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technology

From Tech-Loving Lockdown to a Stimulus-Charged Reopening?

By | 2021, Money Moxie, Newsletter | No Comments

The stock market does a good job discovering prices, but it gets carried away to extremes by narratives that capture everyone’s attention. When these stories change, the market changes.

In the early days of computing, memory was expensive, and programming in binary code was tedious. To save both money and time, programmers abbreviated years to two digits. For example, the year “1999” would have been recorded as just “99.”

This limitation was widely known going back at least to 1985, but by 1997, it was crunch time. Without a fix, there may or may not have been a valid date in computers for the first day of January 2000. And who would want to be in an elevator or flying in a plane when the clock struck midnight?

This “Year 2000 Problem” became known as Y2K. Companies all over the world were upgrading computer hardware and software in anticipation of Y2K. This further increased the high demand for technology, and the stock market investors were well-aware. It added fuel to the tech-stock fire and caused many to adopt a belief that the best way to make money was in technology stocks.

Covid-19 precautions created a similar tech-heavy narrative to investing in the year 2020. While many of the largest companies profited a great deal from the Covid-lockdown of 2020, investors began to favor any technology companies, even those without profits, by the end of the year.

I decided to go back over the last 20 years to test the idea that the best way to make money is in technology stocks. After all, who could argue that technology companies have not been the most successful since the year 2000? What I found surprised me. From February 2000 to February 2021, the tech-heavy NASDAQ index returned an average of 5.05% per year. How about the more diversified S&P 500? Over the same time, it averaged 5.02%—roughly the same with a lot less volatility.

How could the S&P 500 outperform when “FAANG” (Facebook, Apple, Amazon, Netflix, Google) companies have been so prominent? While these did fine in the early 2000s, the best performing areas were sectors outside of technology.

It is impossible to say exactly what the future will bring, but a change in leadership at some point is inevitable. As we enter the spring of 2021, we may have already seen a change begin. With vaccine distribution, investors have transitioned from a tech-loving lockdown to a stimulus-charged reopening. Only time will tell if this is truly the beginning of new market leadership or if that change won’t come until later.

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2021 – Year of the Vaccine

By | 2021, Money Moxie, Newsletter | No Comments

Irrational Exuberance
On January 7, 2021, Elon Musk tweeted a recommendation that people replace the social media app Slack with Signal. Instantly, the stock for Signal Advance, Inc. began to climb. It finished the day up over 500%. Unfortunately, Signal Advance does not have a social media app.

Investors should have started selling the moment the mistake was publicized. Instead, the stock kept rising. In less than a week, Signal Advance rose 11,700%!

Let’s look deeper into what a number like this really means. An investor who owned $10,000 of this stock would have had nearly $1.2 million three days later. Of course, groups often move in irrational ways, but at some point, the truth begins to matter. On the fourth day, it had an epic fall, giving up most of the gains.

Behavior like this has happened before. In fact, it was common back in 1999. On April 1, 1999, The Wall Street Journal reported the story of AppNet Systems, which filed to have its stock publicly traded. That day, investors began buying up Appian Technology. Despite being described as an “inactive company,” the stock rose 142,757% in two days. Needless to say, it didn’t end well for most of these investors.

In 1999, online trading was new, and so were the internet chat rooms where investors could share stock tips. It seemed that nothing could stop the momentum.

Warning Signs from 2000
Technology stocks began to fall in February 2000, and the rest of the market began to fall in March. What triggered the decline? Were there any signs?

(1) Was it Yahoo’s addition to the S&P 500 on December 7, 1999, which signified the acceptance of technology domination in the investment world?

(2) Perhaps it was the symbolic show of a new world order when internet upcomer AOL purchased media giant Time Warner on January 10, 2000?

(3) Finally, could it have been that the S&P 500 price divided by future earnings was at an all-time high of 26 in February 2000?

(If you don’t remember or have never heard of AOL, well, that proves the point I am trying to make. Good investing is very different from speculation.)

Investor Mindset
Greater and greater stimulus from the federal government and the Federal Reserve have created an environment where some investors are only focused on return. They ask themselves, “How much money do I want to make?” Then, they invest accordingly.

Of course, there is no limit to how much money most people want, which is exactly why this won’t last forever. The stock market is not an ATM.

This bull market will end. However, it is difficult to accurately predict the timing of a falling market when in the middle of a powerful bull market. It could be in February or, with all the government support, it may keep going throughout 2021.

Government stimulus and all the new money that comes with it will have to go somewhere. This could be a great support for investors as 30% of the stimulus is not needed by its recipients and gets saved. Roughly the same amount is spent, and another part pays off debt. All of these help the stock market either directly or indirectly.

If even more stimulus comes in 2021, then we can expect more spending and more investing.

What could go wrong in 2021?
Unintended consequences are an incredible risk for the unprecedented government stimulus we have experienced. However, we have not seen any major negatives yet. Until we do, it is quite possible that the stimulus will continue to flow in 2021.

I will be keeping an eye on inflation. In the Great Depression, America had the New Deal. People were paid to work. In the pandemic of 2020, people were just paid.

As the money is spent, demand could outstrip supply, and prices could rise. If inflation somehow reaches 3% in 2021, then I believe the Federal Reserve will take the punch bowl away from the party. For now, Fed Chairman Powell says he is “not even thinking about thinking about” doing that. So, no reason to panic.

What could go right in 2021?
I expect a great rotation to begin at some point in 2021. This change could end what I would call the profitability of speculation. However, it does not necessarily mean a crash in the market. I’ll explain.

