If you're not familiar with Jerome Powell or quantitative easing,
let me give you a quick rundown of what's going on. Then I'll talk about what this means for us,
as growth oriented investors who follow ARK Invest and the Metaverse Index
and emerging markets, and so on. Then I'll tell you exactly what I'm watching out for and
what I'm buying moving forward. Your time is valuable, so here's a quick summary up front:
the Federal Reserve is stopping the money printer completely over the next 4 months
and is now expecting to raise interest rates several times over the next few years.
Research shows this could be even worse for growth stocks than we expect. Either way, in the short
to medium term, growth stocks in general and probably fintech stocks specifically are going
keep going down in price because they just got riskier. Since these growth stocks just got
riskier, I'm going to diversify my holdings a little more, both in terms of stocks and
in terms of other assets and I'll talk about exactly which ones. If you've got places to be,
that's the high-level overview. For those of you sticking around, let's get into the details.
As Jerome Powell said in that clip, the Federal Reserve has two goals: maximize employment
and keep prices stable. Right now, inflation is near a 30 year high. So, while lowering interest
rates and quantitative easing helped with maximum employment, it also caused prices to rise.
A lot. If you don't know what quantitative easing is, it's actually where the Federal
Reserve increases the money supply to encourage borrowing and investing by buying bonds on the
open market. So, when you hear big news channels talking about "tapering" or the winding down of
pandemic support, that's the Federal Reserve slowing down how many bonds they're buying until
they're no longer buying any bonds at all, which they expect to happen in March of next year.
Once that "money printing" hits zero, the Fed can begin raising the federal funds rate, which
is also called the overnight lending rate. The federal funds rate is the interest rate that banks
charge each other when they borrow money, which in turn determines the short-term interest rates
that banks and other lenders charge companies and individuals to borrow that money from
them. Currently, that lending rate is close to zero, which is great for growth stocks. Here's
the issue. Back in September, most Federal Reserve Officials agreed that this federal
funds rate will stay under 0.5% by the end of next year and around 1% by the end of 2023. As of this
last Fed meeting on December 15th, those estimates essentially doubled to roughly a 1% federal funds
rate by the end of 2022 and as high as 2% or more by the end of 2023. We should also consider the
possibility that the Fed could decide to raise this rate even higher if inflation data pushes
them in that direction. For example, Goldman Sachs Global Investment Research expects the
overnight lending rate to rise even faster through 2024 and reach over 2.5% in 2025. So, according to
them, the market needs to price in even MORE pain for growth stocks than it has been.
Let's stay on topic for now and I'll get back to this when I talk about the stocks I'm watching.
Rising interest rates are bad for growth companies because it now costs them more to borrow money
which they'll sometimes do to reinvest into their growth. It's even worse for younger Fintech
companies who are trying to acquire customers as cheaply as possible since now they have to charge
those customers more money for loans and lines of credit. That could slow their overall growth.
Yet another issue is when interests rates rise, bond prices usually fall, making them much more
attractive investments. When bonds get cheaper, risky growth stocks look riskier, since they have
to provide an even bigger return to outperform bonds. So, these rising interest rates can be
a real triple-whammy for growth stocks, which is why ARK Invest's funds are so sensitive to them
and why they've been underperforming the market all year. As a result,
I expect two things. First, I expect growth stocks to keep going down for a while.
I know. You're shocked. The other thing I expect is that they'll also get more volatile,
which will cause a lot of investors to panic sell stocks they don't have high-conviction in. Just
look at Tesla, which is ARK Invest's number one holding. Maybe it's yours too. Yes,
Tesla is down by over 20% over the last couple months, but look at how it got there. Volatility
is way up because the market literally cannot agree on Tesla's value. Is it a tech giant? Is
it growth company? At almost a trillion-dollar market cap, can it somehow be both?
If so, what exactly do these rising interest rates mean for Tesla as a result? The overall
market is confused on Tesla right now, so its share price looks like a literal rollercoaster.
Here's my honest advice. If rollercoasters aren't for you, don't get on the ride. There's
no shame in staying on the sidelines until YOU are ready. You also don't have to put ALL of
your money into these very volatile stocks if that's not for you. And if it IS for you,
you can still choose to average that money in over time instead of getting on the ride
all at once. Even though it's not always easy, averaging in is actually the simplest form of good
risk management. Diversifying your holdings is another form of good risk management.
