Blog | Castlerock Financial Planning | Mendota Heights, MN 55118

What is all the talk about NFTs?

April 5, 2021 By Lauri Salverda, CFA, CFP®, AIF®

Digital currency like Bitcoin has been around since 2009 and has widened our understanding of what currency looks like. Now there’s a new currency making waves: NFTs.

What is an NFT?

We’re all at least somewhat familiar with Bitcoin by now: it’s a digital currency, with balances kept on a public ledger and created through a mathematical encryption algorithm. The “encryption” part is what makes a digital currency also meet the definition of a cryptocurrency. Bitcoin uses huge amounts of computing power to verify transactions using complex mathematical equations. (In fact, the amount of computing power so massive, the annual carbon emissions from the electricity required to mine Bitcoin and process its transactions are equal to the amount emitted by all of New Zealand.)

But now, more than a decade after the launch of Bitcoin and the launch of many similar cryptocurrencies, the financial sector is seeing something new and exciting: the nonfungible token (NFT).

So, how does an NFT compare to Bitcoin?

Both are verified using blockchain technology, a unique network of computer recorded transactions that provides buyers proof of authentication and ownership.
Cryptocurrencies like Bitcoin are considered fungible tokens because they are identical to each other and therefore can be used as a form of currency—they are essentially “electronic cash.”
An NTF can take many forms including videos, .jpg, songs, or any digital asset. NTFs shift the crypto paradigm by making each token unique and irreplaceable.

Why are NFTs so popular?

Most importantly, NFTs provide artists who use digital mediums, who had been previously left out of the art sales market, a way to receive payment for their creations. For example, the artist Mike Winkelmann, also known as Beeple, just sold his NFT creation “Everydays – The First 5000 Days” at Christie’s for $69.3 million, the third highest price achieved by a living artist.

Other popular NTFs include Dapper Labs, who partnered with the NBA and in 2020 released their beta version of their TopShot collectable and tradable NFT app. In October of 2020, Dapper Labs released its full version to its fans and by February 28. 2021 reported over $230 million in gross sales.

One of the exciting elements of NTFs is that they appear to be forming new markets and forms of investment. In the future you may be able to break up parcels of land easily by taking pictures of the various areas within that parcel and sell each area as an NFT, rather than selling the entire parcel.

Are NFTs a good investment?

It is still a budding market having just started in 2017. With the activity around the world and digital art auctions at Christie’s, it is clear that NTFs have taken the art market by storm. It has started strong, but remains to be seen over the long haul, if value is retained. As in all markets, there are always risks of booms and busts, but because of the newness of this market, no one can say for sure where we are now.

How do you value a bond?

January 7, 2021 By Lauri Salverda, CFA, CFP®, AIF®

Recently, someone asked me “How do you value a bond?” I thought others may have the same question.

First, we need to understand what a bond is. A bond is similar to a loan: you are lending an amount of money to a corporate or government borrower, who then issues you a bond. The issuer promises to pay you interest semi-annually and pay the principal back at maturity. When looking at the value of the bond, there are five important questions which need to be asked.

What is the face value of the bond, i.e., what is the “par” value of the bond?
What is the interest rate that the bond states it will pay, i.e., what is the “coupon” rate?
When does it mature?
Can the bond be paid off early, i.e. is it “callable”?
What is the current yield on a similar type of bond of equal quality?

While the first four questions will give us a sense of the technical parameters of my bond, the question of current yield varies with the market and requires we do more analysis.

Let’s use an example to explain. I own a $1,000 bond that pays a 5% interest rate (coupon), matures in 10 years and cannot be paid off early (non-callable). If current yields on a bond similar to mine are 5%, the value of my bond is $1,000.

But what if current yields are higher or lower?

If a current yield on a similar bond is 3%, the value of my 5% bond is higher than the face value because my bond has a higher return. Let’s walk through it:

My 5% bond is paying me $25 semi-annually for a total of $50/year, while current 3% bonds are paying $15 semi-annually for a total of $30/year.
If I were to reinvest that $1,000 in a new bond, I would only receive a 3% annual yield. Therefore, I would want to sell that bond for more than $1,000 value it states on the bond (par), so I can reinvest my money to get the equivalent of my 5% return.
Thus, I would sell it for $1,667 so that if I reinvested that money at a 3% current return, I would receive an interest payment of $25 semi-annually and $50 annually.

