Your Financial News Roundup
May 10, 2023
TL;DR
1. Economy: Over the weekend, Warren Buffett held Berkshire Hathaway’s annual shareholder meeting in Omaha; while debt ceiling talks continue in Congress.
2. Tech: Walmart plans to expand into fintech in Mexico; and President Biden called on the CEOs of leading AI firms to align on regulatory actions with the government.
3. World: The COVID-19 global health emergency declaration was officially lifted; meanwhile Russia is struggling against Ukrainian forces in the city of Bakhmut.
Personal Finance Concept [Part 2/8]: Dollar Cost Averaging
Economy
🔮 The Oracle’s Predictions: Legendary value investor and Oracle of Omaha, Warren Buffett, held the annual shareholder meeting for his company, Berkshire Hathaway, over the weekend. He warned that if the FDIC enforces its $250K cap on bank accounts, that could lead to a banking crisis. He also covered the dangers of excess money printing and government spending, the long-term consequences of AI, life advice on healthy spending habits, and more. (Yahoo! Finance) (BI)
Our Take: Warren Buffett anticipates an economic slowdown spurred by rising inflation, excess federal spending, and high interest rates. But he is optimistic that the dollar will stay a reserve currency and that there are still plenty of opportunities for savvy investors, as “dumb people will [keep] doing dumb things.”
👀 Debt Ceiling Talks: Yesterday, senior Congressional leaders of both parties met with President Biden to discuss the debt ceiling. Republicans want a negotiation that lowers the deficit while Democrats insist on passing a clean bill to raise the debt ceiling. Alternative options on the table include passing a short-term debt ceiling extension bill, having deficit reduction meetings in the fall, or even using the 14th Amendment to authorize continued borrowing. With a potential default coming as soon as June 1st, markets have declined while awaiting an outcome. (Yahoo! Finance)
Our Take: Though both sides have entrenched themselves, it’s unlikely that the U.S. will default. The markets bet on a similar outcome to the 2011 debt ceiling debate, where both sides compromise and pass a last-minute deal to raise the debt ceiling — even if it’s a short-term extension.
Tech
👥 Money for the Masses: Walmex (Walmart in Mexico) wants to tap into Mexico’s underserved fintech market through its Cashi digital wallet. Marcelino Herrera, a financial services executive, says that Walmex wants to build its fintech presence through enabling transfers, withdrawals, and eventually loans in the future via Cashi. Currently, more than 50% of Mexican adults are unbanked. But, there is risk in lending to this customer niche due to high delinquency rates. (Reuters)
Our Take: Using a scalable, digital solution to extend financial access to the world’s unbanked could be a huge booster to Mexico’s economic growth and Walmart’s bottom line. As Walmart wades into fintech, it’ll find new opportunities to grow at home and abroad while transforming into more of a tech company.
😲 Please Come to the President’s Office: Last week, CEOs of leading AI tech firms Satya Nadella (Microsoft), Sundar Pichai (Alphabet), and Sam Altman (OpenAI) met with President Biden. The CEOs were told they have a “moral duty” to protect society and incorporate safety rails and security measures into their products. The government also said it reserves the right to regulate the AI sector. Both techies and politicians want AI regulation to match its pace of adoption. (BBC)
Our Take: Alignment between the AI sector and the government will hopefully safeguard the early development, use, and societal effects of AI — unlike its no-touch approach with the early Internet.
World
🧬 COVID Emergency is Over, But..: Last Friday, the World Health Organization (WHO) announced that the coronavirus pandemic is no longer considered a global emergency. However, WHO Director-General Tedros Ghebreyesus warned that governments need to continue to manage COVID-19 as the risk of new variants remains high. It’s unclear when the pandemic will end, so health officials recommend continuing to take care and avoid putting others at risk. (CBS News)
Our Take: The WHO’s decision to lift its global health emergency declaration for COVID-19 will likely pave the way for more countries around the world to lift any remaining travel restrictions and focus on sustainable economic growth.