Here's an example of a great little micro-portfolio of just four holdings:
Tesla, Palantir, the Grayscale Bitcoin Trust, and SPY, which tracks the S&P 500.
In just 3 positions, you've got exposure to the bleeding edge of artificial intelligence,
energy storage, robotics, enterprise software in a wide variety of markets, and a cryptocurrency
that more and more institutions are starting to put on their balance sheet. Then, you can use
the S&P500 as a hedge and lower the volatility of this little portfolio, all while still getting
some very reasonable returns. If you're keeping up with my portfolio project,
you're seeing me do this exact same thing, except I'm holding Ethereum and Bitcoin instead of GBTC
and I'm holding Google and Facebook instead of the entire S&P500. The less confident you are
in picking individual stocks like Tesla and Palantir, the more you can consider putting
into SPY until you clarify your position on your individual companies. It's not all-or-nothing.
What's that? You have a life with more important things to do than reading investor presentations
all day? Heh. Yeah. Me too. [shifty eyes]. That's where fund managers like Cathie Wood
and Matthew Ball come in. I'm not a financial advisor or professional money manager,
but they are. So I could take something like 5 or 10% of my money and put it in ARKK, which is
Cathie Wood's flagship innovation fund, or META, which tracks Matthew Ball's Metaverse Index.
By doing that, I've actually diversified the investing behavior that influences my returns
altogether, since a separate person would be managing some of my money. I would also gain
exposure to some new areas of technology, like genomics in ARKK and semiconductors in META, all
without compromising on my personal investment philosophy. I know what I hold and if I don't,
I at least understand why these fund managers hold things at a high level. Why is that important?
Because that's exactly how you get the conviction to hold these things as they drop 10, 20,
30%, or more in the first place, let alone buy more as they crash.
Here's the thing. When the Fed raises interest rates, all growth stocks are affected,
regardless of who is managing them. So, another way to protect yourself from volatility is to
invest in assets that aren't correlated to the stock market. I already mentioned one example,
which is cryptocurrencies like Ethereum and Bitcoin, or even the Grayscale Bitcoin Trust
which trades like a stock but tracks the price of Bitcoin. Another example would be real estate,
which is how YouTubers like Graham Stephan, Meet Kevin, and even Steven Mark Ryan got their
start. They can go for the more volatile kinds of growth stocks because they've spread their overall
financial risk across different asset classes like real estate and crypto. If I'm right
about growth stocks getting more volatile in the near future, I think assets that don't move the
same way as them should become more attractive as investments. Well, not everyone can afford
a mortgage and not everyone is comfortable with crypto or interested in pokemon cards,
so how can we invest in assets that aren't correlated to the stock market?
I actually spent a lot of time digging into this and the partner for today's video is a
great way to do just that. Masterworks dot IO is the only platform that lets you invest
in physical multi-million dollar paintings without breaking the bank.
Before I learned about Masterworks dot IO, I thought investing in art was only for the
super-wealthy, but I was wrong. I like Masterworks because, according to a recent report by Citibank,
fine art had the lowest correlation to the stock market of any major asset class, and
that's exactly what we're looking for as interest rates rise and growth stocks continue to fall.
Also according to Citi, contemporary art pieces have almost tripled the S&P500's total return
from 1995 to 2020. That's why billionaire art collectors allocate between 10 and
30% of their overall portfolios to art. That's way more than you thought, right?
The other thing I really like about Masterworks is that they're really focused on the investment,
not just the art. Their team of analysts use proprietary data to identify artists whose work
would produce the best risk-adjusted returns. Then, they acquire paintings by these artists,
file the artwork with the SEC, and then securitize it, meaning regular people like us
can buy shares of the artwork as if it were a stock. These aren't no-name artists drawing
animals on digital coins. In 2020, investors saw a 32% net return on their sale of Banksy’s
Mona Lisa. That’s two times better than the S & P 500. They also just got a brand new painting
by Pablo Picasso. Masterworks dot IO is disrupting one of the most exclusive asset classes in history
by giving everyone frictionless access to artists like Banksy and Picasso,
instead of just the ultra-wealthy. That's why I partnered with them. I think the reason
Masterworks has such a long waitlist is that they make something that used to be impossible
so easy. You go to Masterworks dot I O, create an account, browse their artwork, and can instantly
diversify your portfolio with one of the oldest and most stable assets around. So,
I reached out to them and they're giving you VIP access to their latest offerings, including that
new Picasso painting. I'll leave a link to that offer for you in the description below.
