Alt Blend

It never hurts to have a reminder of the things that matter in life, and it’s fair to say that many people would be willing to exchange money for more time if only it were possible (I suppose it is indirectly possible, as money can improve longevity via better healthcare, nutrition, personal training, etc.). While we cannot have life without time, we certainly can have life without money; however, that doesn’t mean money isn’t important.

Today’s title consists of a fun-to-say phrase I cobbled together from the pros and cons of digital currency. It loosely translates to the “willful parallel happenings (within digital currencies),” which is just what I’m planning to work toward today: improving our understanding of money and where things currently stand within the realm of digital currency. Continuing where we left off in Part 3 of this series, we find ourselves in a front-row seat for what may be one of the most notable developments in the history of money. The only problem is that we won’t know that until decades have passed and the ongoing “digital currency revolution” can be placed within a historical context. Here we go!

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“Bitcoin and digital currency is just this thing that was always going to happen.” – Tyler Winklevoss

The digital currency movement (including Bitcoin) is undoubtedly “a thing” that is happening, but I think the jury is still out on where it all goes. Will it:

Take over the world of fiat currencies and function as the dominant form of global reserves?

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“I am everywhere and I am nowhere. That’s the beauty of the Internet Age.” – Ai Weiwei

In part one of this series, we touched on the origins of blockchain and cryptocurrency technology, so let’s build on that today by exploring how it works. Don’t worry – the goal isn’t to be able to code the next cryptocurrency (and sorry to disappoint you, if that’s your aspiration). But, by approaching this in “bit-sized” pieces, we can better understand what is really happening behind the scenes and, hopefully, make the whole topic less daunting. Here we go!

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“I guess you guys aren’t ready for that yet. But your kids are gonna love it.” -Marty McFly.

After bringing the Enchantment Under the Sea Dance to a dead stop with a blazing rendition of “Johnny B. Goode,” today’s quote was the line Marty uttered to the awestruck crowd before leaving the stage. I’d like to think that if they make a Back to the Future reboot that begins in the year 2045, and Marty travels back in time 30 years to 2015 (instead of the original 30-year leap from 1985 to 1955), he could use the same quote after giving a cryptocurrency/blockchain presentation at a retirement community. I’ll let you choose your own adventure regarding the backstory of why he would be doing such a thing, but perhaps it’s to trick an elderly Bif into unwisely investing his retirement savings? (I know, I should really get into writing screenplays).

The whole “crypto” movement may feel very futuristic for many investors. While no one knows what the future holds, the extreme perspectives range from crypto/blockchain eventually being involved in nearly everything to just being a short-lived fad. What is for sure is that the crypto phenomenon has gained a lot of traction, grabbed a lot of headlines, and created/destroyed a lot of wealth over the last decade. And, since it’s “a thing” and definitely an alternative investment, it’s about time – now 36 posts into Alt Blend – that we learn the basics of how it works and what potential utility it holds for us and future generations. I’m not an expert on cryptocurrencies or the blockchain, so this may be more of a research project than most editions of Alt Blend, but maybe that means we’ll collectively learn even more than usual. Here we go!

This post is a helpful reminder that I need to consistently prioritize setting my and client expectations as an essential component of successful investing, especially for Alts. Like most investments and life itself, Alts will rarely play out as originally intended. They may be better, and they may be worse. Still, the management of each strategy involves continuous adaptation to unforeseen circumstances, which is something we must expect and accept when investing. Diversifying across a mix of strategies (even ones that may be inherently diversified) and sizing investments appropriately can help smooth out the total portfolio impact and our experience. And all of that can better align outcomes with our (hopefully realistic) expectations. There WILL be unpredictable investment journeys, but what we must avoid at all costs are potentially catastrophic outcomes related to concentration risk, thus allowing us to fight another day, try again, fail again, and fail better.

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I could’ve more predictably started this post with a quote from F.A. Hayek, well known in economics for what is concisely named “the knowledge problem,” which he lays out in his short writing, “The Use of Knowledge in Society.” But what fun is predictability? And, if it’s knowledge-problem quotes you desire, an entire chapter of this There’s No Free Lunch book is dedicated to the subject.

I took more of the “roundabout” path into wealth management (via engineering rather than economics), but – from my non-economist perspective – the knowledge problem can be summarized as follows: it’s impossible to make good decisions without complete information, and NO ONE has complete information because everyone’s circumstances vary so significantly. The POTUS cannot possibly make broad (macro) decisions that are in the best interest of every US citizen at their particular (micro) level. But even making decisions at the local level is not going to be the best thing for every person. There are always tradeoffs. However, the beauty of free markets is that local decisions made with local, specific knowledge can aggregate to good overall outcomes for society.

When I first learned of the knowledge problem (which, I assure you was much later in life than it probably should have been), it screamed “RELATIVITY” to me, and that brings us to today’s quote and Einstein. While Isaac Newton did a relatively (😊) good job explaining motion observed in the world around us, his equations – though extremely impressive for their 1686 origins – weren’t perfect. Einstein introduced his theory of “Special Relativity” in a 1905 paper to help address the shortcomings of Newtonian Mechanics, particularly related to explaining light, including the well-known equation, E=mc2 (if you think about light for a minute, it’s tricky to pin down, so it was a big pain-point of physics: What is it, actually? Does it have mass? Is it a wave or a particle?).

Unless you have some type of tax-sheltering structure in place (or tax losses that can help offset income or gains), then Uncle Sam will almost always be taking a slice of your “pie” (aka investment distributions). The way in which investments are taxed varies significantly, but how does that work, exactly? Also, where do fees fit into the equation, and – to finally discuss the question that prompted this series over a month ago – why are investment returns often confusing? Listen for the answers.

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“Money, well, get back. I’m alright, Jack, keep your hands off of my stack.” -Pink Floyd, Money

Your investment portfolio may seem a bit ethereal, as it’s held electronically at a custodian under the guidance of a trusted wealth management team (hopefully TBG), helping to capitalize companies and economic activity throughout the world. But, if you’re distributing income (aka yield) from your portfolio, that can feel much closer to home, contributing directly to your local “stack” of cash (or bank account).

It’s worth spending “some time” on the concept of yield because it can be confusing. And it turns out (in hindsight) “some time” is a precise term meaning an entire edition of Alt Blend, instead of the originally planned four topics I thought we’d cover today. With that in mind, let’s discuss more than you probably ever wanted to know about yield. Here we go!

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“Money, it’s a gas. Grab that cash with both hands and make a stash.” – Pink Floyd, Money

Not so fast. Yes, many people receive income from their investments into their accounts, which they can reinvest, spend, or use to “make a stash.” However, my hunch is that very few investors understand how the income distribution process works and its impact on the investments themselves. While it’s not typically an issue, sometimes this lack of understanding can cause unnecessary concern. For example, in December 2021, our clients – or at least the ones who follow their accounts closely – awoke one morning to discover that one of their mutual funds had dropped -17% overnight.

If your initial reaction was, “Yikes! What happened to that fund?” you’re not alone, and that situation naturally led to some incoming client questions. But what if I told you that there was absolutely no issue with the investment and that the “loss” was simply a matter of optics related to an income distribution? That real-life situation is partially what prompted this current Alt Blend series. And with our income-generation basics in mind from Part 1, it’s what we’re going to continue learning more about today. Here we go…

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You’re likely already familiar with many different types of investments and distribution terms like interest, dividends, capital gains, and return of capital. But what are the similarities and differences between different types of distributions? How do distributions affect the value of an investment? What are the tax implications? THAT is what we’re going to begin talking about today:  how different investment options generate income and how that income is distributed to investors.

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