Cryptocurrencies were back in the headlines throughout 2020 and into 2021, with some high-flying returns that attracted investor attention. Tesla CEO Elon Musk tweeted support for Bitcoin, and a few of the largest university endowments have begun to endorse cryptocurrencies as potentially viable investments. In times like this, with growing concerns about potential U.S. dollar devaluation and increasing inflation, investors often turn their eye to alternative options for hedging these risks. Given that cryptocurrencies are gaining broader acceptance, it is not surprising to see some investors considering whether they deserve a role in portfolio construction. So where do cryptocurrencies fit in?
At this point, we struggle to see them as anything other than a speculation. For clients concerned about a falling U.S. dollar or inflation, we believe our current approach to protecting against those risks (diversification, scenario planning) is both more effective and reliable. For context, our investment framework revolves around a fundamental approach to building globally diversified portfolios across asset classes, each serving a distinct role in the portfolio (some targeting the aforementioned risks):
Furthermore, as fundamental investors, we invest in assets that we can reasonably value, that offer transparency and defined liquidity, and finally, that we can be confident are subject to a reasonable amount of regulatory oversight and legal protection, to minimize the risk of price manipulation. We have a very difficult time applying any of these criteria to cryptocurrencies. Even as currencies, cryptocurrencies fail to meet the requirements to be a reliable “store of value” or “unit of account.”
For our Chief Investment Officer’s words of caution on Bitcoin’s investment merit, please read his analysis here >
As the capital markets continue to rally and valuations get increasingly stretched across nearly all asset classes, thus muting future returns, investors have inevitably cast a wider net. More speculative investments have lured investors after delivering spectacular short-term returns, including cryptocurrencies, special purpose acquisition companies (SPACs for short), and “meme” stocks. At times these have been driven higher by an army of retail investors, fueled by information that is quickly shared via social media and zero-cost trading.
These spectacular returns have reintroduced the age-old, dangerous behavioral risk: FOMO, or Fear of Missing Out. FOMO can tempt investors to take risks beyond what they would normally consider acceptable in search of incremental return. This behavior is often reinforced by reports that “smart money” endowments are making these same investments (likely in small size, limiting downside). Our guidance to clients and investors broadly is to regularly revisit your risk tolerance and return objectives and ensure that your portfolio remains well aligned with these objectives. If you find yourself lured into taking increasingly risky positions, we ask that you take a hard look in the mirror and ask yourself whether you are falling victim to FOMO.
We encourage you to reach out to our advisory team if you have questions about your portfolio or want to discuss this topic further.
Commentary from Our CIO—Second Quarter 2021
Global stock markets continued to surge in the second quarter. In our assessment of the macroeconomic backdrop and outlook, we continue to expect a strong global economic recovery over at least the next 12 months. In this quarterly commentary, our Chief Investment Officer, Jeremy DeGroot, reviews the current reasoning for our portfolio positioning, outlook on inflation, and forward-looking scenario analysis on the broader economy and markets.
Research Update: Increased Return Expectations for U.S. Stocks
As the economy and financial markets continue their recovery from the pandemic’s impact, our recent analysis resulted in improved expected returns for U.S. stocks. In this post we summarize our analysis and why we think an increased allocation to U.S. equities could benefit the risk-adjusted return profile of our portfolios.
Advisor Q&A: Tax Planning and the American Families Plan with Senior Advisor Chris Wheaton
The American Families Plan was recently released by President Joe Biden and includes many of the provisions outlined during his campaign. We asked Litman Gregory Senior Advisor, Chris Wheaton, to answer some questions about key proposed tax law changes, and related tax planning ideas for our clients to consider in 2021 and beyond.