DO YOU SEE THINGS clearly when it comes to money? Here’s a test to find out. Which of the following scenarios would you prefer?

A 5% raise, but the inflation rate is 10%.
A 3% salary cut, but the inflation rate is 0%.

If you chose the 5% pay raise, you’ve fallen victim to a “money illusion.” This term describes our tendency to view money in nominal terms instead of inflation-adjusted “real” terms.
In the first scenario,

EVERY MARKET DECLINE is different, but all of them can feel unnerving, even for the most steadfast of investors. Spooked by 2022’s financial market turmoil? There’s good news: Stock and bond values today look much more compelling than at the turn of the year.
Thanks to 2022’s 14% drop, the S&P 500 now trades below its five-year average price-to-earnings (P/E) ratio, based on expected profits. On top of that, corporate earnings rose impressively in this year’s first quarter.

IN A NOTE TO CLIENTS last week, Deutsche Bank analysts wrote that they expect a “major recession.” What should you make of ominous predictions like this?

First, don’t panic. Yes, Deutsche Bank is a big institution. But it’s worth noting that last week two equally prominent institutions also weighed in—with a different point of view. Goldman Sachs argued that a recession is “not inevitable.” UBS wrote that, “We do not expect a recession.” They can’t all be right.

EXPERIENCED INVESTORS know that the stock market and the economy sometimes diverge. Early 2020 offered a stark example: Even as the economy was still contracting rapidly, stocks started bouncing back.
But right now, many areas of the stock market are doing about what you’d expect. After all the efforts by the Federal Reserve and Congress to prop up the economy over the past two years, rising inflation is front and center, along with rising interest rates. 

INVESTORS ENDURED a lot in the first quarter, including rising interest rates, high inflation, fears about a recession and news of war. But it’s important not to get caught up in the scary headlines. Consider COVID-19. Not so long ago, it dominated the news, but now it’s hardly discussed because the situation is much improved.
No doubt today’s fears will also abate. Indeed, despite 2022’s dire news, stocks staged an impressive recovery toward the end of the first quarter.

KNOWING WHAT RETURN you can reasonably expect from stocks, bonds and other asset classes is valuable because it can help you make more educated asset allocation choices. It also helps you decide how much you need to be saving. If expected returns are low, you’ll need to save more.
Such estimates don’t require extraordinary clairvoyance. In fact, when it comes to bonds, estimating returns is quite straightforward. The expected return from a bond is very close to something called the bond’s yield to maturity,

IT’S BEEN A STUNNING quarter for the bond market. According to Bloomberg, short-term interest rates have seen their biggest jump since 1984, as measured by the yield on two-year Treasury notes, which now stands at around 2.3%.
The rise this time around seems especially sharp, considering how low yields were at the start of 2022. Back in the early 1980s, the two-year Treasury yielded north of 10%, versus barely above 0% at times last year.

FINANCIAL MARKETS are full of indicators and data relationships from which we tease conclusions. Few signals grab our attention more than an inverted yield curve and its habit of showing up before recessions. But is this signal still accurate in predicting economic trouble?
When U.S. Treasury bond yields are plotted on a graph, they normally have an upward slope, with short-term yields generally lower than longer-term yields. That makes sense: Lenders demand a higher rate for 30-year loans than 10-year loans because their money is at risk for longer.

I TELL MY CHILDREN that they can’t possibly fathom the amount of information that they have in their hands. I’m part of the last generation—so-called Gen X, those born between 1965 and 1980—who actually had to trudge down to the library and pray it had the information we needed. Today, the internet provides it all in seconds.
I needed to change a leaking bathtub faucet. I’m not qualified to be a plumber. But I looked up a few YouTube videos and,

FOREIGN STOCKS suffered big losses last week. Vanguard FTSE Developed Markets ETF (symbol: VEA) dropped 6.2% as fears about Russia’s aggression came to a head. Losses were most sharp in Europe—iShares MSCI Eurozone ETF (EZU) plunged 13.3%. For the year, the U.S. stock market is now slightly ahead of international stocks.
Investors often question whether they should own non-U.S. stocks. The common logic—flawed in my opinion—is that domestic firms offer enough foreign exposure because many are multinational businesses.

ACCORDING TO GMO investment strategist Jeremy Grantham, we’re in the midst of a rare “superbubble,” which he defines as a three-sigma event. Three sigma is a statistical term in probability, referring to an event which should occur less than 0.3% of the time or about once every 333 years.
Calling a bubble, let alone a superbubble, can be hazardous both to one’s reputation and one’s wallet. Even if Grantham’s call is correct, using that information to make money—or avoid losses—is easier said than done.

EVERYBODY SEEMS to hate bonds right now. Can you blame them? Inflation is at a four-decade high, the Federal Reserve is sure to hike short-term interest rates two weeks from Wednesday, and geopolitical jitters make owning high-yield bonds all the riskier. On top of that, returns have been awful since the start of 2021.
But maybe we should take a contrarian approach. Almost everybody should own at least some bonds. Yields have improved significantly.

A FRIEND TEXTED ME yesterday. He wanted my thoughts on putting cash to work given the big stock market decline over the past few weeks. I took my usual approach, saying it’s always a good time to make retirement contributions, and that he should go ahead and swoop in. That was when the S&P 500 was down roughly 2% in the morning. We texted again in the afternoon before the closing bell—and after the market had rallied big.

THIS IS A TEST. This is only a test. This is a test of our stock market resolve. Remember how you told yourself you’d stand pat during the next stock market decline, that you wouldn’t get rattled like you did in 2008-09 and early 2020? That moment has arrived.
Like any person with an ounce of decency, I’m appalled by Russia’s invasion of Ukraine and the unnecessary death and suffering that will result. But I’m also confident that the Russians will come to regret their actions.

NEW YEAR, NEW TRENDS. That theme continues to play out. So far in 2022, the U.S. stock market, as measured by Vanguard Total Stock Market ETF (symbol: VTI), is down 9.1%. Brighter conditions are found overseas, despite today’s geopolitical risks. Vanguard FTSE Developed Markets ETF (VEA) is down just 4.3% year-to-date, while Vanguard FTSE Emerging Markets ETF (VWO) is up 0.5%.
A sore spot for international investors has been small-cap stocks. Vanguard FTSE All-World ex-U.S.