We had two brazen stimulus measures: 1) the Fed (with no help from the fiscal side) to deal with the 2007-08 financial crisis, and 2) fiscal policy to counter the 2019-20 pandemic (which eventually forced the Fed to do so). Plot).
Both events were totally unexpected, although the former was endogenous and the latter exogenous. The somewhat unprecedented economic policy – monetary and fiscal policy – not only influenced the economy and the financial market, but also affected society in many ways.
In hindsight, the questions are 1) whether it was the right policy, 2) what the right normalization policy is, 3) what the right execution procedure is. The Fed and the government are now occupying very challenging positions.
Stubborn inflation, the looming recession and the controversial bear market have been the main headlines of the last few months. The Fed rate hike is scheduled for this week (September 20th and 21st).
The article is mainly intended to write a practical guide on how to start “investing and trading” for various investors: 1) active and newly discharged armed forces, 2) students, 3) new graduates, 4) new employees, 5) new 401 (K) owners , 6) new immigrants, 7) new heirs, 8) new divorcees, and so on.
I’ve published 20 articles (2012 – 18), all of which are standalone, so not just recurring update posts, but standalone ones. The target investors were mostly older people (over 50 years old).
Since my 21st article this past week (September 12, 2022), my lens has turned to the younger audience (50 or under) and especially the novice investors.
The top-to-bottom is my base, first I look at: 1) macroeconomic conditions, second examination 2) microeconomic fundamentals and then finally analysis 3) market data on stocks, bonds and cash (where there are some variants are). ).
The current state of investment
A recession is not in the near future in my opinion. The main tool for analyzing business cycles are the composite indicators (leading, coincident, lagging and the inverse lagging which are ahead with a long time lag) and various diffusion indices.
The terminal rate (a classic Swedish economist in the late 19th century, Knut Wicksells or neutral or natural) rate (which we cannot observe directly, so simulate with a small New Keynesian model enhanced by artificial intelligence – AI) is 4.5%. So the worst of inflation (like 1973 or 1980) was probably behind us.
“Knut Wicksell … emphasized the concept of an equilibrium level of interest rate … In his 1898 book Interest and Prices he wrote that “there is a certain level of the average interest rate towards which general prices have no tendency either upwards or downwards move.’… In modern language, this level of interest rate is commonly referred to as the natural rate of interest.”
(Fed Vice Chairman Stanley Fischer’s speech at the 40th annual central bank seminar sponsored by the New York Fed in late 2016).
A bull market (started March 09, 2009) is still with us according to my previous article from September 12, 2022. Currently, the S&P 500 has been moving along the bear market surface established on June 17th ($3636.87, which is not the case). Intraday but close): 1) two weeks minus momentums, 2) one week + M and 3) one – M again last week. When do we have a solid uptrend? Nobody knows.
The investment advice
As a long-term (5 years or more) investor, you can start investing at any time (either an upswing or a downswing or a trendless or a faltering or whatever): it really doesn’t matter.
All that matters is choosing investment products with minimal costs and the best quality, as well as the services of brokers and mutuals. You need to do a thorough research by viewing the right sources.
You are better off riding the smooth and steady bull market that is normal than the sharp drop and volatile bear market that typically lasts around six months. Also, avoid the margin loan, don’t try options (albeit TD Ameritrade ads “Think or Swim”), and don’t initiate short sales, the loss of which is theoretically unlimited. Currently, I only trade three short ETFs defensively (DOG, SH, and PSQ, which are the shorts of the DOW, S&P 500, and QQQ, respectively).
However, as a short-term trader, you can’t jump in the water without patiently testing waves and temperatures or sharks. After going through a long and tricky learning curve, you would start with pencil and paper first and then gradually increase the trade: My current betting limit (1% of my account balance), frequency (as many as possible) and break even (+1% above the cost) are used.
I currently allocate between 30% and 40% (depending on market conditions), but you probably shouldn’t exceed 5% of your total money by 2020 like I did.
A portfolio is not just a group of stocks and bonds, but a portfolio-theoretically sound selection of stocks and bonds that historically show negative correlations to each other. Some ETF portfolios are recommended. I never offer individual shares.
My dozen core ETFs are:
Vanguard Total Stock Market ETF (VTI)
Schwab US Broad Market ETF (SCHB)
Vanguard Total Bond Market ETF (BND)
Schwab US Aggregate Bond ETF (SCHZ)
Vanguard Short-Term Inflation-Protected Securities Index ETF (VTIP)
Schwab US TIPS ETF (SCHP)
Vanguard Total International Stock ETF (VXUS)
Schwab International Equity ETF (SCHF)
Vanguard FTSE Emerging Markets ETF (VWO)
Schwab International Small-Cap Equity ETF (SCHC)
Vanguard Total International Bond ETF (BNDX)
SPDR Bloomberg Barclays International Treasury Bond ETF (BWX)
(Note: All ETFs and individual stocks are free to trade online at Charles Schwab and TD Ameritrade.)
For long-term (minimum 5 years) investors, a dozen ETF templates are illustrated for your convenience:
T.60:40 – VTI (60%) BND (40%)
T.60:40 – VTI (50%) VXUS (10) BND (30%) VTIP (10%)
T.60:40 – VTI (50%) VXUS (5) VWO (5%) BND (30%) VTIP (5%) BNDX (5%)
T.50:50 – VTI (50%) BND (50%)
T.50:50 – VTI (40%) VXUS (10) BND (40%) VTIP (10%)
T.50:50 – VTI (40%) VXUS (5) VWO (5%) BND (40%) VTIP (5%) BNDX (5%)
P.60:40 – SCHB (60%) SCHZ (40%)
S60.40 – SCHB (50%) SCHF (10%) SCHZ (30%) SCHP (10%)
S60.40 – SCHB (50%) SCHF (5%) SCHE (5%) SCHZ (30%) SCHP (5%) BWX (5%)
P.50:50 – SCHB (50%) SCHZ (50%)
S50.50 – SCHB (40%) SCHF (10%) SCHZ (40%) SCHP (10%)
S50.50 – SCHB (40%) SCHF (5%) SCHE (5%) SCHZ (40%) SCHP (5%) BWX (5%)
Note: T: TD Ameritrade and S: Charles Schwab.
Permanent Asset Allocation (‘PAA’) vs. Rebalancing (‘RB’)
I have been committed to PAA for many years:
What are the relative merits of PAA (which I prefer) versus Rebalancing (RB) (that’s advice from Vanguard and others)? As a long-term investor, think very carefully.
First, RB requires good timing, which has to be a challenge. We just don’t know WHETHER an asset class (ie stocks) will top and hold (meaning the top would continue to rise higher) for a while OR NOT.
Second, and more importantly, comparing the current prices of two asset classes can be misleading. Because bond yields are much higher than stock dividends, and some portfolios don’t even reinvest dividends.
Third, PAA offers unintended Dollar Cost Averaging (DCA), which is an excellent systematic investment timing strategy. Younger investors can regularly accumulate (or save) money with small amounts over a longer period of time. PAA gives them DCA as a byproduct, but RB doesn’t.
Fourth, PAA is more tax-advantaged in most non-tax-advantaged (“TDA”) accounts. Because the deferred taxes in TDAs, like IRAs, must eventually be paid, a delicate tax schedule is required for all accounts – taxable or tax-deferred. Especially the older ones (over 60) should consider PAA rather than RB.