Cryptocurrency, Inflation Update, and a Refresher on How to Determine the Appropriate Investment Allocation
by Michael Carbone, CFA, CFP®
- Crypto bubble
- Favorable month-to-month report for October inflation
Investors in digital or crypto currencies have experienced great financial pain as rising interest rates have given pause to investment speculators. This has been particularly true in the last few weeks as major flaws in the crypto system have been exposed, leading crypto investors to seek shelter, collectively bidding down the price of digital currency investments. This downside volatility has been extreme due to the high levels of leverage in the crypto market – when investors purchase investments with borrowed money. Bitcoin, which is arguably the most well-known crypto currency, was down ~26% from November 5th to the 9th and ~66% year-to-date as of November 22nd.
Stock investors generally fared better in November as markets reacted positively to recent inflation data. We believe the recent report was generally good news, but that investors should remain cautious. As discussed last month, market participants are watching inflation closely as it will likely influence the Federal Reserve Bank’s (“the Fed”) decisions regarding interest rate hikes. Interest rate hikes are designed to slow the economy as it makes borrowing money more expensive. We believe that the Fed is going to remain “hawkish” until they’re convinced that our inflation issues are behind us. A “hawkish” Fed is one that favors aggressive policy, high interest rates, etc. The markets generally prefer a “dovish” fed i.e., the opposite of “hawkish”. Unfortunately, we believe the Fed will need to see more economic pain before it's convinced to slow it’s role. The markets will be watching economic data and the Fed closely over the next few months, which we believe will create continued volatility – to both ends.
What should you be doing?
- I believe investors should reflect on what they’re looking to accomplish by investing their money. Most of us are investing our money to hopefully grow it faster than our future spending needs. If this is true, the allure of speculating in order to “get rich quick” becomes less attractive. I believe this mindset often guides investors to make better investment decisions.
- Market volatility may present opportunities to realize tax losses in non-retirement accounts. Unused 2022 losses may be “carried forward” to offset future gains in taxable accounts (currently up to $3k/year).
- Continue to prioritize paying down any variable rate debt.
- Consider utilizing money markets for liquid holdings – a money market would be considered a “cash alternative”. As I write this, some prime money market funds are yielding over 3%.
- Grandparents and parents looking to save for college – volatile periods may make front-loading 529 contributions more compelling.
Please don’t hesitate to reach out to discuss these topics in greater depth. I can be reached at 978-455-7799 or Michael.firstname.lastname@example.org.
Thanks for reading!
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Past performance is not indicative of future results and there is no assurance that any investment strategy will be successful.
Financial and investment planning inherently involve potential tax and legal implications, with which we are generally familiar. We do not, however, practice as lawyers or CPAs and cannot give specific legal or tax advice. You should always consult with your tax advisor, or your attorney, when making complicated legal or tax decisions, however, we’re glad to work with your tax or legal professional to help you meet your financial goals. Raymond James financial advisors do not render advice on tax or legal matters.
Any opinions are those of Michael Carbone - not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.