March 9, 2022

Let’s imagine for a moment that on your daily walk to work, your normal route takes you past a pawn shop that is known to display expensive jewelry.  Over the past couple of days, you’ve noticed that the jewelry on display has been marked down—for reasons that you don’t really understand.  All you know is that, in the past, these times when the jewelry went on sale were quite temporary and, in fact, in the past the prices were far more likely to go up than to go down.

The store also buys jewelry from the public, and over the same recent time period, the prices it is willing to pay have been declining as well.

The question is: would you pick this time to sell some of your own jewelry, or to buy some while it’s temporarily on sale?

You can apply this same thought experiment to on-sale items at the clothing rack or in the grocery store, and the answer is always the same: your inclination would be to buy when things are on sale, and to sell (if you happen to have something) whenever the prices go back up.

The peculiar thing about this thought experiment is that whenever you’re talking about jewelry, or clothing, groceries or pretty much any everyday item in the marketplace, the response is obvious.  But when we’re confronted with exactly this same situation regarding stocks, ETFs or other investments, the immediate inclination is exactly the opposite. 

Why should that be?  Psychologists have had a field day exploring the ideas of herd mentality and recency bias and a lot of other mental shortcuts (psychologists call them “heuristics”), but nobody has ever managed to explain why our instinctive reaction to price movements in investments should be different from our instinctive reaction to virtually everything else in the global marketplace.  We know that fear plays a role, but how rational is that fear when every market decline in history has been followed by subsequent record highs?  We know that fluctuations in our net worth are tied to our sense of well-being, but why should we feel less confident when the paper value of our holdings is 2-3% lower today than it was yesterday?  Do we feel that much more confident when the markets are UP 2% or 3%?

Years ago, after Microsoft stock had risen from practically zero to astronomical heights, a financial journalist interviewed a few people who had become wealthy by holding on to their Microsoft investment for two full decades.  The first surprise was how few of them there were; many people had been given stock grants during the company’s early years in business, and others had invested in this hot company with a promising new operating system.  But most of them had cashed out at the first, or second, or third dip, long before the real money was made.

The second surprise was how all of these now-wealthy stockholders told the same story: that there were many times when they had to grit their teeth and avoid the temptation to sell the stock of a company that was increasingly dominating desktop software.  Every bump in the road was, to them, a strong sell signal, which required a certain fortitude to hang on.

The lesson in all this is that all of our brains are wired to be dysfunctional investors.  Now that the markets are becoming unpredictable and stocks are going on sale, all the tendencies to make bad decisions are being triggered.  If the same thing were happening at the grocery store or in that pawn shop display, we’d all be cheering this nice (albeit temporary) opportunity. 

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

March 4, 2022

The question that you are hearing most often about the Russian military invasion of Ukraine is: how effective will the coordinated financial sanctions be in persuading the Russian leadership to back off?  Will the Russian oligarchs be stripped of their wealth, and rein in their leader?

The most painful sanctions that have been imposed on Russia’s leadership include seizure of their assets in Western banks—and there is talk about seizing super-yachts and private aircraft as well.  Real estate holdings may be next. 

But Russian oligarchs have had a lot of time to prepare, having benefited from inside knowledge that their leader was likely to proceed with the shocking invasion of its democratic neighbor.  Yes, they have an estimated $340 billion of wealth that is sitting in sanction limbo right now at various Western institutions.  But the wealthy Russian leaders appear to have been quietly squirreling away a nice chunk of their wealth in a place where the West is powerless to touch it.

In fact, the Russian government itself has estimated that its wealthiest citizens have now accumulated $214 billion worth of various cryptocurrencies—roughly 12% of the global total.  Those assets are out of reach of the global banking system.  They are not completely anonymous, but some experts have noted that sophisticated crypto holders can set up a web of wallets with different addresses across several exchanges, which make it very difficult to tie transactions back to a particular individual.  And several crypto exchanges are not based in jurisdictions that support the sanctions.

Of course, the complicated part of this plan is eventually converting crypto holdings back into fiat currencies, since most business entities still don’t accept bitcoin for their services.  Western nations can prevent the exchanges from making these conversions—or, once they are made, that money can finally be traced and seized.  The oligarchs’ plan seems to be to keep the anonymous assets in safe storage and wait for the sanctions to ease a year or two from now—which might not work if the Russian invasion succeeds and the sanctions become permanent. 

Meanwhile, it should be noted, bitcoin—the most visible of the cryptocurrencies—has seen its value decline by nearly 50% since last November.

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Source:

https://worldcrunch.com/business-finance/russian-oligarchs-crypto-sanctions/bitcoin-boom-in-moscow

https://worldcrunch.com/business-finance/russian-oligarchs-crypto-sanctions/bitcoin-boom-in-moscow

https://www.ndtv.com/business/how-crypto-may-help-russia-and-its-billionaires-go-around-sanctions-2788483

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

February 4, 2022

For most of us, it’s a little hard to believe that Europe might soon be plunging into another war.  But the prospect is hard to ignore now that Russia has sent 100,000 soldiers and massive amounts of tanks, fighter jets, missile launchers and other military equipment right up to the borders of the sovereign nation of Ukraine—following up on years of simmering military intervention that has claimed the lives of Ukrainian soldiers on a daily basis. 

Lest anyone think that Russia is incapable of brazenly conquering another country’s territory in this day and age, it is helpful to remember that it sent in its ‘little green men’ (later conceded to be Russian soldiers) to annex the entire Crimean peninsula from Ukraine right after the 2014 winter Olympics.  Russia has also assumed military control of the Donbas region east of the Ukrainian city of Donetsk, under the pretense of ‘protecting’ Russian-speaking citizens there.  In an ominous sign, Russia has reportedly been handing out hundreds of thousands of Russian passports to Donbas, which would offer a pretext to argue that those visitors ‘need to be protected.’