When the economy was barely growing over the last 10 years, it didn’t make sense to run from growth. This made it possible for technology, which was a poor investment from the year 2000 through 2008, to become a leader. Technology was the undisputed leader of 2020 as it was also well positioned for the stay-at-home economy during the pandemic.

Technology represents over 25% of the U.S. stock market, but this is not a fixed level. Just before falling out of favor in 2000, it was 30%. By 2008, it was only 15%.

Keep in mind that in 2020, technology only represented 6% of the U.S. economy and just 2% of employment. That means there is a massive amount of opportunity out there just waiting to regain strength. I believe that at some point in 2021, we will get that change of focus and market leadership.

International stocks, small company stocks, industrial stocks, and energy stocks have already begun to strengthen after years of lagging behind.

Only time will tell, but if the new trend continues as it has over the last few months, then we may be seeing new market leadership that will point the way forward for years to come.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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What Tech Employees NEED from Financial Advisors

By | 2017 | No Comments

I recently surveyed tech employees to find out how financial advisors can better address their biggest concerns. Here’s what they had to say.

Make me believe that my company is a unicorn, but help me save as if it isn’t.
Even with the tech boom, only 15 to 20 new companies per year will eventually reach the mark of $100 million in revenue. The good news for Silicon Slopes companies is that the majority of those companies are coming from outside the San Francisco area.i The new 2017 list shows that Utah is home to 4 Unicorns: DOMO, Qualtrics, Pluralsight, and InsideSales.com.ii

Are you working for a unicorn? Many tech employees sink all of their excess cash into stock options. This can create a huge windfall or a major money pit. Britt Hawley from InsideSales.com says that tech employees need financial advisors to, “help them understand, manage, and factor (stock options) into their financial planning.” A good financial advisor can help you create a holistic plan that still optimizes your stock option purchases while giving you some balance through your 401k, insurance planning, and other investment planning. Dan Preece from HealthEquity found this to be true when the company he works for went through an IPO; “One of the biggest things for me was having help navigating through stock options, IPOs.”

Part of a holistic plan is creating a way for you to reach your goals even if your company doesn’t get bought out or go public. There is a lot of value in diversification and multiple income streams. You should still be contributing 10-15% of your salary into your 401(k). If your 401(k) ends up being the smallest piece, then it is still icing on the cake. If your 401(k) is your main retirement, then you will be grateful you chose to save. You don’t want to have to delay retirement because you are still hoping that your company will go public.

Help me without taking all of my money
Too many times tech employees seek out good advice only to find a sales person, masquerading as a financial advisor, pushing the “hottest thing since sliced bread.” Kayden Holt from Pluralsight put it this way, “Employees need people to help them without taking all of their money.” Unfortunately there are a few rotten “advisors” that taint the whole bunch. Be wary if an investment planner is only playing on a one string guitar or sells you something that is too good to be true.

Seek out a holistic advisor, typically a Certified Financial Planner®, that will look at all of your goals and will devise a plan to help you get there. Also make sure the fees they charge are in line with the service provided and that they can prove the value they are providing. Tech employees “like to know in a tangible way how they are benefitting from a financial advisor,” stated Mr. Hawley. Good advice does not have to be expensive, but bad advice always costs you dearly, no matter how little you pay for it.iii

Educate me about how to invest.
Tech employees are more savvy than most. “They like to understand the why” behind an advisors investment actions, said Mr. Hawley. Good investment advisors will be able to explain the details of their investing process with its pros and cons. They can explain in concrete ways what they can do for you that you can’t do for yourself. If you want to do your own investing, they can help you do it. If you want to have someone else manage your money, they can do that too. Most importantly they will be a teacher. “Just as much as we needed grade school to learn how to read and write,” said Mr. Holt, “we need financial advice to learn, grow, and earn.”

Give me different ways to access advice.
The world of advice is changing. The old stockbroker model of paying commissions for stock trades is dying. In its place you can find different models: Do it yourself, monthly retainer, or assets managed for a fee.

Technology is changing the landscape and making better advice and trading platforms available to the masses. Many do-it-yourselfers are drinking in the information and trading their own account.

Paying a monthly retainer, like $100 a month, is a newer model. It allows you to call up and ask questions anytime you want. It also helps people start out on the right foot even if they don’t have a lot of investable assets. It begs to reason that if you are willing to invest $100 in a phone every month, you should be willing to invest $100 in your financial security.

If you don’t enjoy researching investment ideas, you don’t have the time, or you’re afraid of not knowing what you don’t know, then seek out a holistic fee based firm that will also give you advice as part of that fee. The fee based model makes sure the advisor’s interests are aligned with yours.

Shield me from taxes
Tech employees tend to excel and have some great financial rewards. You may also be working for a unicorn and end up with a windfall. In either case you are probably getting killed by taxes, figuratively of course. Mr. Preece stated that reducing tax liability is extremely important because “I’ve worked hard to earn what I’ve got (often putting in late hours) and I want to ensure that I can enjoy as much of what I’ve earned as I can.” The best financial advisors will work in concert with CPAs specializing in stock transactions to make sure you can shield yourself from as much tax as legally possible.

Tech employees have some unique needs. The right financial advisor can help address those needs and make sure your future is all that you expect it to be. As Mr. Holt said, an “advisor is one of the only ways to balance your money and invest in yourself.”


i https://www.strictlyvc.com/2014/12/01/many-tech-companies-break-year/
ii https://www.cbinsights.com/research-unicorn-companies
iii http://www.cbsnews.com/news/quest-for-alpha-the-final-10-rules-for-being-a-successful-investor/

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