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The "Financial Planning Blueprint" Blog

  • Writer's pictureJason Flurry, CFP

A night to remember and a year to forget (so far)

In 1958, there was an award-winning film called A Night To Remember that recounted the sinking of the Titanic. So far, this year is feeling a lot like that night.

You may have seen by now that the first half of 2022’s stock market performance is the worst we’ve experienced in 52 years. The Federal Reserve has raised rates at a clip we haven’t seen in decades and inflation is still ripping through the economy at levels not witnessed since the early 1980’s. It’s no wonder why the second quarter from April to June has accounted for most of the year’s decline as the pressure on investments and investors alike mounted.

You don’t need me to tell you more about why investment balances are down while everything else you spend money on is up. The facts are the facts and I think we have all heard enough lately to give us reason to be concerned. What I want to share with you here is a perspective I hope will enlighten and encourage you as we look ahead to the second half of the year. There is more to the news than gloom and doom, even though we don’t hear nearly as much about it…

Let’s start with where we are in this bear market compared to other similar bear markets and see if we can find useful patterns that will help us gage our next steps wisely and profitably.

In the chart above, you can see that the past 6 months have been the 4th worst investment return period over the past century. No one would have guessed things could go from so good to so bad so quickly – but they did. Fortunately, the story doesn’t stop there though. In each of the corresponding 6 months that followed, financial markets recovered, in most cases significantly. Even the 5th and 6th worst periods below ours had nice rebounds, which leads me to think we are due for a strong bounce higher in the foreseeable future too.

Another positive sign can be found in the IPO market where the issuance of new investments has all but dried up compared to this time last year. The total amount of money raised from new companies coming to market for the first time dropped 93% year over year. That may sound bad, but there was a great need for this to happen. Too many investments were coming to market and diluting the purchasing power of investors looking for opportunities to grow. We are still paying the price for that, but the tide is turning in a positive direction again now.

Bitcoin is another pain point for many people as it had its worst quarter on record this past spring. Additionally, it’s price volatility helped spook stock investors too, making the outlook for the future even more pessimistic – unless you saw through the cloud of anxiety and remained focused on the fundamentals behind stocks and bitcoin. Let me explain what I mean.

In the chart above, you can see that bitcoin has traded lower on a valuation basis compared to where we are today only 13 days since bitcoin’s inception 4,363 trading days ago (0.2% of the time). Whenever these types of similar circumstances appeared, a sharp rally higher followed. Even though we could see bitcoin fall farther, even down to the 16,000 level before bottoming out this time, I believe we are due for another strong bounce soon after that. And the magnitude of that potential bounce could be well worth the wait!

In the meantime, there were other factors making bitcoin’s ride even bumpier recently. One of the main avenues for investors to purchase bitcoin in their accounts, the Grayscale Bitcoin Trust (GBTC), finished the quarter at a record 34% discount in price compared to its actual underlying bitcoin holdings. In other words, it was the equivalent of bitcoin trading at less than 13,000. Once again, the SEC has temporarily denied Grayscale’s application to convert their fund into an Exchange Traded Fund that will more accurately reflect the market price of what they have in the fund, but Grayscale is fighting to get an appeal granted that will make their investment vehicle more consistent with other commodity-based funds. I think they will eventually be successful, but bitcoin’s potential for its price appreciating and taking GBTC’s level of demand higher with it could make the discount irrelevant over time. After all, bitcoin’s price is down over 70% from it’s high yet it is 20% stronger as a global financial network than a year ago. It also remains the best performing asset class over the past decade plus, despite its recent volatility. Some very smart people with deep pockets and large amount of influence are keenly aware of this. It’s an opportunity that could eventually be too hard for them to pass up.

Ultimately, bitcoin is software – that’s all it is. We had the Internet of people and the Internet of things. This is the latest iteration, the Internet of money. And, because bitcoin violates all the financial rules we were ever taught, the more information you have about traditional investing, the harder it is to wrap your head around how bitcoin works. Its inventors wanted it to replace all money and put governments out of the business of printing and managing money, because they do a very poor job of it. But as we’ve seen, bitcoin and other crypto assets are volatile. And, since most people want their money to be stable, the volatility scares them away.

But don’t write bitcoin off just yet. People who are focused only on its volatility are missing the point. Any new asset class is going to be volatile at first and bitcoin is only 13 years old. It has experienced 70% declines seven times of its original value in the last 12 years, including what we’re witnessing now. But even with those declines, it has gone up on average over 150% year-over-year. Other big tech companies, like Amazon for example, experienced similar volatility when they were young, so it’s not surprising for bitcoin to do the same.

I share the chart with you and give you this background to remind you that you are adding on additional volatility risk with a new asset like bitcoin, but if you wait until it is a “safe investment,” you miss the growth – and that growth is likely to be a life changing “lifeboat” for those who endure the bumps along the way.

The first half of the year has not been pleasant, but I want you to remember that is has not been a normal year – even for bad seasons or past bear markets. It has been one of the worst starts ever. But as media outlets keep us stirred up with bad news and threats of a recession, global conflicts, and runaway inflation try to distract us from our mission of reaching our financial goals, we must stay patient and remain flexible. These depressing events have happened before, and like sunshine following the rain, market recoveries have helped those who persisted get back in the game. Making it through the darkest times with financial security and our peace of mind intact will depend on how well we implement sound judgement and make wise strategic choices as new information is revealed. It also depends on how open we are to new possibilities as we explore alternative approaches to building and preserving wealth, like adjusting trading styles and giving new opportunities like bitcoin enough room to run, during these difficult times.

The evidence shows that history is on our side at this point and the odds of success are good if we play the percentages correctly. It is a game you can win if you don’t give up or allow your fears to make you give in. Being an investor is not easy, but in the end it is worth it, especially when you have someone focused passionately on serving your best interests. That’s always what we strive to do for you and why we appreciate the opportunities we have to share the good times and the bad times together. Life is made up of both on purpose to help us grow and lean on each other for encouragement and advice. Let’s live our lives to the fullest and embrace all it has to offer knowing that in the end as we come through it together, it will truly be remarkable!


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