and professional investors had heard of Beyond Meat before it IPO'd, and its stock is doing great.Takeaway: If you’re not going to be one of the anointed few to get in on the ground floor, then you might want to wait until the volatility subsides to buy a new stock.If you buy a new stock on its first day of public trading, you need to view this as among the riskiest investments that you can make.

Beware the Modern-Day Gold Rush

When everyone is talking about the next big thing in investing, it may be too late to get in on the ground floor.One of my favorite things about living in Austin is being here for the South by Southwest (SXSW) annual conference. Over the years, it’s become a prime venue for announcements about new companies, technologies and ideas. Twitter even launched at SXSW in 2007.I love going to SXSW for lots of reasons. First, I love feeling like I’m in the middle of it all, where the action and the new ideas are. I also like learning about new technologies that may affect the markets and my own firm. And yes, ok, I admit it’s nice to have a change of scenery and get out of the office for two weeks each year. I always get a major rush of inspiration from being in such an exciting environment.Each year, SXSW does a pretty good job of focusing on one hot trend to showcase. Last year, it was cryptocurrency and blockchain. This year's hot trend was cannabusiness -- the businesses of expanding the market for marijuana/cannabis.In both cases, I learned a lot about the way investors are thinking about the future of these two industries. But I also saw how a toxic blend of money, hype and marketing can lead to very bad investment decisions that can hurt regular investors.There’s Gold in Them There HillsYou’ve probably heard about the gold rushes that took place in the western US and Canada in the 19th century. But do you know how few people actually got rich?In August 1896, three local miners discovered gold in a tributary of the Klondike River, way out in the wilderness of northwest Canada. The following summer -- when some of the early prospectors returned to San Francisco and Seattle with their riches -- the Klondike Gold Rush really began in earnest.Roughly 100,000 people attempted to reach the Klondike's remote gold fields. It is estimated that between 30,000 to 40,000 actually made it there. Of those, only about 4,000 reportedly found gold -- and only a few hundred really struck it big.A Modern-Day Gold Rush?Just like the first Klondike miners that arrived in San Francisco, early Bitcoin speculators arrived at SXSW in March 2018 to announce the future of investing. The story was pretty simple: If you wanted to strike it rich, the easiest path was the largely unregulated world of cryptocurrencies. Media outlets and financial publishers quickly picked up the story and soon everyone was talking about investing in crypto.The trouble was, by the time the 2018 SXSW conference rolled around, the Bitcoin boom was fading. Bitcoin’s price peaked in December 2017 at roughly $19,800 per bitcoin. By March 2018, its value was hovering around $8,500. And by the end of 2018, the price of bitcoin had dropped to $3,700. In retrospect, it looks like a lot of people got caught up in a bubble.In 2019, the same type of folks who’d been touting cryptocurrency in 2018 were back again -- only this time they were extolling the virtues of cannabis-based investments. And the story was very similar to 2018’s bitcoin pitch: If you wanted to strike it rich, the easiest path is pot.I was shocked by how similar the message and the timing looked. Once again, by the time the 2019 SXSW conference rolled around, the cannabis boom was fading. Tilray -- one of the industry’s best-known stocks -- went public in July 2018 at around $22 per share. It hit $300 per share by September 2018. By March 2019, its value was hovering around $72. And today, Tilray stock is around $36. In retrospect, it looks like a lot of people got caught up in another bubble.As an investor, I think the cannabis story and the crypto story are both fascinating to watch. But to recommend one or both, I need to understand the relationship between an investment’s price today vs. its potential and profitability in the future.These stories are still playing out. Bitcoin's value today is back up around $8,500, and it could become a viable, widely-used currency in the future. And the expanding legalization of cannabis is likely to create new, profitable, industry powerhouses.But neither will happen quickly, and neither will be easy or painless. Trying to get rich quick on either idea is a no-go in my book.So as a general rule, consider this:When you get a tip about the “next big thing”, please understand that the odds of striking it rich are not in your favor.By the time you hear about the next great investing opportunity -- especially if you’re hearing about it at a large, public gathering along with thousands of other people -- it's usually too late to make the big money people are raving about.

***

Gold Rush Trivia: Go West, Young WomanOne person who beat the odds and got rich during the Klondike Gold Rush wasn’t even a miner. Belinda Mulrooney bought silk underwear, cloth and hot water bottles in bulk and had them shipped to the Klondike, grossing six times her initial investment. With her profits, she built a restaurant and hotel near the gold fields in Dawson City.