🇷🇺 An Incoherent Blunder: Yevgeny Prigozhin, founder of the Wagner Group, a Russian private military contractor firm (aka mercenaries), threatened to withdraw his forces from the hotly contested Ukrainian city of Bakhmut due to a lack of ammo and heavy losses. He called out the Kremlin for not providing the needed support to secure a victory. But, he later retracted his plans due to the lack of leverage. Meanwhile, Britain is planning to classify the Wagner Group as a terrorist organization to increase the pressure on Russia. (AlJazeera) (Yahoo! News)
Our Take: Russia’s invasion force is made of competing factions, such as the military and private contractors, that don’t work well together. Though he is a close Putin ally, Prigozhin criticism of the military for its ineptness led to retaliation by the Russian defense ministry — harming Russia’s overall war effort.
Finance Concept of the Week
The Investor’s Playbook [Part 2/8]: Dollar-Cost Averaging
Investment Strategies for Financial Success
Investing can seem like a foreign language to most people. But, timing the market can be even harder to do, especially on a consistent basis. With asset prices changing daily, you never know when they will go up or down, or by how much.
That’s why investors choose to dollar-cost average (DCA) instead of looking for the “right time” to invest. Dollar-cost averaging is a risk management strategy that helps you deal with market uncertainties by investing in small amounts on a regular basis regardless of market conditions. You can use this strategy to invest in a broad range of assets, including stocks, bonds, crypto, and more.
Pros
- Combats Volatility: You’ll be less affected by market conditions, thus reducing the effects of volatility on your portfolio. With this method, you don’t have to worry about timing the market. Instead, you’ll buy more shares when prices are low and less when prices are high, so the costs even out over time.
- Reinforces Investing Regularly: DCA makes it easier and more encouraging to be a consistent investor as it leaves emotions and reactive decision-making out of the picture. It also reinforces a habit of investing since you are committing to a set schedule, which will help you build your net worth over time.
- Makes Investing Hassle-Free: Once you’ve set up a system to invest, you won’t have to worry about watching the market or identifying what direction prices are trending. Instead, you can invest without the stress of making decisions under pressure.
- Helps Those with Limited Funds: If you’re short on capital, dollar cost averaging makes it easy for you to begin investing. Rather than investing a large lump sum all at once, you can make small investments over time without waiting to save a set amount of money before you start.
Cons
- May Underperform Lump Sum Investing: Research from the Financial Planning Association and Vanguard found that dollar cost averaging underperforms lump sum investing ~67% of the time. In most cases, you may be better off investing your money as soon as possible (though ~33.33% of the time, you may end up better off through DCA).
- Potential Opportunity Costs: DCA involves spreading investments over time, which means that a portion of your capital remains uninvested during the DCA period if you have a large amount of money. This may result in missed opportunities if the assets’ prices appreciate significantly during that time.
- Doesn’t Prevent Losses: Investing comes with inherent risks. Dollar-cost averaging does not make you immune to losses and may lead you to forgo some potential returns.
Tips and Tricks
- Consider Your Goals: Dollar-cost averaging is most effective if you are investing over long periods. Consider what your financial goals are before using this strategy as it may not be as effective if you have short-term goals.
- Create a Plan: If you decide to use dollar-cost averaging, plan out how often you want to invest and the dollar amount you want to invest at each interval. Make sure it’s realistic and fits within your budget.
- Set Up Automatic Investments: The easiest way to start investing is to allocate a set amount of your income every paycheck or month to an investment account, such as a retirement account like the Roth IRA or employer-sponsored 401(k).
Best For
You may want to consider dollar-cost averaging if you are a beginner investor or have limited funds to buy shares. Additionally, if you are not interested in doing research to time the market or get emotional when the markets are down, dollar-cost averaging allows you to take a hands-off approach.
Tip of the Week
💸 Create a diversified investment portfolio based on your goals and risk tolerance. Spread your investments across different types of assets and regions to reduce risk and maximize potential returns.
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