February Newsclips – Bitcoin ETFs, Rip Van Winkle Investing and More

February Newsclips – Bitcoin ETFs, Rip Van Winkle Investing and More

February 12, 2024

We strongly believe an informed and educated client will be a more successful steward of wealth.  Sadly, the financial media is not interested in your “fiduciary fluency.”  Flatrock’s “Newsclips” are designed to filter out the unproductive noise and help make sense of the headlines.  Further, we dig deeper to bring you some research and perspectives, while off the beaten path, offer substantive lessons for long-term investment success. 

This month we look at Bitcoin ETFs, Rip Van Winkle Investing, Personal Indexing, and the Value of Deferring Capital Gains. 

Morningstar: Spot Bitcoin ETFs Are Here. Should You Invest?

On January 11th, the U.S. Securities and Exchange Commission approved 11 spot bitcoin exchange-traded funds (ETFs) after over a decade of waiting. These ETFs offer a more cost-effective option for investors compared to existing crypto funds, with significantly lower fees. While spot bitcoin ETFs present a better alternative to futures-based options, investors should be aware of potential inefficiencies, counterparty risks, and the unique challenges associated with the volatility and valuation of bitcoin.

Flatrock’s Take: Two key considerations on bitcoin. First, as we outlined last year in Investment versus Speculation, the purchaser of crypto only gets a return if someone else comes along and is willing to pay a higher price.  There are no intervening cash flows.  So its return is based on the “Greater Fool Theory”.  Secondly, Morningstar notes that bitcoin prices are 4 times more volatile than the overall stock market.  Indeed, many bitcoin spot ETF investors have learned exactly that…in the first twelve days post ETF launch was down more than 16%!  In previous work, John noted that the more volatile an asset, the more likely investors will time poorly for lower returns.

Wall Street Journal: What I Learned When I Stopped Watching the Stock Market

Jason Zweig reflects on his return to The Wall Street Journal after a seven-month hiatus, during which he disconnected from daily market fluctuations and forecasts. He highlights the apparent silliness of many predictions, including his own, and the contentment that comes from not acting on them. The article emphasizes the value of taking a longer historical and broader psychological perspective on investing, suggesting that reacting to daily news can negatively impact portfolios and quality of life.

Flatrock’s Take: Zweig is one of our favorites – his columns are worth the subscription price alone.  His book The Devil’s Financial Dictionary is an irreverent searing of Wall Street culture and a great gift idea for the market follower in your life.  (Better yet, ask John to lend you his signed copy!)

Like Zweig, we noted the silliness of 2023 forecasts in our last client letter.  Financial news and associated cocktail party chatter can be fun and interesting.  But acting on it can be dangerous to your wealth.  Be more Rip Van Winkle and less Jim Cramer!

Financial Analysts Journal: Exclude with Impunity: Personalized Indexing and Stock Restrictions

The concept of personalized indexing allows investors to deviate from benchmark indices, incorporating tax-loss harvesting, factor enhancements, socially responsible investing, and single-stock exclusions. The study simulates the impact of stock and entire industry (such as oil and gas for a carbon reduction) exclusions on passive and active portfolios.  The authors find that modest exclusions of up 1/3 of the eligible universe have little effect on performance.

Flatrock’s Take: We believe custom indexing is the future of stock market investing for high-net-worth families.  It is a cornerstone of our portfolio construction as it brings household customization that incorporates social values, human capital, charitable giving, and taxes.  Indeed, tax loss harvesting and gifting of appreciated stock are substantial levers for affluent households.  And with modern technology, custom indexes can be delivered at a fraction of the cost of actively managed mutual funds.  Many active stock pickers claim that this customization would come at the expense of returns.  This peer-reviewed paper comprehensively shuts that notion down.

AQR: The Enduring Appeal of Gain Deferral

The analysis shows that deferring gains versus realizing today is expected to lead to higher wealth if tax rates remain unchanged. The advantage of gain deferral becomes more pronounced over longer investment horizons. While real-world portfolios may involve complexities, strategies facilitating gain deferral can be valuable, especially in the long term.

Flatrock Take: We love using realized losses in the investment portfolio to defer gains from other areas of our clients’ capital stacks.  These can include private businesses, sale of primary residences and more.  Gain deferral allows money that would otherwise go to taxes today to compound in the future.  The tax liability remains but the investor gets the compounding from what is, in essence, a no interest loan from the government.  Further, gain deferral provides opportunities for potential lower taxes in the future for clients that wish to relocate down the road to states with lower capital gains taxes. 

Let us know if you would like to dive a bit deeper on any of these topics.  Markets fluctuate. Priorities change.  We’re here to help. 


Disclosures

Flatrock Wealth Partners LLC (“Flatrock”) is a registered investment advisor.

Information contained herein should not be considered investment advice or a recommendation to buy or sell any particular security. Flatrock renders investment advice on a personalized basis, only after gaining a full understanding of a client’s unique situation.  While every effort has been made to verify the information herein, Flatrock Wealth Partners makes no representation as to its accuracy.  Past performance is no guarantee of future investment results.  Data referenced is not meant to communicate or signify past, future or hypothetical returns of an actual investment portfolio.  Information is at a point in time and subject to change without notice. Information is derived from sources that are believed to be reliable, but are not audited by Flatrock.    

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