Critical Thinking Required

This is our 2024 first-quarter commentary. Nathaniel discussed 3 main topics: US stock market performance, and why the S&P 500 doesn’t truly reflect the overall stock market; inflation, and how it impacts your investments; and lastly, the 2024 presidential election and how it may affect your financial planning.

If you are planning to have a child, or you just had one, there are some financial preparations that you may find extremely beneficial in the long run: 1. Cash Flow: Create a realistic budget and increase your emergency fund; 2. Estate Planning: Pick your guardians, create a trust, or at least complete the free estate planning templates your state provides; 3. Life Insurance: Now that you have (or are about to have) another person who depends on you, please review your insurance needs. It's a risk management tool, not an investment! 4. Education Planning: Utilize 529 plans and other useful investment vehicles for your child; 5. Tax Breaks: Talk to your advisor and CPA about child and dependent care credits, FSAs, and other tax benefits.

In this episode, Nathaniel and Tim discussed what the S&P 500 index is, its performance, and does it truly represent the overall stock market. From January 1 to June 20, 2023, the S&P 500 increased 14.3%. That's well above the 10-year and 20-year averages through that same time period of 3.6% and 3%, respectively. "The markets must be doing really well this year then!", you may think. But why are your 401(k)/retirement accounts not doing as well? Did you know that the top 9 companies of this index (Apple, Microsoft, Amazon.com, Nvidia, Tesla, Alphabet, Meta Platforms, Berkshire Hathaway, and UnitedHealth Group) accounted for almost 31% of the market capitalization? And if you exclude these top 9 stocks, the index would be up about 3% in the same time frame, making it a very mediocre year. Nathaniel talked about what drives the 2023 jump, and the volatility of the short-term market.

In this episode, Tim and Nathaniel discussed estate planning for digital assets. This is a relatively new concept for older generations. Most of us are familiar with wills and trusts for cash, real estate, and other investments. But what about digital assets like Bitcoin, online bank accounts, etc.? If you are an influencer or work in the media industry, what about your social media accounts, movie/music rights? Nathaniel and Tim also discussed password management. We understand that estate planning is always difficult because we don’t want to face our mortality. But please give it a try, and do the hard work on estate planning, so that your loved ones can focus on mourning your passing and building a meaningful life afterward, instead of stressing out about where everything is.

In this episode, Tim and Nathaniel discussed private investments: what're their qualifications, why they have income/assets restrictions, and how should one view them. A couple of research filters to go through: define your goals, understand the vehicles, consider the risk, know the management/leadership, and pay the right price. Nathaniel made a great point: if you have a small business or part-time side business, the best private investment could actually be your own company. You know the industry well, you understand the product/service, and you are in control of the execution. When it comes to investments, new and shiny may not be the best option. Why not put your money into things you know best?!

Threads is Meta’s latest social media app. It’s a Twitter-like product with short missives you can share with followers. It lets you post text, photos, links, and videos. It reached 100 million subscribers in a record time: within 2 days. In comparison: it took ChatGPT 2 months, TikTok 9 months, Instagram 30 months, cell phones 15 years, and telephones 75 years. Tim and Nathaniel discussed from an investor’s perspective, what Twitter’s and Thread’s (really Twitter and Meta’s) pros and cons are and what the future may hold for them.

For this episode, Nathaniel and Tim discussed investments within the music industry. The earning method has changed in the past decade with streaming services. Nathaniel used Taylor Swift as a perfect example of how top artists can change the power dynamic with corporate giants. There are many different types of organizations in the music industry (artists, music production, recording companies, publishing companies, agencies, etc.); which ones will Nathaniel choose to invest with? He gave his answer and reasoning.

In the last episode, we discussed some frequent spending habits we’ve seen, and how we should interpret them. For this episode, we are going to discuss budgeting. Before we start, understand that this is going to be an emotional and hard exercise. Ask yourself, are you really ready to make a lifestyle change if needed? Be realistic about your expectations and numbers: if not, you are going to fail again and again, and create a negative emotion feedback. Dan and Tim discussed delayed gratification, outliers, and the importance of understanding the value of your dollar: both quantitatively and qualitatively. How you feel matters a lot when it comes to budgeting.

This is part one of our spending habits discussion. Dan and Tim listed what people call “spending red flags”: frequent small expenses like coffee and restaurants; unused subscriptions and memberships; impulse purchases; and trying to keep up with your friends. We are not disagreeing with these points, but it’s also important to understand this: our spending is not about the objects/services that we pay for, but more about the emotions behind the purchase. You have to ask yourself: why did I buy it, and does it bring me the maximum happiness?

