FEDERAL RESERVE CHAIR Jerome Powell, speaking last Friday at the Jackson Hole Economic Symposium, said that bringing down inflation will mean “some pain” for households. But what sort of pain are we talking about? Powell and the rest of the Fed members are hoping to create “tight conditions.” That isn’t some opaque description of the economy and financial markets. Instead, the term has four specific components that help dictate Fed policy. The U.S. dollar. A stronger greenback slows economic growth by making domestic goods more expensive for foreign buyers. Net exports, a factor in determining GDP, often drop when the dollar rises. With the dollar near 20-year highs, the currency market is working in the Fed’s favor. Corporate bond yields. When interest rates climb, corporate borrowing and investment slow. The Fed won’t be thrilled by what’s happening here. The spread between high-yield “junk” bonds and Treasury bonds, after easing during the summer, is now widening once again. But the spread between higher-quality corporate bonds and Treasurys remains modest by historical standards. Stock market performance. This component is as basic as it sounds. Lower stock prices sometimes lead to reduced consumer spending, because folks feel less flush—what’s called a “wealth effect.” The upshot: For now, the Fed might want to see the bear market continue. Interest rates. For consumers, higher borrowing rates stifle spending, including spending on home purchases. Look no further than the state of the real estate market, where sales seem to be slowing sharply amid plunging housing affordability. As of last week, the average rate on a 30-year conventional mortgage was 5.73%. We can think of the current period as a hangover from 2021’s binge of stimulus and speculation. Today’s high inflation is the price we’re all paying, and the Fed is hell-bent on taming it. The good news: Expected inflation is at its lowest level since January. Investors and traders are pricing in much softer inflation readings for the next five years. But getting to those lower inflation rates will likely require some pain.

WHEN I WAS IN COLLEGE, I thought I had investing all figured out. I’d taken a handful of finance and portfolio management courses, I’d allocated real money for the University of North Florida’s student-managed fund, and I’d researched individual stocks, mutual funds, exchange-traded funds and even options. But my confidence was crushed by a year of unsuccessful options trading when I was age 20. Nonetheless, through my 20s and into my 30s, I remained optimistic that I could earn handsome long-run returns by overweighting a few investment factors—such as smaller companies and value stocks—and by having plenty of foreign stock exposure. But that also hasn’t panned out. Sure, U.S. large-cap performance has been robust since early 2009, making broad market benchmarks hard to beat. Still, lackluster returns among U.S. small-cap stocks, foreign-index funds and value stocks have left my portfolio below where it could have been if I’d gone all-in on an S&P 500 index fund. One example: I tried to get cute with a pair of Vanguard Group factor funds. One ceased trading in 2022, while the other has performed no better than the broad market since I purchased shares in 2018. Chastened by this underperformance, I’ve lately been tweaking my stock portfolio, so it more closely resembles the global market. Today, at age 35, if I look across my taxable and retirement accounts, I have roughly equal amounts in U.S. and non-U.S. stock index funds. Those two geographical buckets each make up roughly 40% of my total portfolio, with another 8% in a bond market index fund and the rest in a high-yield money-market mutual fund. Compared to the weightings for the global stock market, I’m still overinvested in foreign shares, small-cap companies and, to a modest extent, emerging markets. Rather than selling any of these overweight positions, my new purchases simply go toward my U.S. and international total stock market index funds, which has the effect of diluting my overweight positions. The accompanying pie chart gives a snapshot of my current asset allocation. I recently reviewed my mix of taxable account, retirement account and health savings account money. Overall, 53% of my assets are in my taxable brokerage account, consisting primarily of low-cost exchange-traded index funds (ETFs) and cash at Fidelity Investments. A third of my portfolio is in tax-deductible retirement accounts—a solo 401(k), a traditional IRA and a rollover IRA—plus I have some Publix Super Markets shares in the company’s employee stock ownership plan. This last holding is a holdover from my part-time work at Publix as a teenager and in my early 20s. Just 11% is in the Roth bucket, though I’m aiming to increase that. This year, I made my first mega-backdoor Roth contribution, adding after-tax dollars to my solo 401(k) and then immediately converting that money to my Roth IRA. Finally, my health savings account makes up a modest 3% of my portfolio. I admit to owning a tiny bit of a precious metals stock ETF—just 2% of my portfolio. Several years ago, in my taxable account, I purchased the fund at a fortunate time, and I’ve hung on to avoid realizing the capital gain. I also went rogue with extra emerging markets and real estate exposure, doing so using dirt-cheap index funds. [xyz-ihs snippet="Holiday-Donate"] Readers might recall my 2021 venture into fringe alternative investments. I’ve since divested all my holdings, except a small sum invested in fine art through Masterworks, and I managed to do so without too much pain. I also