7 Moves to Make in 2024: #2 and Bitcoin ETFs
7 Moves to Make in 2024: #2 Build Your Emergency Fund
In the first quarter of every year, gyms across America are filled with good-intentioned people looking to improve their health. By April, most of those New Year’s resolution warriors have fallen back to old habits and admittedly, not quite as resolved as they were on January 1st. The excitement of that beach body tends to wear off when none of the fitness machines produce it in the first few months.
The second most popular resolution centers around some form of financial health. As a new wave of investors pour into the stock market in the first quarter of 2024, many will find by mid-year that like their health and fitness counterparts, they are less resolved because their investments have not doubled, or maybe even lost value.
Warren Buffett is worth 119 billion dollars. He didn’t get there by investing in CDs. Warren Buffett has had every ingredient to be the world’s greatest long-term investor. Warren didn’t buy penny stocks or meme stocks. He bought quality stocks at a fair value and held them for decades. He was quoted as saying “Our favorite holding period is forever.” My defining Warren Buffett moment was in 2008. As the market was crashing in what became known as the Great Recession, Warren penned an article titled, “Buy American, I am.” You can still read it today with a quick Google Search. In fact, I’ll put the link here. I highly suggest that if you are new to investing, you read it. Being a successful long-term investor requires one to stay invested when the rest of the world is acting irrationally. When Warren wrote that article, the recession was less than halfway over. The world’s greatest investor missed the bottom of the recession by a long shot. Yet it didn’t matter. He built a career buying great stocks at good prices. He didn’t need to time the bottom; he knew the decades ahead of him would exponentially increase his wealth. You likely will never match Warren Buffett’s wealth. We are not here to do that. What we take away from Warren is not his total, but his process. You can repeat his process and I’m going to give you a hack that can help you do it.
Without a doubt, the number one quality a long-term investor needs to be successful is control over their emotions. The second is the ability to stay invested. At first, one might think the first takes care of the second requirement. It would seem logical that an investor who has control over their emotions would be less likely to panic and sell when investment markets decline. What if they were forced to sell?
It is not uncommon to see determined investors invest every spare dollar into their long-term investments. This strategy works great on paper but tends to be disrupted by real life. On paper, the furnace and family car do not break down in the same month. No one loses their job or becomes ill. In real life, those events happen frequently enough that failing to plan for them will result in underperformance of the accumulation plan.
Crosby Advisory Group, LLC recommends that all investors build an emergency account that is equal to at least 6 months of income. In other words, an investor who makes $60,000 per year should build an emergency account equal to $30,000. The money in an emergency account should be invested in stable investments such as a money market or short-duration treasury bills. We do not want emergency fund money invested in stocks, because chances are when you need the money, the stock market will be declining.
An emergency account serves several purposes that helps to fuel long-term growth. First, it provides immediate access to money when life’s unexpected expenses or hardships arise. Second, knowing that you have at least six (6) months of accessible income helps investors avoid panicking when investment markets fluctuate to the downside. An investor with a healthy emergency fund is emotionally better suited to stay invested.
Does this mean you should take a few years break to build an emergency account before you start investing in long-term assets? No. At Crosby Advisory Group, we show our clients how to build an emergency account alongside their long-term retirement investments. The process is fairly simple. We start by helping our clients get to a savings rate of 15% of their take-home income. This includes matches from employer-sponsored retirement plans. Let’s assume Mark Doright gets a 4% match from his employer’s retirement plan. This means that Mark needs to be able to save only 11% of his own income to achieve the target savings rate of 15%. However, Mark isn’t going to put the entire 15% into his long-term investment account(s). Initially, he will put 10% into long-term retirement accounts and 5% into an emergency fund. The emergency fund can’t be an IRA or 401k that has restrictions for accessing the funds. It must remain accessible without penalties at all times. As the years go by, eventually Mark’s emergency fund will grow to a value that is at least six (6) months of his take-home wages. Once Mark achieves that value, he can stop funding his emergency fund and reroute the 5% into long-term investments. If Mark has to use some of his emergency money, he begins building it back up again until it is equal to six (6) months of his wages. Mark has created an accumulation plan that works in real life and on paper. He can absorb most of life’s unexpected costs without jeopardizing the long-term success of his accumulation goals.
Bitcoin ETF: Failure to Launch?
Written by Derek Ballinger
Disclaimer: Members of Crosby Advisory Group buy and hold Bitcoin. Bitcoin and cryptocurrency are volatile, and you should do research and consider your risk & volatility objectives before buying Bitcoin directly or through an ETF.
