Archives for May 2022

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Investing Blog Roundup: Revised Publishing Schedule

Quick admin note: for the last few years, the publishing schedule on this blog has been an admittedly strange week-on/week-off system, with an article on Monday and a roundup on Friday during the “on” weeks and nothing being published during the “off” weeks. Starting today, it will be a more intuitive schedule: publishing every Monday, alternating between articles and roundups. (In other words, the roundups are being moved from Fridays of the “on” weeks to Mondays of what were previously “off” weeks.)

Recommended Reading

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Politics and Personal Financial Planning

The political votes we cast can influence our –and other people’s — finances.

But the influence should usually not be allowed to flow in the opposite direction. That is, personal financial planning decisions should, in most cases, not be influenced by our political views.

For instance, I’m a vegetarian treehugger atheist liberal snowflake. And if you’re a steak-loving truck-driving devout evangelical conservative, a portfolio of actively managed funds with high expense ratios would be as bad an idea for you as it would be for me.

If for some reason your marginal tax rate is lower this year than you expect it to be in the future, a Roth conversion is probably a good idea. The math is the math, regardless of where you sit on the political spectrum.

We might disagree about what tax rates should be for one particular group or another (or for one particular type of income as opposed to another). But if your finances and my finances are similar, the tax planning decisions that make sense for you make sense for me as well. The likelihood of a particular legislative change occurring and effecting us is the same, regardless of how we feel about that potential change.

The insurance coverage that you need has nothing to do with who you plan to vote for in November. (If anybody is dependent upon you financially, you should have life insurance.  If you are dependent on your income from work, you should have disability insurance. And so on.)

If you do or don’t like the person in the White House, and you begin to let that feeling make you think that you can predict what the stock market is going to do over the next month (or 48 months), you’re in for a rude awakening. No one person has that much control over the stock market.

Of course, there are some exceptions — some cases where your political and other views will (and should) inform your financial decisions. Most obviously: your charitable donations. And some portfolio decisions could reasonably be influenced by political views, though as I’ve written before I sincerely think that the most common version of “ESG” funds are unhelpful and likely detrimental to the very causes they ostensibly serve.

In most cases though, as soon as you let your political views begin to inform your personal financial planning decisions, you start to make worse decisions. And you open yourself up to manipulation.

Many products (financial and otherwise) are sold based on fear. If somebody can tap into your political fears, they’ll have an easier time selling to you. You political fears may be well founded, but as soon as you notice that somebody is trying to sell you something based on those fears, your level of skepticism should be at its maximum.

Investing Blog Roundup: Jack Bogle, Rabble-Rouser

When you think of the words punk or rabble-rouser, you probably don’t think of a man in his late eighties, wearing a navy blazer and khakis. But as Eric Balchunas writes, that’s exactly what Vanguard founder Jack Bogle was.

He turned an industry on its head, and he spoke his mind in a way that few people really do. As Balchunas notes, “His TV hits on business networks were mostly about the futility of trying to pick stocks or time the market. He’d give a speech at an ETF conference about why ETFs were awful, or trash active management at a conference for fund managers.”

“He built an entire genre of investing by trying to eliminate everything that gets in the way of investors getting a fair share of returns, including management fees, brokers, turnover, trading costs, market timing, and human emotion.”

Recommended Reading

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How to Invest with a Looming Recession

A reader writes in, asking:

“I had a question that might work well for an upcoming blog post. Deutsche Bank recently forecasted an upcoming recession, and I was curious what your suggestion would be regarding how to invest a bonus with a potentially looming recession.”

It’s important to make a distinction between the stock market and recessions. For a few reasons, a recession happening over a particular period does not necessarily mean that the stock market would perform poorly over that period.

Firstly, the stock market is concerned with how much profit businesses earn. Recessions are determined by changes in production. (Specifically, a recession is usually defined as a decline in GDP over two consecutive quarters.) Production and profitability are linked, but production changing by a certain percentage definitely doesn’t mean that profitability will change in the same direction by the same percentage.

Second, GDP is concerned with a broader group of entities. The stock market is the market for publicly-traded corporations. So by definition it’s only concerned with publicly-traded corporations. In contrast, GDP includes production by privately-held businesses as well as by government entities.

Finally, the most important distinction, for our purposes, is that the price of a stock is essentially a prediction. It’s a function of how much the market collectively expects that company to earn. (Specifically, it’s the present value of the expected future cash flows from that company.)

So if the market has recently decided that publicly-traded corporations are, collectively, about to become less profitable (which could well be the case in a recession), that doesn’t mean that the market is probably about to go down. It means the market has probably just gone down. (And indeed, it has. As of this writing, the stock market is down about 14% year-to-date.)

In finance-speak, we say that the probability of a recession has already been “priced in” (i.e., it’s already reflected in the current price of stocks).

To reiterate this important point: the current prices of stocks are, themselves, predictions. So to make a prediction about what the stock market will do next is to make a prediction about a prediction. (i.e., will people’s predictions about corporate profitability become worse or better in the near future?).

And that’s really darned hard. Stock prices generally already account for all of the information that you or I are likely to know.

So How Should We Invest?

Moving in and out of stocks (or in and out of certain sub-categories of stocks) usually doesn’t make sense, because of how hard this guessing game is. That’s why it usually makes sense to just pick an asset allocation and stick with it, rather than trying to adjust your allocation based on events in the news.

Conversely, it definitely can make sense to change your asset allocation when your life circumstances change. For example, for a young person who sells a business for a very large sum, the allocation that might now make sense could be very different than the allocation that made sense a few months ago.

It’s possible that such a concept would apply with a bonus, if the bonus is a life-changing amount of money. But most of the time that’s not the case. Most of the time a bonus doesn’t constitute a major change in life circumstances and therefore does not require a change to the overall portfolio asset allocation.

Changes to the fixed-income side of a portfolio can make sense though, as economic circumstances change. That’s because current interest rates do give us some actionable information. That is, the interest rate on a given fixed-income investment is a decent predictor of its rate of return (and it’s obviously a very good predictor, if you plan to hold to maturity). So shifting between fixed-income options as the available interest rates change is not crazy.

For example, for years Allan Roth has written about using CDs rather than individual bonds or bond funds when CDs offer an interest rate that is as good (or sometimes even better), with less risk than bonds. Similarly, many people have been buying I-Bonds lately, because of how their yields compare to most other fixed-income options.

So, how should we invest if a recession is looming? About the same way we invest the rest of the time. It doesn’t usually make sense to make portfolio changes based on economic news, though changes within the fixed-income part of the portfolio can make sense, as the fixed-income option with the highest interest rate for a given level of risk can change over time.

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