Great. We've covered the Fed working toward raising interest rates, the effects those interest
rates have on growth stocks, the potential increase in volatility of those growth stocks, and
ways to manage our risk accordingly, both inside our portfolio and out. Now let's bring it all
together and talk about specific stocks. This Goldman Sachs Forecast is really changing my 5
year outlook on growth stocks. If Goldman Sachs is right, the stock market is really only pricing
in about half the pain it should be from these future changes in interest rates. This is where
all the research that went into this episode comes together. There are two specific types of stocks
that I think are are becoming much more attractive right now, neither of which should be surprising.
The first kind are the mega-cap tech companies we all know and love today. Specifically, Google and
Microsoft. In addition to being big innovators in many different markets with fairly diversified
income streams, these companies all have high amounts of stable free cash flow and large cash
reserves on their balance sheets, so they don't really need to borrow as much money to grow.
Here's what makes these 2 companies special among the other tech giants like Facebook and Amazon,
as well as Nvidia and Tesla. They're much lower volatility. Microsoft has a beta of 0.87,
meaning it's even less volatile than the overall market. A beta of 1 would mean a stock is just
as volatile as the S&P500 over the last 3 years. Google has a beta of 1.07, so its price is also
very stable. This is a catch 22 because Google and Microsoft are big parts of the S&P500,
so they're defining the beta for the market. But if you're already investing in the market,
you might as well pick the technology innovators driving its baseline performance, not just its
measure of risk. Those are the reasons Google and Microsoft stand out from the rest, at least to me.
Google and Facebook are already in my portfolio and I'm thinking about adding Microsoft as well.
The other kinds of stocks I think are going to be great are the ones that are being mistaken
for Fintech stocks buuuuut they're not. For example, Sea Limited has 3 business units: Garena,
their online game development and publishing arm, Shopee, which is their big e-commerce marketplace,
and Sea Money, which is their digital wallet and payments solution. It's easy to look at Sea
Limited, say two out of three of their business units get hit by these interest rates, and write
them off as a Fintech company. Even though Shopee and Sea Money are quickly growing and exciting to
follow, all of actual their operating income comes from Garena, which is digital entertainment. This
is kind of like mistaking Tesla for an insurance company because Tesla insurance is a thing. I'm
not saying that this hundred billion dollar market cap company, which headquartered in Singapore and
makes most of its money through gaming, shouldn't be affected by these raising interest rates. I'm
just saying that maybe it shouldn't be as effected as Paypal and Square have been. I WOULD start a
position in Sea Limited, except it's already my number one position by a very large amount. So,
I'm watching out for more companies that the market appears to be mistaking for a small cap
fintech company when in reality they're something else. I'll keep you posted if I find more.
So, there you have it. Comment below or tweet me at Ticker Symbol
YOU with your thoughts on inflation, on volatility,
and on risk. Are you worried about the future of some of your favorite companies?
How far out are you thinking? Do you often think about your overall portfolio, including assets
outside of the stock market, or are you just looking for new stocks now that interest rates
are going to change? I read all my comments and tweets and I'm excited to hear your thoughts.
And if you want to be updated as soon as I make an investment decision instead of waiting
for me to make a video about it, consider joining my highest-tier Patrons on Patreon
or Channel Members right here on YouTube. Those supporters are getting a lot of extra
content each week as growth stocks keep trending downwards. If seeing me lose a ton of money
every day isn't really your thing, no worries, I totally get it. I talk about my portfolio
and its holdings here pretty often, whether they go up or down. [and it's gone]
Either way, I hope this episode helped you understand what's going
on with the Federal Reserve, what their updated policy means for growth stocks,
and gave you ideas for how to manage your risk inside your stock portfolio as well as outside of
it. Thanks for watching and until next time, this is Ticker Symbol YOU. My name
is Alex, reminding you, that the best investment you can make... is in you.