Wealth Management Mailbag: Spring 2022
In our Wealth Management Mailbag, our wealth experts answer your most pressing questions on financial planning and the stock market. In this issue we tackle inflation and investing in cryptocurrency.
How long should we expect inflation to run high?
Answered by Sascha Schreiber, Senior Financial Planner at Baird
One reason the current spate of inflation has been so strong and could very well persist for a while is that there are several causes for it. We’ve overwhelmed the global supply chain, as bottlenecks developed everywhere and caused core goods inflation to skyrocket in 2021. After a slowdown when the pandemic hit, U.S. housing had been booming, and house prices have only continued to rise. The U.S. economy remains in a “full-employment” position, which means wages have been rising. And in addition to other geopolitical instability, the worsening health situation in China may provide another disruption to the global economy.
The Federal Reserve cannot bring inflation down by itself without raising rates substantially, but it is trying to create an economic soft landing. The Fed has signaled seven total interest rate hikes in 2022 and another four in 2023, but the private sector and international sector are likely to have considerable say in whether they succeed. One reasonable expectation: a 2023 mid-cycle slowdown as the private sector helps the Fed bring inflation under control and the supply bottlenecks ease. Though it’s less likely, there’s also the chance that if the Fed overdoes its tightening, growth would falter and a recession would be possible.
Should I be considering cryptocurrency as part of my portfolio?
Answered by Mike Antonelli, Baird Market Strategist
Anytime you consider a new investment, there are a few questions you should ask yourself first.
- Do I understand how this investment works? What makes it go up or down? Cryptocurrencies can be highly volatile and vulnerable to regulations and public sentiment. In May 2021, for example, Bitcoin plunged 30% in one day when Tesla said it would no longer accept it as payment.
- Is the investment liquid? Can I get my money in and out quickly? With a market cap over $1 trillion and cryptocurrency markets trading 24 hours a day, 7 days a week, Bitcoin can be considered a liquid asset. That said, as much as three-quarters of the Bitcoin supply is stored offline in crypto wallets, which are off-market and unavailable for trading. Note that if you ever decide to switch exchanges, you would pay capital gains – there are no in-kind transfers at this time.
- Is it secure? Do I need to worry about it being stolen or losing it? There’s not a lot of regulation around cryptocurrency, which makes it a prime target for nefarious actors. Also, you can find many stories of people forgetting or losing their private keys and getting locked out of their accounts.
- How does it fit into my overall plan? What bucket would it occupy – long-term holding, alternative asset, speculative asset? Understanding where it fits into your financial plan can influence portfolio decisions surrounding risk and asset allocation.
If you can’t answer these questions, then I’d recommend doing more research before moving forward. If you have done your homework and are still interested in the space, reach out to us and let’s talk more about it.
Answered by John Taft, Vice Chairman of Baird
Extreme volatility and uncertainty, a lack of transparency, an explosion of innovation driving competing technologies, insufficient regulatory oversight – these are only a few of the challenges facing investors interested in cryptocurrencies. These concerns have amplified the risk – and, for many investors, the appeal – of investing in what is essentially a brand-new asset class.
So how should interested investors consider taking that first step into cryptocurrency? A prudent approach might be to try to mitigate as much as possible this asset class’s potential for risk and volatility. That could include liquid investment vehicles (such as stocks, ETFs, mutual funds, separately managed accounts) that offer diversified exposure to the broad digital finance ecosystem. You could also consider companies involved in the development, innovation and utilization of blockchain technology, exchanges, non-fungible tokens (NFTs), payment systems, smart contract platforms and the metaverse.
This is an ever-changing space, and there's still much to be decided in terms of regulation and identifying products that provide exposure securely and effectively. Every investor in crypto should remain aware that this will be a continuing discussion for some time.
For more insight into managing wealth during unprecedented times, be sure to check out the latest issue of Digest.
Baird does not currently recommend the purchase of cryptocurrencies, products that attempt to track cryptocurrencies or cryptocurrency custodians and won't until there are more secure and cost-effective ways to gain exposure to this asset class.
The information reflected on this page are Baird expert opinions today and are subject to change. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.