The crypto ETFs are not doing too well for the past year. The fall of some leading players like Tierra/Luna and FTX hurt investors greatly, and the potential criminal fraud investigation is even more alarming. And now, with the rise of ChatGPT, you can clearly see that crypto is no longer ETFs’ favorite new baby; the money is moving to the AI world. Investors are piling into shares of graphics chip maker Nvidia, Microsoft, Google, and other stocks that they think stand to benefit from AI technology. What can we learn from the crypto fallout, and should we jump on the new AI investing wagon? Nathaniel and Tim discuss the four main reasons why investors lost millions over crypto and their thoughts on how to approach the new AI investment trend.

In this episode, Nathaniel discussed 4 hot industries that he won’t invest in, and what his exceptions are: 1. No commodities like oil, gold, and silver, etc., but yes to commodity royalties. 2. No Bitcoin, but yes to blockchain technology or other related industries. 3. No real estate as a landlord, but yes to professional real estate investment groups. 4. No cash-heavy and cyclical industries like shipping, but yes to utilities and railroads in the US. Overall, you can find a pattern: Nathaniel doesn’t like asset-heavy and high-risk industries, and he doesn’t like investments that require a lot of upfront capital-intensive work either. But overall, that’s not what ultimately stops him. What Nathaniel truly cares about when he invests, is his circle of competence. Kobe Bryant, LeBron James, Warren Buffett, Dr. Dre, what makes them successful? They all stick with what they are good at: their own business, their strength, their core values. When it comes to investing, most of the time “safe and boring” is good! It’s not worth it to chase the next “sexy new thing”.

The U.S. government has never defaulted on its debt, and it’s unlikely it will default this time either. But if it were to happen theoretically, it would have severe consequences for the country's economy and global financial markets, from rising interest rates to lower stock market prices, and from higher inflation to the end of the U.S. Dollar dominance. What can one do to prepare for such a disaster? Academics have differing opinions, but in real-life practice, our one golden rule is: position yourself well with complete and consistent financial planning and actually execute the plan. Don’t deviate from your ongoing investment contributions or distributions, be it your 401k or other retirement accounts. CONSISTENCY IS KEY. Nathaniel gave an example of 2011 when the U.S. came close to default, and what would have happened to your investment if you had sold everything in a panic vs. holding your position and riding the turmoil out.

Charlie Munger and Warren Buffett are Nathaniel's all-time favorite investors. As always, they offered a lot of wisdom (and a couple of zings) at the 2023 Berkshire Hathaway annual meeting. Tim and Nathaniel discussed the duo's take on: 1. Why are they against "diversification" when everyone else thinks it's the golden rule, and the importance of building up your circle of competence; 2. The pair called Elon Musk a "brilliant, brilliant man", but may "overestimate himself" sometimes; and 3. This is one of Nathaniel's favorite quotes: "You should write your obituary and figure out how to live up to it." Overall, their take on life is simple, and yet requires a lot of self-discipline: "You spend less than you earn. Invest shrewdly. Avoid toxic people and toxic activities. Try to keep learning all your life. And do a lot of deferred gratification. If you do all of those things, you are almost certain to succeed."

For this episode, we asked ChatGPT and Google Bard: "Write a podcast outline on how will ChatGPT/Google Bard change the financial planning industry?" Here is the second part of each chatbot's outline. Discuss potential concerns and limitations of using ChatGPT in financial planning: o Make mistakes that could lead to financial losses. o Be biased in its advice, which could lead to people making poor financial decisions. o Not be able to understand all of the nuances of a person's financial situation, which could lead to bad advice. Overall all, we believe that AI technology is good at gathering, processing, and analyzing raw data. It will help advisors to scale their practice rapidly. But as always, a brilliant plan is only great when executed correctly. Until the machine learns to feel (oh man, we hope not), we will always need a human touch in the financial planning industry. Because most of the time, people choose not the best plan, but the one that makes them feel complete, relaxed, and happy.

