Please find an excerpt from our March 2024 Newsletter below.
White lighthouse investment management philosophy and crypto?
There are many ways to earn and build wealth. Working at a job and saving, buying or building a company, lending money, buying a physical or digital possession and selling it for a higher price later, speculation/gambling, and many more. There are also many ways to lose wealth through spending, gifting, selling something at a lower price than you purchased it, inflation, misappropriation, physical loss etc. Most assets can be valued in multiple ways, market prices exist for commonly traded assets (stocks, bonds, currencies, and commodities), comparable prices are often used (real estate, private companies, art etc.), economic modelling of the value of future cash flows (with assumptions about discount rates, growth, taxes) etc., and then there is plain old sentiment. How much is a willing buyer willing to pay for a specific item at a specific time. Even for the most refined investment models, sentiment and comparative valuations are important or put another way…markets are generally efficient but sometimes, especially in times of great stress or jubilance, they are not.
At White Lighthouse, we are most comfortable investing in investments that have multiple methods of valuation and specifically those that have expected future cash flows. Basically, things we think we understand. Areas that we tend to shy away from are investments that are opaque, difficult to value or that do not generate a lot of cash flow. This keeps us away from everything from wine and art, hedge funds, NFTs, cryptocurrency, Louis Vuitton and Hermes handbags, casinos, and lottery tickets. This is not to say that these areas should never be invested in, it is just that we would advise clients to use more moderation and caution.
The White Lighthouse Investment philosophy has been built on the principles of asset allocation in a diversified portfolio depending on each client’s unique profile. We don’t try to time markets and while we are not stock pickers trying to find the latest Apple or Nvidia, we have made some long-term deviations from pure indexing, notably being more favourable to US-listed stocks and, specifically, technology. I have written in the past about cryptocurrency, which I still believe has more similarities to the Tulip craze of the 1600s than to traditional assets such as stocks, bonds and real estate. However, retaining a degree of flexibility in one's thinking is critical and so this article from the Economist, "Bitcoin’s price is surging. What Happens next", about bitcoin has gotten me pondering. The most relevant quote that I am considering is
“Diversification among uncorrelated assets is the foundational principle of portfolio management. Reallocating, say, 1% of a fund to bitcoin would be a low-stakes hedge.”
In the past, clients who have wanted to buy cryptocurrency would (and still do) receive the requisite notes of caution. Cryptocurrency is highly speculative, we do not recommend buying more than you can afford to lose and consider at what point you would sell and take profits. This is not something we would have added to a portfolio for many reasons, not the least of which is client security. Now that bitcoin is available in multiple ETFs I am considering, only upon client request, to add small amounts in ETF format, and would generally look at replacing part of your gold allocation, which tends to be quite small. ETFs from iShares, such as IBIT, have relatively low fees, a trusted reputation and enough volume to pass several of our screenings. However, none of this makes crypto less risky in our opinion. I will be interested to hear what you think.
Another interesting Economist article “Should you put all of your savings into stocks” is a theme that often pops up after large increases in the market. The article then poses the question, well, why stop at 100%, it is easily possible these days to invest 150% or more in stocks by taking on debt, which is really not much different than the way people invest in homes when they take mortgages. Though admittedly margin calls and price risk are much less common (but do exist, especially in Switzerland) on real estate. While I can think of some circumstances where a 100% stock portfolio may make sense for certain clients. The flip side of this however is not how much risk one can afford to take, but is it necessary to take on such a high degree of risk? When my kids are investing in retirement accounts in their teens and 20’s, I have no problem encouraging them to approach close to 100% in stocks, with a multi decade horizon…but admittedly this is not their biggest asset, much of their wealth is in their potential to work and earn…the definition of “100%” is what remains key.
Our clients find our newsletters to be a valuable part of working with White Lighthouse.
A sample of our past newsletters is freely available below.
