From CEO & CIO Jeremy Torgerson:
Hello nVest Advisors clients-
We hope you have all enjoyed the holiday season and entered 2024 happy, healthy, and surrounded by family and friends.
We are watching several developments that we believe will impact the creation of our investment models for 2024. Although our macroeconomic research and analysis strongly points to a recession in the second half of the year, we know that many of our clients have been defensively positioned for quite some time. We made changes to our “Total Defense” model in August of 2023 to give some protective exposure to stocks for those accounts, but we are exploring additional options to increase your return and yield even while we prepare for what 99 out of 100 economic indicators is strongly predicting: a sharp economic downturn, soon.
I wanted to bring light to a couple of specific areas of concern to our firm, and what we are doing in the short term:
The Bitcoin ETF has been approved
One of the biggest financial events in recent years was the announcement today, January 10, 2024, of the SEC approval of a handful of Bitcoin ETFs (exchange-traded funds). Prior to this event, Bitcoin and all other cryptocurrencies had to be purchased through either offshore crypto trading exchanges, or else some US-linked ones that have had a large swatch of legal and/or financial difficulties.
As you know, nVest Advisors takes a very cautions view of cryptocurrencies in general, for several reasons. First, there is no real purpose for them in a client’s portfolio. As the CIO of our firm, I could never determine a reason to own them. Recent experience has proven that they do not hold their value in any stable way (so they’re not really “money”), they do not act as a hedge against inflation (they collapsed the moment inflation arrived in late 2021), and they are too volatile to be a short or medium-term store of value (which is the third and final argument their adherents constantly give us).
Additionally, unlike most investments, they are impossible to accurately value. With no sales or revenue, no product or service, no customers, no annual reports, etc. cryptocurrencies only seem to be valuable if there is buying interest in them. Without constant promotion on social media to find new investors, the price tends to collapse pretty quickly.
The push to centralize control over Bitcoin (remember: only one coin is now available on the U.S. investment markets) seems anathema to the original purpose for it in the first place: that of a decentralized currency for trade that is not manipulated or controlled by the world’s banking systems. These ETFs eliminate that primary purpose, as they will now be decidedly controlled and regulated by the largest banks and government agencies in the world.
So where do we go with Bitcoin? We are watching it for now, but will likely make it an investment option for our clients once we have an idea of how it will behave as a traded investment product in different economic and market situations. We also need to learn what it will be most closely correlated with, and how it will act differently than other investments in the technology space. Adding Bitcoin to a portfolio with a lot of tech stocks, for instance, may concentrate your risk instead of diversifying it if Bitcoin begins to trade in tandem with other stocks in the tech sector. So we want to wait and see first if it behaves more like a currency, like a small startup tech company, like gold, or if it does something entirely different. It’s just too early to know, and for that reason, it’s too early to add this to our core investing strategy at this time.
However, clients who wish to own a small portion of this in their accounts now can do so. We strongly recommend not more than 5% into this, or any single investment. We will research the dozen or so ETFs that were approved today to find the lowest management cost and the most stable presentation and make that available to you by next week.
Transitioning back to our normal risk models
We are not going to be in a protective mode with our models forever. We are waiting for the markets to correct downward before the coming recession. Stock investors tend to try to front-run economic events by as much as 6 to 12 months, so once the markets accept the inevitability of the coming recession (you can follow that analysis once a week on our blog), they will begin to abandon riskier investments with increasing speed. This usually results in panic selling, what we call in the industry, “capitulation”. You’ll recognize it when you start seeing markets fall 3% or more in a single session, for a few sessions in a row. The last time we saw panic selling was in the early days of the Covid-19 pandemic in March 2020.
It is at that moment that we want to restart our normal risk models. This means, your assets will revert to appropriate investments based on your risk tolerance and account objectives. We have the models ready and are simply waiting for a deep correction, which always comes with economic downturns, to do so.
Until then, we ask for your continued patience. The economy is like a huge ocean liner; it doesn’t turn on a dime. And history shows us that recessions start slowly, and then rapidly pick up momentum. We are ready to resume more traditional investing strategies but we must have the “all-clear” in economic data to do so.
Updates to our current protective portfolios
Until we reach the time when we can move back completely into risk-based models, we will continue to try to seek out better and better returns for you that are NOT directly correlated to the stock market. These involve some actively managed funds that use a combination of strategies to do their work, and we insist that they have a track record of performing at or above our expectations during similar conditions that we are facing today. Some of the strategies are fairly novel and complex and may have different paths to their expected outcomes, but please know that we never invest in something we do not fully understand.
I ask you to communicate with us if you have concerns about the markets, the economy, or any other financial matter. Recessions hurt real people. Sadly, some businesses and jobs will be lost, placing extreme hardship on families. I pray nightly for all of your protection and prosperity, but it would be foolish and irresponsible of me as a financial fiduciary to believe our country, economy, businesses, and families won’t be affected in some meaningful ways by an economic downturn. We can’t walk between the raindrops; no one can.
Welcome Joshua Torgerson
And finally, I wanted to let you all know that my son, Joshua Torgerson, has passed his securities exams and is now officially a junior advisor here at our firm. Joshua will begin by assisting me with our current clients and business operations as he begins to build his own family of clients in Colorado. Josh graduated from the University of Texas – RGV in May of 2016. He has been married to his beautiful bride Anjelika for almost five years and they live in Lakewood, Colorado. Later in the year, Joshua will relocate to Colorado Springs and work from nVest Advisors main office.
(At the moment we have one more trainee preparing for his securities exam, to continue to grow nVest Advisors as an independent financial advisor under our banner in Texas. I look forward to sharing his success story with you in the weeks ahead.)
Thank you all for your patience, good spirits, trust and friendship. We are growing more every day, learning more every day, and working harder every day to get this right. I’m always at your service.
Jeremy