For this episode, we asked ChatGPT and Google Bard: "Write a podcast outline on how will ChatGPT/Google Bard change the financial planning industry?" Here is the first part of each chatbot's outline. From Chat GPT: I. Introduction A. Introduce the topic of how ChatGPT is poised to revolutionize the financial planning industry B. Briefly explain what ChatGPT is and its capabilities II. Background on the financial planning industry A. Discuss the traditional model of financial planning B. Identify the limitations of the traditional model C. Explain how technology has already begun to disrupt the financial planning industry III. The role of ChatGPT in financial planning A. Explain how ChatGPT can improve upon the traditional model of financial planning B. Highlight some of the specific ways ChatGPT can help financial planners and their clients 1. Streamlining data collection and analysis 2. Providing personalized investment recommendations 3. Automating routine tasks 4. Improving communication and customer service Google Bard: I. Introduction Introduce the topic of Google Bard and how it can change the financial planning industry. II. Discuss the potential benefits of using Google Bard for financial planning. A. Save more money by creating personalized budgets and investment plans. B. Make better financial decisions by providing access to unbiased information and advice. C. Reach their financial goals sooner by taking advantage of automated investing and other features. In the second part of the episode next week, we will discuss the rest of the outlines created by ChatGPT and Google Bard, which focuses more on potential problems and challenges.

In this episode, Ying and Nathaniel discussed the fight between Disney World and the state of Florida. Back in 2022, the state of Florida passed the Parental Rights in Education bill, aka “Don't Say Gay” law. Because of Disney World’s pushback, the Governor of Florida sought to take away Disney’s special tax district until he realized that the abolishment of the district would require taxpayers in Orange and Osceola Counties to pick up the tab for services paid by Disney World like fire protection and road maintenance, and more than $1 billion in debt. Instead, a new bill was passed to take control of the special zone’s board. The Governor also implied that the government wanted more control over Disney’s content within the parks. In response, Disney passed a Declaration which essentially took control away from the future board and gave it back to Disney, the company. There is a unique time period term “King Charles III clause" assigned to the Declaration, which makes the new Declaration valid virtually forever. We believe any company has the right to make a stand on social matters; but at the same time, the power balance between the government and corporations is quite delicate. It will be interesting to see how this event will continue to unfold, mostly at the cost of Florida’s taxpayers and Disney.

Many studies have been done from quality and quantity perspectives on whether money can buy happiness. It can, to a certain level. Caroline recommended reading the book: "Happy Money: The New Science of Smarter Spending" by Elizabeth Dunn and Michael Norton. The authors discussed 5 ways to actually increase happiness with money: 1. buying experiences; 2. buying time; 3. making it a treat; 4. paying now and consuming later; and 5. investing in others. How does all that tie in with financial planning? We don't care where you spend your money (well, as long as it's legal). What we do care about is whether you understand your spending patterns? Is it sustainable? Do you have enough cash to be prepared for unexpected life changes? And lastly, is your spending matching your ultimate life goals?

In today's world, with social media's help (or curse?), we are beyond "keeping up with the Joneses." Billions of people on the internet are our "neighbor Jones" that we are trying to keep up and compete with, from the five bedrooms house in the Valley to the new Porsche, from traveling to Naples on a whim with some friends to the new Birkin special order. Social pressure spending can get out of control fast. Dan gave some chilling data: did you know 40% of millennials have gone into debt to keep up with their friends? Oh my... Gary gave some tips on keeping your FOMO ("fear of missing out") spending in check. One of my personal favorites: practice gratitude!

Nathaniel and Tim discussed the collapse of Silicon Valley Bank: what happened and what went wrong. First, unlike most banks, most of SVB's clients are not retail individuals/small businesses, but VC-funded tech/crypto startups. As you know, they are having a tough year. They are burning through cash and thus taking significant deposits out of SVB. SVB had to sell its long-term bonds/Treasuries at a loss to cover its withdrawals. The snowball started to roll from there. Because most of its clients are VC-funded startups, the average account is a whopping $4.2 million, far over the FDIC's threshold of $250,000 per account per bank (the definition is more complex than this). Therefore, when the snowball got going, depositors had a legitimate worry that they may not get their money back, creating a feedback loop that exacerbated the situation. We believe this is an isolated situation because of SVB's unique client base and its management's apparent risk management oversight. Of course, nothing is risk-free (not even U.S. Treasuries), but the average person's accounts are likely safe.

Caroline and Tim discussed some highlights of SECURE ACT 2.0 and how it impacts us: 1. The age changes of RMDs (Required Minimum Distributions). 2. Allowing direct transfers from 529 plans to Roth IRAs under certain circumstances. 3. Changes with 401(k)s. 4. 401(k) catch-up contributions. 5. New Roth SIMPLE/SEP IRAs for small businesses and self-employment. 6. Employer's match for emergency savings. All these new rules have nuances/circumstances built around them; please consult an Advisor and see if they make sense for you.