Nor, as most articles have reported, are all the military ‘exercises’ being conducted on the eastern border; in fact, there has been substantial troop movement to the north and northeast of Ukraine, which could signal a multi-pronged attack on the country.

Or it might not.  The Kremlin has denied that there is any plan to attack anybody in the region, and maintains that the massing of troops from Belarus and elsewhere is simply a training exercise—albeit a highly unusual one.  And political analysts have pointed out how awkward it would be for Chinese President Xi Jinping if Russia were to launch an invasion while Vladimir Putin was attending the Winter Olympics as Beijing’s special guest.  There is speculation that Russia is simply using the threat of invasion as a bargaining chip to prevent any expansion of the NATO alliance, or that an invasion would stop once Russia had conquered the coastline between Donbas and Crimea. 

Finally, military analysts have pointed out that, for all the belligerence and blustering, Putin’s Russia has been extremely shy about direct military confrontations in cases where the enemy is capable of fighting back—and with U.S. aid, the Ukrainian military definitely has the capacity to inflict painful damage on any invasion force.  Putin seems to have a knack for manufacturing crises and then resolving them in ‘benevolent’ gestures, rather than risking the political consequences of large losses of soldiers’ lives.

What does all this mean to us sitting safely on the far side of the ocean?  If there does happen to be an invasion, we can expect a certain amount of panic in the markets, due to the threat of economic destabilization and uncertainty that such a shocking development would trigger.  An invasion could disrupt Ukraine’s agricultural production, which is surprisingly important to the world’s food supplies.  It is estimated that Ukraine farmers account for about a sixth of the world’s corn exports. 

There would also be some as-yet-unmeasurable impact on world energy supplies.  Russia supplies about 30% of the European Union’s natural gas, which could be interrupted, raising global energy prices including here in the U.S.  An invasion would almost certainly be followed by severe economic sanctions, which means Russia’s ability to export oil could be hampered or even crippled.

Perhaps most importantly, all of us—as citizens of the world and as investors in what we always hope will be a peaceful and productive economic community—would feel less comfortable about the global political environment if we were to witness the brazen invasion of one European nation by another.  The threat of war is unsettling enough; a real one, playing out on the evening news, would be undeniably scary.

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources:

https://www.cnn.com/2022/01/28/europe/ukraine-russia-explainer-war-threat-cmd-intl/index.html

https://www.brookings.edu/blog/order-from-chaos/2020/03/17/crimea-six-years-after-illegal-annexation/

https://www.cnn.com/2022/01/28/europe/ukraine-russia-explainer-war-threat-cmd-intl/index.html

https://www.cnn.com/2022/01/29/europe/russia-ukraine-global-implications-cmd-intl/index.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

February 1, 2022

In U.S. stock market history, bear markets—defined as a drop of 20% or more for a broad market index—happen roughly every four years and eight months.  With the recent month of January being down in the markets, we may be in the early stages of a new one.

Or we may not—and that, of course is the problem.  It is very easy to see these market downdrafts in retrospect, but impossible to know when one is occurring, or to predict them in advance.  Nor can we know how far down they’ll take us or when the recovery will begin.

Some of the longest declines were triggered by major geopolitical events—such as the attack on Pearl Harbor that pulled the U.S. military into World War II (a 308 day downturn, nearly a year), and Iraq’s invasion of Kuwait in 1990 (108 days).  The terrorist attacks of 2001 and the North Korean missile crisis of 2017 also triggered market declines.  In 2008, the collapse of Wall Street speculation nearly brought down the entire global economy.  More recently, in 2020, the emergence of a major global pandemic caused a rapid decline which was, as most of us remember, followed by a precipitous rise in market values that has continued through the end of last year.

At the moment, it’s not easy to see a major catastrophic trigger that would cause investors to race for the exits, but there have been other bear markets where a bull market simply ran out of steam—a recent example is the bursting of the dot-com bubble in 2000.  The hardest-hit investors in that period were all crowded into the latest craze—tech stocks—and the tech-heavy Nasdaq index didn’t recover its former value until 2015.  The lesson there was not trying to time the market but to maintain the discipline of diversification despite the temptations of rising valuations.

Which brings us back to the possibility that we’re entering a bear market today.  Taking another look at history, since 1929, the average duration of these 20%+ downturns is 21 months—and it is just as impossible to predict these durations as it is to predict the downturns to begin with.  The Covid-related downturn in 2020 is a terrific example of how unpredictable the recovery can be.  The pandemic news didn’t change from February to April 2020, but the markets recovered anyway, and were not discouraged through the ensuing political drama, the Delta and Omicron variants, and the highest inflation rate in decades.

The most important historical fact is that every bear market in U.S. history has been followed by new highs.  Since 1950, we have experienced 53.8% up days in the market and 46.2% down days, and the magnitude of the positive days has exceeded the magnitude of the downdrafts.  The champion investors always have some cash or cash-equivalents in their portfolios, which lets them buy when the markets go on sale—which is perhaps the best way to view bear markets: as an opportunity to buy valuable stocks at a discount.

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources:

https://www.investopedia.com/terms/d/dotcom-bubble.asp

https://www.thebalance.com/u-s-stock-bear-markets-and-their-subsequent-recoveries-2388520

https://www.kiplinger.com/slideshow/investing/t052-s001-8-facts-you-need-to-know-about-bear-markets/index.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.