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AnthroFi Newsletter Q2 2022

In this edition, we are going to be covering both stock and cryptocurrency markets, inflation, the behavioral psychology of investing, and things you can do to take advantage of downturns. Sprinkled throughout will be quotes from a man most people look to for investment advice (though they shouldn't), but I turn to for his elegant wit and simplicity in explaining complex ideas. Warren Buffett.

Markets

If you're reading this, you probably know that I am one of a handful of financial planners to denounce the fascination and interest in investing. This is mostly due to the attraction of the shiny object and the gambler mentality of most investors rather than the methodical investing required for long-term success. 

           "The propensity to gamble is always increased by a large prize versus a small entry fee, no matter how poor                    true odds may be. That's why Las Vegas casinos advertise big jackpots and state lotteries headline big prizes."                -Warren Buffett

Tortoise and the Hare

I consistently use the allegory of the Tortoise and the Hare to describe investing. From the outset, it is glaringly obvious that Hare is going to win the race. He has speed, flash, arrogance, and seems to be quite easily distracted. Hare resembles most investors.

Alternatively, Tortoise is slow, boring, modest, and incredibly focused on the objective at hand. Not many investors resemble Tortoise (though it tends to be women when they do). 

SPOILER ALERT: Against all odds, Tortoise wins.

If you work with me, you invest like Tortoise. It's boring, slow, modest, and incredibly focused in a way that makes it successful over the long term. We don't get distracted by investments du jour, talking heads, or what your neighbor is investing in. We stick to the plan and we win.

Stock Markets

We've seen stock markets take quite the tumble this year. As of market close on May 16, 2022, the S&P 500 is down 16.44%, the Dow is down 11.92%, the NASDAQ is down 26.34%, and the Russell 2000 is down 21.52%. 

Any time the market is down 20%, it is deemed to be a "bear market" or one that is trending downward. This situation often compounds because prices drop when more people sell than buy. When people see prices drop, they often incorrectly sell to avoid further losses causing more and more of a tumble. 

This is when taking the right action pays off the most. We'll discuss behavioral psychology shortly.

         "Every decade, or so, dark clouds fill the economic skies and they briefly rain gold" - Warren Buffett

Cryptocurrency Markets

We've seen a shockwave go through cryptocurrencies for the first time in a while that has caused so-called "stablecoins" to be remarkably unstable. Advocates are claiming this is a bump in the road for a long-term viable technology and economic tool. Detractors are claiming it is the end of trust in crypto.

Both stances are to further agendas, but the main thing to take away from recent cryptocurrency failings is that crypto is still a shiny object. It may be the future and is still a very speculative asset. 

           "It's only when the tide goes out that you realize who has been swimming naked" - Warren Buffett

Inflation

Inflation has reared its head for the first time since the 1980s. Most of us younger investors haven't had to deal with it and with interest rates rising, there is talk of a stagflation, an economic environment with inflation and a stagnant economy. Stagflation is one of the most feared economic environments that can set a generation back significantly financially. 

Some ways to combat inflation are to own hard assets like real estate, gold, or even stocks. The US Treasury also offers a Series I bond that tracks inflation directly and is currently paying over 9% in interest.

Inflationary environments are times to consider how you spend, where you keep your cash, how much cash you keep, and where you can get cash if you needed it.

        "...inflation is a far more devastating tax than anything enacted by our legislature" - Warren Buffett

Behavioral Psychology and Winning During Downturns

Without getting up to our necks in psychological theory, I want to briefly explain why economic downturns are so terrifying.

You and I still have a fight or flight instinct instilled in our primate brains and this instinct served us extremely well when we came across a sabretooth tiger (fuckin run!). It serves us less well in the current world where most of us are lucky enough to face predators on a day-to-day basis (even though the Colorado Avalanche just swept them in the NHL playoffs). 

We want to flee from potential pain and the pain experienced today is that of financial loss. Losing is more than twice as painful than the pleasure received from winning. There is a reason that many professional athletes state their desire to not lose as greater than their desire to win.

We have the ability to make a decision in the face of modern day "dangers" like market downturns and "flight" is not the better option. That said, "fight" is different than what you are likely imagining. 

Actions to Take During Downturns

Here is how you "fight" against a market and economic downturn:

  • Don't move your investments to cash
    • Put more in, if you can
  • Rebalance your portfolio
    • This is when you sell the winners and buy more of the losers
  • Consider a Roth Conversion
    • Roth conversions have less of a tax hit when markets have dropped
  • Reduce your spending
  • Consult your financial planner about other options that suit your needs