Secure Act 2.0 Broadens 529 College Savings Plans

Each of us has a different ability to live with uncertainty (risk) and so our investments will be different:

Remember each of us has different goals and needs, and our asset allocation should fit us and our family.

If you have questions about your asset allocation, or your retirement plan investments, I’d be pleased to assist.

Vanguard mutual funds and ETFs (exchange-traded funds) continue to perform as expected.  I expect each Vanguard fund or ETF, for each ten-year period to be in the top 1/3 before taxes based on low cost, and they ought to be in the top 1/4 (stock funds) after income taxes.

The Vanguard High Yield Corporate Bond fund takes significantly less risk that the average “high yield” (also known as “junk bond”) fund.  The Vanguard fund, which takes less risk, continues to rank highly in the rankings over the last ten-year period. Over the last ten years, the Vanguard fund has captured most of the excess of junk bond returns over good quality bond returns—meeting my expectation.  I continue to believe that, for tax-deferred accounts, this fund is a reasonable, additional diversification and comprises some of my personal bond holdings.

If you have questions about your investment asset allocation, please contact me.

From the World Ahead 2023 edition of The Economist Magazine, released in December, 2022, subtitled “The American Economy is Set for a Downturn, Not a Crisis:”

“Start with the bad news, America is heading for a recession in 2023.  Over the past half-century, whenever inflation has reached an annual pace of more than 5%, it has always taken a recession to wring it out of the economy…The current episode of inflation will be no different.  Only when growth truly goes negative will America be able to contain its rampant price pressures.

A churl would point out that American growth was already negative in the first half of 2022. That technical decline coincided, however, with a remarkably robust labour market such that the boffins at the National Bureau of Economic Research, whose job it is officially to identify recessions, demurred from declaring one.  In the coming year [2023] they will not be so reticent.  As growth softens, the unemployment rate will climb, leaving little doubt that America’s economy is in fact contracting.

The proximate cause of the recession will be the Federal Reserve, which is set to continue tightening monetary policy in 2023.  In September, 2022 the median forecast of Fed officials was that they would raise interest rates to a floor of 4.6% in 2023, up from 3% now [December, 2022].  But inflation will still be frustratingly persistent in the new year, so they will probably go beyond that, taking rates up to about 5%.  Financial markets, already under stress from all the rate rises in 2022, will face fresh worries as indebted companies and spendthrift households struggle to cover their elevated interest costs.

But it will not be all gloom.  There is reason to think that the coming recession will be mild.  Throughout the past year the number of open jobs has far outstripped the number of available workers.  The implication is that even if a growth contraction leads companies to pare back their hiring plans, they are likely to refrain from large scale lay-offs.  The unemployment rate will inch up from the lows of 2022, but it will not rocket up, as has typically been the case in previous recessions.

America has plenty of additional buffers that will help cushion the impact of a downturn.  That is thanks in large part to the long half-life of pandemic era stimulus programmes.  At the end of 2021 state governments were sitting on cash reserves of more than $250 billion, roughly twice as much as in 2019.  Households have about $1.5 trillion in excess savings compared with before covid.  Businesses have also build up solid rainy day funds.  All of these reserves will be whittled down by a recession but they should be sufficient to forestall giant spending cuts, even if growth slows.

The picture of the American economy will change markedly over the course of 2023.  Disinflation will eventually take hold, turning into outright month-on-month deflation when the recession strikes.  That ought to spell the end of the Fed’s rate increase cycle by the middle of the year, with the focus instead shifting to when it might start to loosen policy.  The Fed will be in no haste to make big rate cuts, having fought so hard to rein in prices.  But the combination of a recession and fast-diminishing inflation will head it to trim rates before the end of 2023, in an attempt to ease the downward pressures.

…The bloom may come off the big-spending rose.  Even as growth slows, it will be hard to find the workers needed to deliver big [infrastructure and environmental] projects, which will drive up their costs.  There will also be growing criticism of the government’s ambitious investments as wasteful, especially in semiconductors, as that industry swings from global undersupply to oversupply.

By the end of 2023 the American economy will be climbing out of its mild recession, with inflation in retreat.  Instead the concern will be whether America’s costly plans to re-engineer its industrial landscape, guided heavily by the government, amount to a clever strategy or a hubristic mistake.”