sidestepped danger by withdrawing my stablecoin holdings before last year’s turmoil in the cryptocurrency market. That’s a lot of drama for what I claim to be—a boring index-fund investor focused on increasing my net worth over the long haul. Indeed, I fear my money journey has been marked by too much excitement and hubris. Going forward, I plan to maintain an 80% stock-20% bond mix, all via index funds. Moreover, rather than having accounts scattered among several brokerage companies, I’ve made an effort to consolidate everything at Fidelity for easier tracking and fewer tax headaches. I played the account bonus game for a few years, moving my investments from one brokerage firm to another to score some free money. But simplification is my new financial mantra. I brought my many taxable accounts home to Fidelity over the past two years. Now, my year-end goal is to consolidate my traditional and rollover IRAs into my solo 401(k), leaving just nondeductible contributions in my IRA, which I’ll then convert to a Roth IRA—what’s called a backdoor Roth conversion. For me, it's a huge psychological victory to take advantage of tax-savvy strategies, while also consolidating my numerous financial accounts. Another bonus: It’s now a breeze to refresh my net worth and asset allocation spreadsheet. Thanks to my prodigious savings rate since I was a teenager, my investments today afford me financial independence by just about any measure, even though I’m still three decades’ away from the typical retirement age. But despite my net worth, my human capital remains my most valuable asset, and I have no plans to stop working. Indeed, continuing to engage in meaningful work is crucial not just to my wealth, but also to my health. Mike Zaccardi is a freelance writer for financial advisors and investment firms. He's a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com and check out his earlier articles. [xyz-ihs snippet="Donate"]

NATIXIS INVESTMENT Managers published its ninth annual Global Retirement Index last week, which focused on overall wellbeing and financial security. The U.S. slipped to an unimpressive 17th out of 25 countries. Perhaps that isn’t surprising given the state of Social Security. Based on the program’s current financing, benefits would need to be cut after 2033. None of us wants to hear that, but we also aren’t surprised. The Natixis study reports that a whopping 77% of U.S. investors think rising government debt will lead to reduced Social Security benefits, with 46% of millennials saying it would “take a miracle” to live a financially secure retirement. Allow me to offer a caveat to that seemingly grim outlook: It isn’t as if Social Security goes belly up a dozen years from now. The latest projection states 76% of scheduled benefits will be payable if we stay the course. There will almost certainly be changes to the current system. Perhaps we’ll see higher payroll taxes to fund Social Security, adjustments to the full retirement age or reduced benefits for wealthier individuals. Or perhaps the government will simply borrow more money. Whatever happens, sharp benefit cuts aren’t something the electorate will take kindly to. There are also reasons to feel somewhat upbeat about the future. Employers are stepping up to the plate in significant ways. Wages are rising sharply for younger and low-wage workers. Some major corporations have announced they’ll pay employees’ college tuition costs. On that note, Natixis found that 82% of U.S. investors believe employers have a responsibility to help their employees achieve a financially secure retirement. Taking advantage of your company 401(k) match is a common personal finance refrain. What if employers pay workers more and help alleviate student debt burdens? That could pave the way for employees to contribute even more to their 401(k).

WHEN I TAUGHT AT the University of North Florida, I always sought to arm my finance students with the best tools of the trade. College textbooks are notoriously expensive, so I aimed to provide some great free resources. Few things get me more pumped than when I come across an impressive financial website—one that doesn’t charge. One of the most frequent questions from students: What sites do I visit every day? I would often share stories in class about various writing assignments and investment projects I was working on, so that probably sparked the students’ curiosity. In the end, my recommendations came down to the handful of stock market pages and financial information sites listed below. There are so many types of data-digging you can do when it comes to stocks, bonds, mutual funds, portfolio management, news, charts—the list goes on and on. I gravitate to simple, quality charts and one-stop shops. I try to avoid sites I have to register for and, heaven forbid, whip out my credit card to use. Being on the impatient side, I also don’t want to spend too much time creating my own graphs, tables and data series. Here are four fantastic free sites that meet my standards and offer great visuals: Yardeni.com. Economist Ed Yardeni’s treasure trove has pretty much all the economic information, in chart form, you could want. Many of Yardeni’s charts are updated daily. Fidelity.com. I hop over to Fidelity Investments’ site whenever I want to compare exchange-traded funds (ETFs) or even individual stocks. What I find especially useful are the research reports available on just about every stock and ETF. While the site and an account are free, some tools require you to have a Fidelity login. Vanguard.com. Want to see charts on index funds? Vanguard Group is your place. There are