THE FEDERAL RESERVE caught the market by surprise this past week. In fact, it seemed like Fed policymakers caught even themselves by surprise.
Previously, they had been forecasting that interest rates would stay near zero through 2023, on the assumption that inflation would remain manageable. But as the country has emerged from hibernation, inflation has run much hotter than expected. As a result, an increasing number of Fed officials now expect they’ll have to raise rates much sooner.
TYPE THE WORDS “safe withdrawal rate” into Google and it’ll return more than a million results. I’m not surprised by this. People debate practically everything in personal finance, but the debate around this question is particularly intense.
For at least 25 years, the conventional wisdom has been that it’s safe for retirees to base portfolio withdrawals on the 4% rule. But not everyone agrees. Some feel that percentage should be higher, while others feel it ought to be lower.
WHEN IT COMES to financial questions, there are two common reasons people disagree. Sometimes, they disagree about the facts—whether, say, interest rates are headed higher. But sometimes, people disagree for another reason: They see the world through different lenses.
Last week, I mentioned that Ray Dalio, a prominent hedge fund manager, had recently said that bonds “have become stupid.” I disagreed, but not because of the facts. There’s no disputing the impact of today’s low rates.
A TEL AVIV WOMAN named Anat decided to surprise her elderly mother with a gift. Noticing that her mother had been sleeping on the same worn-out mattress for decades, Anat replaced it while her mother was away from the house. She then took the old mattress out to the curb.
It wasn’t until the next morning that her mother noticed the change and asked what had happened to the old mattress. Anat explained that she had put it out with the trash,
LET ME TELL YOU about Alvan Bobrow. His tale—and specifically his lawsuit—are important for every investor to understand. That’s because the legal loophole he sought to exploit is now a pothole for everyone else.
The first thing to know about Bobrow: He’s a tax attorney and, back in 2008, he had a clever idea. In need of cash, he took a $65,000 distribution—the technical term for a withdrawal—from his IRA. Ordinarily, a distribution from an IRA (unless it’s a Roth IRA or includes nondeductible contributions) is treated entirely as taxable income.
CONGRESS IS BACK at it, aiming to change the tax laws again. Just since 2017, there’s been the Tax Cuts and Jobs Act (TCJA), the SECURE Act and the CARES Act, each of which contained tax provisions, some very significant. As I type this, Congress and the White House are horse-trading on another round of changes.
Because new legislation is still being negotiated, I think it’s too soon to change your financial plan. But there’s one strategy that makes sense for a lot of people,
AN MIT PROFESSOR named Edward Lorenz published a paper in 1972 titled Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?
It was a catchy title. Though Lorenz didn’t mean it literally, the basic idea was that events in the physical world are highly interconnected—more so than they might appear.
The world of investments is similarly interconnected in ways that aren’t always visible. Just like the weather,
ON FEB. 27, 1992, Stella Liebeck ordered a cup of coffee from a McDonald’s drive-through. Moments later, as she attempted to open the lid, the cup spilled, causing a burn that sent her to the hospital. Her injury was serious but self-inflicted and not life-threatening. Nonetheless, she sued McDonald’s, and a jury awarded her almost $3 million. That award was reduced upon appeal, but this case is often cited as an example of an out-of-control legal system exploited by personal injury lawyers.
IN RECENT MONTHS, there’s been a lot of handwringing about the stock market. Thankfully, we seem to be on the back end of the pandemic, but things remain far from perfect in the economy. Millions are still unemployed. And the government has had to spend trillions to get us through, adding to a federal debt that was already enormous.
Today, the economy is far more fragile than it was pre-COVID. And yet the stock market just keeps cruising to new all-time highs.
IN THE INVESTMENT world, inflation is the topic of the day. There are four key reasons:
Congress. Since March 2020, the federal government has dropped more than a trillion dollars of cash into the economy via stimulus checks and the Paycheck Protection Program. While many of the recipients were unemployed and needed these dollars to meet basic needs, others were not. The result: More money in people’s pockets allowed them to spend more,
IS THE STOCK MARKET too high? It’s a question I’ve heard a lot recently. Each time, I’ve offered this recommendation: It’s impossible to predict where the market will go next, so your best defense is to have an appropriate asset allocation. But how exactly can you determine an ideal allocation?
The textbook method originated in the 1950s, with the work of a PhD student named Harry Markowitz. Up until that point, investors had mostly picked stocks and bonds in a vacuum,
SCOTT ADAMS, the creator of Dilbert, has this to say about making forecasts: “There are many methods for predicting the future. For example, you can read horoscopes, tea leaves, tarot cards, or crystal balls. Collectively, these methods are known as ‘nutty methods.’ Or you can put well-researched facts into sophisticated computer models, more commonly referred to as a complete waste of time.”
This is funny but, for the most part,
WHEN I WAS GROWING up, one family in the neighborhood lived differently from all the others. In their garage was a Rolls-Royce. When each of the sons turned 16, a new BMW showed up in the driveway. Because it was so out of the ordinary, it caught my attention. It caught everyone’s attention.
Looking back, this is what I find interesting: This kind of privileged upbringing looked like a guaranteed recipe for demotivating their children.
IN THE ONGOING battle between those who believe that the stock market is in a bubble and those who don’t, you may have heard mention of something called CAPE, short for cyclically adjusted price-earnings ratio. Among market indicators, it has the strongest track record in predicting future market returns.
What does the CAPE ratio say about today’s market? It’s flashing red. According to CAPE, the U.S. stock market is more overpriced today than it has been at any time since the 2000 market peak.
AT LEAST ONCE A DAY, I find myself saying, “Another truism of financial planning is….” To be honest, I don’t know whether the 12 concepts below meet the strict definition of “truism,” but I’ve found them hugely helpful in navigating the world of personal finance:
1. There are always two answers to every question. There’s the mathematical answer and there’s the “how do you feel about it” answer. It’s okay—and, in fact,