The 11 Bitcoin ETF(s) were officially approved by the SEC on Wednesday after being unofficially approved after Tuesday’s market close. Thursday marked the first day where investment advisors and retail investors could get direct exposure to Bitcoin in traditional markets. According to Senior ETF Analyst Eric Balchunas at Bloomberg reported that day 1 trading volume for the Bitcoin ETFs passed $4.5B, shattering the previous record held by MSCI USA Climate Action Equity ETF ($2B in AUM provided by a few anchor investors). The ETF with the largest inflows in its first week was the ProShares Bitcoin Strategy ETF (BITO), launched in October of 2021. BITO passed $1.6B in inflows in the first week. BITO however does not directly invest into Bitcoin, but rather Bitcoin futures contracts gaining indirect exposure to Bitcoin.
There is a caveat on the record-breaking $4.5B in trading volume. The Grayscale Bitcoin Trust (ticker: GBTC) was already trading Over-The-Counter (OTC) in U.S. markets but was not an efficient vehicle to invest in Bitcoin indirectly. GBTC charged large fees and traded at a deep discount to the assets it held in the trust. Something that just wouldn't be possible with an actual Bitcoin ETF. Out of that $4.5B in trading volume, half of that volume was funds moving out of GBTC into the newer, cheaper, more efficient ETF options. The net inflow into the Bitcoin ETFs was an impressive $655M on the first day with the largest inflow into the Bitwise Bitcoin ETF (ticker: BITB) at around $237M in day 1 inflows. ETF launches are not typically measured by their day 1 performance, it will likely take months before we can gauge the success of the launch but it's off to a solid start.
The real takeaway here is that this is the first time large asset managers will be able to buy Bitcoin for their clients. The largest asset managers in the world are now actively participating in the Bitcoin spot market. Blackrock, Fidelity, Franklin Templeton with a combined $14.6T in assets under management all participated in the Bitcoin ETF launch (IBIT, FBTC, EZBC respectively). They are also actively competing on management fees for the ETFs. Bitwise came in as the cheapest issuer with a .2% expense ratio, Fidelity and Blackrock at .25%, Franklin Templeton at .29% and Grayscale with a whopping 1.5% expense ratio.
Many Bitcoin enthusiasts were discouraged by the price performance on the launch. Was the Bitcoin ETF a “buy the rumor / sell the news” event? That remains to be seen but there is some evidence of that at least on day one. Once trading began, the price of Bitcoin rose rapidly from 46,000 to just under 49,000 just to come crashing down all the way to 43,000 on Friday afternoon. A full 10% swing in 2 days of trading. There could be a lot of reasons for the poor price performance. The multi-billion-dollar rotation out of GBTC is a lot of selling to out-compete, some large exchanges still have yet to allow access to the Bitcoin ETFs, and some traders presumably bought Bitcoin in anticipation of the ETF announcement just to take profits once it was launched.
It was difficult to overcome the high bar going into this anticipated event. Many Bitcoin holders are looking at 2024 as the start of a new bull market for the asset. Another major milestone for the asset came in December, the FASB (Financial Accounting Standards Board) has set up new reporting requirements for Bitcoin and a few other crypto assets. Under the new rules, entities can measure crypto assets at fair value and can report changes in fair value in net income in each reporting period. Prior to this change, companies could report the value of Bitcoin on their balance sheet at the price they paid for it, but they had to mark down any losses in price and could not claim appreciation if the price grew beyond what they marked the position down to. This would be a headwind for companies who want to own a volatile asset like Bitcoin on their balance sheet.
It's hard to exactly quantify the incremental demand added by the Bitcoin ETFs. I would, however, suggest that this is incrementally bullish for the asset, it marks more mainstream adoption in an asset that can now be held inside of an IRA, 401k, or brokerage account that couldn't be purchased there before. I would be remiss if I did not mention that holding Bitcoin with an ETF wrapper is not actually holding Bitcoin, just like owning a gold ETF has pros and cons relative to owning the physical metal. If you have any interest in owning any of the Bitcoin ETFs inside of your investment accounts, we can certainly help you with that.
"The biggest risk of all, is not taking one" -Mellody Hobson
- Investing and planning: Nate Crosby or Derek Ballinger
- Marketing and Business Growth: Carly Snyder
- Insurance: Julie Maglott
Disclaimer: Crosby Advisory Group, LLC provides financial planning, business growth strategies and Insurance protection. CAG is a registered investment advisor. Investing involves risk including the potential loss of principal. Consider all risks before investing.