easy-to-read tables and pie charts that detail what’s inside the index funds so many of us own. Another feature I like is Vanguard’s target-date fund explanations and portfolio glide path visuals. I’ve shared that page with my students during asset allocation lectures. Fred.StLouisFed.org. Any economic geek knows FRED, short for Federal Reserve economic data, the popular public website run by the Federal Reserve Bank of St. Louis. The charts might take some tweaking, but you can find almost any economic barometer you want. I use it often when citing data in my day job. The “download to Excel” feature makes creating charts simple. College kids love the excitement of the markets. I would urge them to be cautious, but I still wanted to equip them with the best day-to-day pages for stock-watching. I have four websites that provide great market summaries, which I prefer over clunky news sites: TradingView.com. As a freelance market analyst, I keep a watchlist of index ETFs, commodity prices, interest rates and even some cryptocurrencies. I use TradingView’s charts to plot data that can go back decades. It’s helpful to keep a long-term perspective. Koyfin.com. Want the best one-stop market view? Go here. View market performance by sector, along with what’s happening with international index ETFs. I’d encourage my students to use Koyfin to graph fundamental company numbers, such as a firm’s price-earnings ratio or its historical sales trends. That’s quite handy for completing homework assignments. StockCharts.com. Not surprisingly, given the site’s name, this is a favorite place for stock charts. But I also like to use its performance graphs when prospecting for mutual funds and index data. Its sector “perf charts” web page is a regular stop for me. Finviz.com. Popular with many day traders, my favorite tool here is the market and ETF heat map. Users can also use the “bubbles” feature to plot index numbers, such as a graph of firms by market size or a dual-axis plot of S&P 500 companies’ market capitalizations and dividend yields. I have a call to action for HumbleDollar readers: In the comments section below, let me know your favorite free financial resources. If there are enough great suggestions, next time I teach, this could even become my students’ go-to article for the best free financial tools. Maybe they’ll even be able to ditch those costly textbooks. Mike Zaccardi is a freelance writer for financial advisors and investment firms. He's a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com and check out his earlier articles. [xyz-ihs snippet="Donate"]

I RECENTLY WROTE about the market indicators I pay attention to. As a long-term, buy-and-hold investor focused on gradually building wealth, I downplay the importance of day-to-day market gyrations. Nevertheless, I can’t deny my fascination with charts and big market moves. Back in college, I used to watch CNBC all the time. Now, I rarely have it on. The talking heads are constantly discussing matters that I believe are distractions. There’s a set of indicators that make headlines and are great fodder for financial journalists, but don’t mean much for investors. Here are five headline-grabbers that you can safely disregard: The Fed. When it’s “Fed Day,” the major financial news networks don’t discuss anything else, or so it seems. The announcement finally comes in the afternoon—and the market reacts. Then the market reacts to the reaction. By the 4 pm ET close of trading, stocks and bonds may have had huge moves in both directions. What initially seemed like a “bullish” announcement often turns into a bearish reaction, and vice versa. It’s utterly unpredictable. Then, within a few days, everyone has moved on to some other topic. On Fed Day, you’ll find me on the golf course. The Dow. The Dow Jones Industrial Average has been around for more than a century. Everybody has heard of it. It’s a price-weighted index, meaning the stock with the highest price per share gets the biggest weight. Today, that stock is (drumroll, please) Apple. Apple’s 10% weight is only due to its $385 share price. Pfizer is the tiniest part of the Dow with a 1% weighting, since it’s just $36 per share. What’s my go-to? I look at the S&P 500, which is “cap-weighted,” meaning the importance of a company in the index depends on its total stock market value. If I really want to get into the weeds, I see what’s happening with the S&P 500 “equal-weight” index, which is a better gauge of how the typical stock is performing. The news. There’s a headline for everything. During 2019, how often did we hear “stocks rally on trade deal optimism”? Then, the very next day, we’d read “stocks fall on trade talk jitters.” The same goes in 2020 regarding COVID-19. In the financial media, stock market prices drive the narrative—and that narrative supposedly explains the behavior of all investors. When I check out the newspaper or “Finance Twitter,” I look for cool charts and visuals, not the headlines. Small caps vs. large caps. Analysts like to say that when smaller companies are outperforming large-cap stocks, it’s a sign that investors have a healthy appetite for risk, so the stock market should head higher. The problem: There’s little empirical evidence to support this idea. That 1% of your portfolio. Maybe this last one is more applicable to us long-term investors. I’ve found that many investors are like me, with a bias away from simplicity. Perhaps it’s FOMO, or fear of missing out: We want to own a little bit of everything, just so we can say we got a piece of some big market move. But in truth, a 1% position in just about anything won’t make a big difference. Sure, it could be the next bitcoin, going from $10 to $19,000—before falling below $10,000—but that’s unlikely. Instead of FOMO, try KISS, or keep it simple, stupid. Diversification is great, but don’t overdo it. Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Reading the Signs, Inflection Point and Getting Back In. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com. [xyz-ihs snippet="Donate"]

