A chart for the ages, nicknamed over the years “The Greatest Chart Ever”*.
Please make sure the chart above shows on your screen! If not, please ask me to email you a copy.
Simply put, the chart summarizes the inevitable volatility that stocks experience year-in and year-out, while still producing intermediate- and long-term positive returns. Last week’sTGIF 2 Minutestouched on similar concepts related to sticking with a 60/40 portfolio.
A short but necessary reflection on the “60/40 Portfolio”. (Hint for those wanting to move on to the weekend and stop reading here: the 60/40 portfolio is not dead.)
It would help first to define what a 60/40 portfolio is: an overall investment allocation of 60% stocks and 40% bonds (or bonds and cash). But even “stocks” and “bonds” can be too subjectively defined by the average investor. When it comes to a diversified 60/40 portfolio, the stocks category includes globally diversified equities of all sizes (large & small), styles (value & growth) and industries (all tech – not only super-AI tech – financials, energy, consumer goods, etc.). The bonds category can open a huge “can of worms” because a typical bond fund in a 401k account contains far riskier and longer-dated bonds than meant for the “steady, safe” portion of a retirement savings portfolio. Therefore, the bond category can do its best long-term work when invested in high quality, shorter-term bonds and cash instruments. Please ask me more about this topic.
Check out the TGIF 2 Minutes (cut & pasted below) from September 2022 when nearly everyone – especially the media – was saying the US was already in a recession. Today, the potential recession scenario seems even more compelling but somehow the US economy has crept along.
Currently in 2023 and in times like this, it pays to keep a sharp eye on spending and debt levels while maintaining a long-term outlook with savings and investments. If the US does creep or crash into an actual recession, emergency funds with calculated levels of cash can soften the blow. The following points are worth reiterating.
Following on last week’s 2023 Year-End Tax Planning come several key tax moves to consider over the next year or two. These moves do NOT need to be made by year-end 2023 but still need to be top of mind, especially for those in higher tax brackets and those having accumulated significant savings.
Plus, for those approaching retirement and looking to accumulate tax-free monies down the line, there are considerations too. Why bring up this topic now? Because the 2017 tax cuts, set to expire in 2025, did lower the top tax bracket AND expanded the very reasonable 24% tax bracket. Use the lower brackets while they still exist.
Year-end tax planning is a sort of double-event this year, due to 1) the approaching 2023 year-end, and 2) the 2017 TCJA tax cuts expiring at the end of 2025 (sooner than it sounds) – meaning limited time to take advantage of Roth IRA conversions and certain gifting strategies. There are a number of items and trust strategies that can be planned in advance. This week will be Part 1 and next week Part 2.
Part 1 includes basic, yearly items that can be addressed in these final months of 2023:
Have you maxed out your 401k? Many people do not know they can temporarily increase 401k contributions through December 31st to reach the $22,500maximum contribution (those age 50 and older get an extra $7,500 catch-up contribution, for a total of $30,000). Lots of 401k or 403b plans allow participants to contribute 25-30% – or even 100% of pay – and then revert to a lower contribution rate on January 1st of next year.
These 401k contributions can be tax-deductible unless you are contributing to a Roth 401k (which can be an excellent idea too).
Excerpts from a TGIF 2 Minutes written 11 1/2 months ago follow.
Today, the US Fed is not finished raising interest rates.
Inflation is still around for multiple reasons.
Note the emphasized comments in bold.
Wind back to October 2022: A question that may be on a number of people’s minds was, “How long will it take to tame inflation?” Unfortunately, there was very little telling. Part of the reason is that inflation is always part of a complicated economy. Predictions about the timing of inflation (and hard-landing/soft-landing) are nearly impossible.
To add to the confusion, emotions – specifically people’s expectations of inflation – are part of what keeps inflation around. In this inflationary cycle (as of October 2022), inflation had already stuck around longer than at almost any time in US history; long enough to increase people’s expectations that inflation would not go away quickly. The US Fed had stated one of its original intentions was to lower consumers’ inflationary expectations. But the Fed may have missed that boat late in 2021 due to forces out of its control, namely, the pandemic aftermath. Note that today in late September 2023 inflation is still running strong.
From the 2022 Archives of TGIF 2 Minutes with a few updates…
Record-breaking, big outlier events tend to move the needle to extremes in the economy and stock market. Note the word, “outlier”. Outlier events typically are surprises and are often unlikely. In his beyond excellent book The Psychology of Money* author Morgan Housel lists five events that were outliers over history in the US with world-changing consequences:
The Great Depression
World War II
The dot-com bubble
The housing crash of the mid-2000’s.
A conclusion could be drawn from the book’s chapter titled, “Surprise!” that surprises are perhaps the most reliable thing going. But the irony of the reliability of surprises is we do not know what the surprise is until after it has unfolded.
Part 2 of “under the radar” tax law changes. These changes lead to a needed discussion of current, related tax topics applying to ALL ages of savers with 401k accounts – and possibly IRA accounts too. There is still a decent amount of time remaining in 2023 to make a difference in 401k saving.
Remember that Roth 401k plans have slightly different income requirements than Roth IRA accounts:
Roth 401k accounts (which run alongside regular 401k accounts) have NO income limits.