Similarly, if current yields increase to 7%, no one would want my 5% bond because the returns on my bond would be lower. I would have to sell it at a discounted value compared so that the person buying it would receive a yield of 7%.

A good way to think about the value of a bond is a teeter-totter. The chart below shows the value of my bond in different yield environments.

Now, what if we change some of the other technical parameters of the bond?

If my bond was callable prior to maturity, a buyer would have to evaluate whether it is likely that the bond would be paid off, or “called” by the issuer prior to its maturity date. This means that the issuer pays the principal amount of the bond prior to its maturity and then stops paying interest. Think of your mortgage, if current yields are lower than when you financed your mortgage, you would probably refinance your mortgage to pay a lower interest rate. In some circumstances, an issuer has a bond that has the option to pay it off early (callable), they may choose to issue new bonds at a lower coupon and pay off the higher coupon bonds. In the previous example, we were calculating how much I would pay if the bond continued paying its coupon until the maturity date. If there is a possibility of paying the bond off early, I would figure out the price of it to the earliest day it can be paid off (call date) rather than its maturity date.

Another type of bond is a zero-coupon bond. These are typically offered by the Treasury Department but can be issued by any issuer. These bonds do not pay any interest during the holding period, i.e. zero interest. Therefore, I would purchase that bond at a discount based on current yields. If current yields were 5%, and it will pay $1,000 upon maturity 10 year from now, I would buy it for $610, which would provide me a yield of 5% on the money I invested.

Another issue affecting a bond would be the quality of the issuer of the bond and from what funds will it be paid. If I purchased a bond from a high-quality issuer which eventually erodes its ability to pay the bond at maturity, the value of that bond would drop. I would need to receive a higher yield to take on the risk of the issuer.

There can be many market conditions that can affect the value of the bond, but if you can answer the above 5 questions, you will be able to determine the current value at any point of time.

ESG Investing: the What and the Why

October 1, 2020 By Lauri Salverda, CFA, CFP®, AIF®

Environmental, Social and Governance (ESG) Investing takes socially responsible investing to the next level. ESG looks beyond simply social issues: it looks deeply into the environmental, social and the governance imprints of a company. It involves evaluating each company on: their environmental impact; how they treat their employees; the quality of their relationships with local communities, customers and their supply chain; and corporate governance policies and practices, including diversity and equality.

Why should we take ESG investing into consideration? The real question is: why shouldn’t we? The myth that investing in ESG companies may forfeit returns is simply false. A study conducted by Market Watch in the first quarter of 2020 showed that 10 out of 12 ESG focused index funds outperformed the S&P 500 while 11 out of 11 non-US ESG focused funds outperformed their respective international benchmarks. The Harvard Law School Forum on Corporate Governance recently observed that “improved governance can enhance long-term share-holder returns.” Additionally, a recent study by Arabesque found that S&P 500 stocks ranking in the top quartile for ESG attributes outperformed those ranking the bottom quartile by 25% in the five years running from 2014-2018.

As employees, we need to insist that more of our 401(k), 403(b) and other retirement and pension savings plans provide ESG investment choices. The U.S. is currently moving in the opposite direction to the U.K. and EU, who are promoting ESG investing. Fitch Ratings, a firm that rates the debt and equity offerings of companies worldwide, stated that “While these differing approaches are not expected to immediately affect investment managers, pension plans and/or the institutions sponsoring these plans, we anticipate that they will translate into differing investment considerations, risk and potential returns over the long term.” However, in June 2020, the U.S. Department of Labor proposed that all retirement plans governed by ERISA prohibit the use of those assets for furthering ESG objectives. And in August 2020, a second proposal was made that required plans to cast shareholder votes only on issues that have a direct economic effect on the retirement plans. Since retirement and pension plans contain the majority of the investing dollars in the market, the DOL’s proposals work against the goals to have a safer and healthier environment in which we live. In contrast to the DOL’s approach, “regulations in the U.K. and EU promotes the integration of sustainability and ESG concepts into financial decision-making, which has become a more common and/or formalized consideration for pension and retirement fund managers.”, according to Fitch.