THE GREAT RECESSION and accompanying stock market plunge didn’t seem so bad to me. At the time, I was a 20-year-old college student with a little money in a Roth IRA that I’d opened and funded since my high school days. Sure, it was no fun losing half my investment account, but it wasn’t a lot of money—at least compared to today. In the years since, I’ve fallen squarely into the super-saver category, socking away a large portion of my income. That means the 2020 bear market has stung a bit more than 2007-09, even though—so far—the percentage decline has been far smaller. Of course, that sting is just the emotional response. We should try to view the recent 35% to 40% pullback as a feature of the stock market, not a bug. The fact is, for stock market investors, drawdowns of 50% or more come with the territory. What doesn’t come with the territory: good investor behavior. How have you fared through this volatility? Maybe I should rephrase that: What actions have you taken—or not taken? If you’re a long-term stock investor, here are four possible approaches: 1. Sit tight. Have you done nothing through this decline? That means your stock allocation is likely down sharply. A 60% stock-40% bond mix would have been more like 50%-50% at the March 23 bottom—though we don’t yet know whether that was the bottom. 2. Rebalance. Did you have the courage to rebalance your 401(k), moving money from bonds to stocks? Rebalancing is rarely a bad thing. It simply resets your portfolio to the risk profile you identified as appropriate during calmer times. 3. Dollar-cost average. If you automatically contribute to your 401(k), you didn’t have to do anything to keep adding to your stock portfolio. But if you have a taxable brokerage account or an IRA where the onus is on you to hit the buy button, adding to your stock holdings takes more grit. 4. Step up your buying. Did you put extra cash to work as share prices slumped? That’s a great way to take advantage of lower prices and speed up your portfolio’s eventual recovery. Indeed, it’s amazing how periodically investing into a diversified portfolio helps soften the blow of a bear market. Suppose an investor had $100,000 in a 60% stock-40% bond portfolio. He or she rebalanced annually and invested an additional $1,000 a month. Here’s how our hypothetical investor would have fared in the past three bear markets: Tech wreck. The early 2000s bear market was, in hindsight, no big deal for our hypothetical investor. The account would have grown to $106,000 by the late 2002 stock market low and, indeed, would have been worth $262,000 in October 2007, when the market next peaked. Great Financial Crisis. What if our investor started with $100,000 in October 2007? He or she would have been in the red by early 2009, with an account value of $80,000, even after figuring in a year and a half of $1,000 monthly additions. Still, from there, the balance would have ballooned to a whopping $503,000 by the bull market’s end in February 2020. Coronavirus crash. From the end of January 2020, a $100,000 balanced portfolio would have declined 4% in February and another 8% in March, yielding an account balance of just under $90,000 by the end of March. Where does the portfolio go from there? Only time—and investor behavior—will tell. Still, we can see the benefits of good investor behavior by looking back at earlier market declines. Consider the four strategies described above—and how they would have played out during the Great Financial Crisis. Again, we’re assuming that an investor starts with $100,000 in a balanced portfolio. All four approaches ultimately work out fine for the long-term investor, but as you progress through the four stages, the portfolio recovers ever more quickly. 1. Do nothing. At the worst point, a 60% stock-40% bond mix would have been down 29%. Still, the portfolio would have recovered its losses by December 2010, assuming an investor took no action. 2. Rebalance every six months. The portfolio was back to $100,000 by October 2010. At its low, it was off 31.5%. Why is this short-term loss larger than in the “do nothing” scenario? There’s increased risk when you rebalance during a bear market, because you’re adding to your stock exposure as share prices drop. 3. Invest $1,000 a month, while also rebalancing. The portfolio gets back to even—meaning its value is equal to the $100,000 initial investment, plus all subsequent monthly contributions—as of April 2010. The maximum drawdown was 30%. 4. Invest $2,500 a month, while also rebalancing. Our investor’s portfolio is worth $170,000 as of February 2010, equal to the $100,000 initially invested plus the $70,000 in subsequent contributions. The maximum drawdown was 28%. I know, I know, that was a lot of numbers. But here’s the point: The key is to keep your cool and stick to your strategy—and a smart strategy is to rebalance occasionally and to continue saving regularly. Find that a struggle? If you don’t want to go it alone, look for a fee-only fiduciary financial advisor to guide you. Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Stepping Up, Where's My Refund and Scratching That Itch. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com. [xyz-ihs snippet="Donate"]