January 11, 2022

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Good day. Can you guess, which of the following is a top 2022 prediction, according to Visual Capitalist? a. inflation slowly eases off, b. crypto will bust, c. equities will see negative returns. Follow the wave 🌊 below for the answer.

Our money topics for today 👇

Making predictions is harder than ever & how to prepare for the future
Should you use margin?
Paths to a happier financial life

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FINANCIAL PLANNING

Making predictions is harder than ever

Knowledge is supposed to come from experience, right? Under this assumption, it might be entirely valid to assume that after hundreds of years of practice, we'd continuously get better at predicting the future based on past experiences. After all, history does repeat itself, doesn't it?

To an extent, this may be true, but Mark Twain also had a point when he said that "history doesn't repeat itself, but it often rhymes." Rhymes are much harder to predict than repetitions, and as the world becomes more advanced and complex, the level of difficulty adjusts accordingly.

Predicting the future was already hard as is

There's a reason for the saying "time in the market beats timing the market." Why? Because we realize that even the most renowned analysts don't know what tomorrow holds, or what combination of rationale and irrationality will tug on the market's emotional heartstrings in any given session.

Nevertheless, that doesn't stop us from trying our damndest to prophesize. This isn't a bad thing, though. It helps to be prepared, and even if we're wrong a lot, it sometimes only takes a few rights to make it worthwhile.

Why it's harder than ever to look ahead, financially speaking

The unknown variables looming at any given time seem to have increased tenfold. Between a pandemic, inflation, supply chain kinks, labor shortages, and an evolving market that just keeps going up, we've no shortage of candidates to throw a wrench in any economic outlook.

For example, when the World Economic Forum asked businesses, politicians and thinkers heading into 2020 what they thought the most imminent global threats were, a pandemic wasn't in their foresight.

And last year, 68 economists surveyed by the Wall Street Journal stood on 2021 inflation predictions ranging from 1.3% to 4.3%, while the Fed kept it even lower at 1.3% to 3.3%. That inflation number was 6.8% by November.

Also, the CDC put forth a prediction that the omicron variant represented approximately 73% of covid cases reported during the week of December 18th. Then later, that number was then revised to 23%—just a slight adjustment.

How to insulate ourselves from this as investors

Save: Here's a boring tip to help protect you from unforeseen events: just save. Although piling up cash in a savings account is a terrible way to get a good return on your money, it's still a necessary building block of being financially healthy and safe if push comes to shove.
Alternate savings: There are also other ways to "save" money without technically depositing it into a savings account. Putting your leftover funds into safer, boring assets with *slightly* better returns like the US Series I bond, US Treasuries, municipal bonds, CDs or even a really stable stock that pays a good dividend.
Segregate your risk: If you don't want to give up on trading, it may still be important to segregate your risk. Having a separate portfolio with play money set aside from your longer-term investments that you rely on can help ensure that if you really get stuck holding the bag, at least your retirement funds are fine.
Consider a lazy 3-fund portfolio if you think your current allocation is too diversified or too concentrated: Another boring tip for some, but long-term it can make a lot of sense. Sure, active investing might be fun and lucrative, but we also have to look out for our livelihood too, so make sure your ratio between investing and "trading" is safely split.

Create a Simple 3-Fund Portfolio

Investing Basics

6 mins

INVESTING

Should you use margin?

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Margin is a double-edged sword, one of many such weapons available for investors use and abuse within the financial world, and in the investing niche specifically. It can double your gains, and double your losses. It can amplify your bragging rights, or increase your debt exponentially.

Whether or not you should indulge in this opportunity is a conundrum oft pondered by both newbies and seasoned veterans alike, because as lucrative as it may be, we know all too well that things that seem too good to be true always have drawbacks.

Quick overview of margin

Buying on margin means borrowing money from a broker to purchase securities. Think of it as a loan from your broker. It increases your purchasing power because you're using borrowed money to increase your financial leverage.

Let's say you buy Apple stock for $200 and the price of the stock rises to $300. If you bought the stock in a regular cash account and paid for it in full, you'll earn a 50% return on your investment (i.e., $100 gain is 50% of your initial investment of $200). But if you bought the stock on margin—paying $100 in cash and borrowing $100 from your broker—you'd earn a 100 percent return on the money you invested (i.e., your $100 gain is 100% of your initial investment of $100), excluding the cost of borrowing the money.

Margin investing has been around since the early 20th century and was actually first used to finance infrastructure like railroads. As we might expect, initial regulations were fairly loose, meaning it wasn't that uncommon to see accounts up to 90% leveraged.