With more than $15 billion being moved into ESG funds in the first half of 2020, we need to speak louder and have the right to invest our money in the manner in which we choose.

In these times of financial hardships, placing your money in companies that promote these values is an important statement. It says that we support those companies that work toward the world we want to leave for future generations. While donating to causes is one way to create impact in these times, ESG Investing gives us another way to put our money to work in service of our values. It is truly something to reflect on when evaluation who and what actions we are supporting with our investment dollars.

Women financial planners group rings in 25th anniversary with $25,000 donation to promote women, diversity in the industry

August 6, 2020 By Lauri Salverda, CFA, CFP®, AIF®

A local group of female financial planners, the Goddesses of Financial Planning, announced a $25,000 donation to the Center for Financial Planning initiative in honor of the group’s 25th anniversary. The funding will support the initiative’s work to promote women and diversity in the financial planning industry.

Founded in 1995, the Goddesses of Financial Planning is a group of more than a dozen women financial advisory firm owners in Minnesota, including Lauri Salverda of Castle Rock. The group meets regularly to share strategic advice and best practices to support each other in the financial planning industry. In addition to the Goddesses of Financial Planning, each member also belongs to the Financial Planning Association of Minnesota (FPA MN), a nonprofit organization of more than 900 financial planning professionals.

“Finding true community in our industry—both through the Goddesses of Financial Planning and the FPA MN—has been invaluable as my business evolves,” said Lauri. “With our donation to the Center for Financial Planning, our group hopes we can help aspiring planners find the same support as they begin their careers.”

Approximately 23% of certified financial planners in the U.S. are women and less than 3.5% are black or Latino. The Certified Financial Planner Board of Standards (CFP Board)’s Center for Financial Planning initiative is working to attract, onboard and train women and people from diverse communities to become the next generation of financial planners.

Planning Your Estate

June 22, 2020 By Lauri Salverda, CFA, CFP®, AIF®

dark skinned hand signing a paper with a silver fountain pen

In times like these, people tend to wonder, “What would happen if I were to pass away?” “Will my family, my pets and my possessions be taken care of in the way that I want?” These are questions that need to be considered carefully so that children are cared for thoughtfully, your pets don’t end up at The Humane Society, and treasured possessions aren’t sold en masse in a garage sale. With the impacts of coronavirus, state planning attorneys are busier than ever, trying to get estate plans together while loved ones are isolated in ICU units.

No matter how good the attorneys are, when things are rushed and a loved one cannot give their input, mistakes are made. I recently heard a probate judge speak to errors in documents she has recently come across. One that stuck with me was a widow who died of the coronavirus. Her will defined her survivors as her 4 children and her husband’s 2 children as “my children.” Her will stated that half of her estate be given to “my children” and the other half be given to her husband’s children. I am not sure she meant to split half of her estate among all 6 children and the other half between just her husband’s 2 children—however, that was how the will was drafted.

This is a great time to talk through what you would like to see happen when you pass and choose who is the most appropriate to handle your estate. If there are younger children or a large estate, perhaps it is appropriate to have trusts set up. Who would you like to handle your household finances should you be unable to pay bills? Who do you want to make end of life health care choices for you, and will they be capable of making the choices you desire?

The next step is to take the time to have the documents drafted by a qualified Minnesota estate planning attorney. They will know how to incorporate Minnesota law into your documents to make sure your wishes will be carried out. If you change states, make sure that you have an attorney in your new state check through the documents to determine is your will is valid in your new home state. You should at the minimum have a will, health care directive, and a durable power of attorney for finance.
Your estate planning documents should be reviewed every 3 to 4 years to determine if goals have changed. Children grow up, friends change, wishes change, and relationships evolve. Make sure your documents stay current with your life.

We have several helpful tips on our resources page to assist you in making sure you take control over your end of life and make it easier for loved ones to understand what your wishes are and make it easier to carry out your wishes. Visit our resources page to get your copy of our Personal & Financial Inventory and What to Do When a Loved One Dies.