It's obviously come a long way from the roaring twenties and is now easier than ever to access. It's risen in popularity alongside the market over time, and the sustainability of these heightened brokerage debt levels is unknown.

The pros and cons to account for

In a recent survey of 1,000 investors, 40% of participants said they'd made use of margin. 80% of GenZers said they'd taken on margin, compared to just 60% of Millennials, and an even lesser 28% of GenXers. That's a lot of leverage.

The pros of buying on margin are obvious: amplified gains. As we saw in the example above, by trading Apple stock on margin, you could earn a 100% return versus 50% in a regular cash account. The appeal couldn't be more clear.

The cons however are more numerous. Something often not accounted for when borrowing on margin is the fact that this is a loan with interest just like any other. Robinhood, for example, charges 2.5% on margin over $1,000.

You can amplify your losses in a big way too. For example, let's say the Apple stock you bought for $200 falls to $50. If you fully paid for the stock yourself, you'd be down 75%. But, if you bought on margin, you'd lose more than 100 percent of your money (i.e, you're left with Apple stock worth $50, and after repaying your broker $100 for the borrowed money, you have -$50). In addition to the loss of your $100 initial investment, you would also owe your broker the interest on the margin loan and any other fees they may incur.

MONEY MINDSET

Paths to a happier financial life

It's almost inescapable. The idea of financial prosperity leading us to the promised land or a life without problems is subtly promoted all around us. It's in our banks, workplaces, families, relationships, and undoubtedly the social media content we're bombarded with daily.

While this is a valiant and noble pursuit that often comes from a place of honest intentions, we can oftentimes find ourselves creating an idealistic image of the life we should have, without properly taking the time to prioritize how we can best organize our finances for the one we were given.

In 2022, we can choose to combine a little contentment with our goals.

Money buys happiness, to a point. We've all heard the statistic by now. Income increases happiness, up to about $75,000 annually, give or take. While this is obviously an overgeneralization that doesn't account for situational/location factors, the premise remains valid. Once we've got enough income to support our needs, wants, and investing for the future, money has less of an impact on happiness after that point. This doesn't mean we shouldn't try to achieve more, but it does mean it's okay to shoot for the moon and end up in the stars, so to speak.
Create time through organization and efficiency. Studies across industries and focus groups find that the more free time, and subsequently less rushing and stress, people have, the happier they're likely to be. You can focus on creating more free time for yourself in two main ways—organization, and efficiency.
Build confidence through learning. Whether or not you feel content with your financial situation might have less to do with the dollars, and more to do with how confident you feel in your ability to handle any financial situation that might come your way. One of the best ways to feel good about your abilities? Learning.

ASHU'S CORPORATE CORNER

Today's Movers & Shakers

Illumina (+4%), a gene sequencing firm, exceeded consensus estimates on revenues; it also announced new partnerships with four healthcare companies
Rivian (-3.5%) after reports that the firm's COO had left the firm; that may impact vehicle production at the EV truck company
Juniper Networks (+5.3%) got a double upgrade from BoA Securities
Albertsons (-5%) topped earnings but the stock is down as the omicron variant impacts the recovery of its supply chain
Intel (+1.7%) announced that it is hiring Micron's (-1%) CFO as its CFO; he starts Monday
Accolade (+11%), a workplace benefits firm, earned 31 cents per share while the street was expecting a loss
IBM (-2.3%) was downgraded by UBS to sell from neutral due to operating risks and "elevated valuation"
Big Lots (-7.4%) told investors that it is seeing a slowdown in traffic and sales trends
Abercrombie & Fitch (+6%) said that it is seeing a pickup in post-holiday sales

This commentary is as of 8:51 am EDT.

🌊 BY THE WAY

🔮 Answer: Inflation will slowly ease off is 1 of 25 predictions for 2022, according to this Visual Capitalist analysis. Here's the full map of their 25 predictions:

😷 How to get your OTC Covid-19 test for free; US health insurers must cover home Covid-19 tests starting Saturday (CMS.gov)
📖 A quick "bite" worth reading. Why tech shares tank when bond yields rise?
Finny lesson of the day. Since we covered buying securities on margin, what about shorting stock? Take this 6-minute quiz-based micro lesson on the topic. Earn 10 Dibs (or gold coins) for every correct answer; then redeem them for rewards.

What's Shorting Stock?

Advanced Investing

6 mins

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The Gist is Finny's twice a week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice. The editorial team: Chihee Kim, Austin Payne. Ashu's Corporate Corner is brought to you by Ashu Singh.

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