Jonathan Clements's Blog, page 210

Material Difference

A RECENT ARTICLE on HumbleDollar, which detailed the economic and moral shortcomings of commodity producers, reminded me of a conversation I had in 2004. I was in my study reading Security Analysis or watching The Sopranos���it was a little while ago���when I heard a knock at the front door. I opened it to find an earnest but scruffy sandal-wearing young man trying to raise funds for the Sierra Club.

He quickly segued into blaming oil companies for the devastation to Mother Earth. When he paused to take a breath, I mentioned that I just happened to work for Exxon Mobil.

���Sorry to hear that, as you���ll be out of a job soon, when Exxon Mobil goes out of business,��� he said, and then quickly walked away.

While I appreciated his youthful enthusiasm and impetuousness, I didn���t appreciate his lack of manners or his salesmanship. Why couldn���t he focus on all the good that the Sierra Club was doing���saving the bald eagle, arranging hikes in Shenandoah National Park and all its other kumbaya activities���instead of dumping on the way I supported my family?

I also didn���t appreciate his forecasting ability. It���s now almost 20 years later, and Exxon Mobil is doing okay. There have been tough times, but the company is still a going concern.

That brings me to the recent HumbleDollar article written by John Goodell. John laid out economic reasons to avoid commodity producers. Now, avoiding a company based on economic analysis is a mainstay of investing, though I���ve never known anyone who could do it reliably. Making the right call on an entire sector seems even more difficult to pull off, especially one as diverse as the natural resources sector. How can you lump companies in such diverse industries as oil, gypsum, lead and diamonds into one homogeneous rock?

The article also mentioned morality as a reason for not investing in the mining sector. My response: The buying and selling of mining company shares on the secondary market has zero effect on the underlying business. If everyone who owned shares in Hindustan Zinc��or China Molybdenum sold their shares today, the mining conducted in Rajasthan or Xinjiang would continue tomorrow just the same. I can understand not buying newly issued��stock or bonds from Bougainville Copper. But once they start trading on the Australian Securities Exchange, that ore train has left the station.

Also, if you���re upset by the mining conditions in South Africa, West Virginia or Bougainville, then you must be outraged by companies that peddle cancer, cirrhosis, alcoholism, handguns and obesity to teens, the mentally ill and the rest of us. So out goes tobacco, liquor, beer, firearms, and food and beverage. And don���t even get me started on investment banking or cable business news. When it���s all over, what���s left? Beyond Meat?

All that said, the conclusions reached by John and me are the same: Invest in broadly diversified index funds. I recommend John invest in the Schwab Total Stock Market Index Fund (symbol: SWTSX), which has 6.8% of its assets invested in the energy and materials sectors���and then donate 6.8% of his gains to the Sierra Club.

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Super Old

FINANCIAL ADVISORS used to suggest a 20-year planning horizon for retirement. Now, most advisors say to plan for a 30-year retirement. From my own experience, I believe 40 years should be the norm, and 50 years isn���t unreasonable.

If we plan for the longest possible life expectancy, we���ll almost always die with money left over. That���s far better than the alternative���living longer than planned and running out of money.

People who live to 100 are called centenarians. The term supercentenarian describes those who are at least 110. While not common, supercentenarians are becoming less rare.

My grandmother, Hazel Blecha, passed away a month before reaching age 112. She was born in November 1894 and passed away in October 2006, so she lived in three centuries���the 19th, 20th and 21st.

The Gerontology Research Group used to keep a list of verified supercentenarians. Unfortunately, its list is no longer updated regularly. When my grandmother turned 109, we contacted the site and asked if we should start the verification process. We were told to wait. Most people who reach 109 don���t make it to 110.

Nonetheless, we started the verification process a few months before she turned 110. The group wanted documentation of her birth date, her change of name when she married and her current identity.

The county where she was born didn���t have birth records going back to the 1800s. Her father, however, published the local newspaper. When she was born, he made sure there was a birth announcement in the paper. We also had her marriage certificate to verify her name change and her passport to verify her current identity.

The Gerontology Research Group checks this data carefully because some older people exaggerate their age. This is nothing new.

Englishman Tom Parr died in 1635, reportedly at the age of 152, a few weeks after being presented to King Charles I. He was honored by being buried in Westminster Abbey.
Henry Jenkins, another Englishman, died in Bolton-on-Swale in 1670, supposedly at the age of 169. When my brother Kenyon walked��coast-to-coast across England, he went through Bolton-on-Swale and saw Henry Jenkins���s tombstone.
On this side of the pond, P. T. Barnum exhibited Joice Heth during the 1830s. She claimed to be 161 years old and the childhood nanny of George Washington.

The Gerontology Research Group estimates there are 300 to 450 living supercentenarians worldwide, with 60 to 80 of them in the U.S.

My grandparents grew up in Severy, Kansas, a tiny town in the southeastern part of the state. They both graduated from Kansas State University in Manhattan, Kansas. My grandfather spent his entire career at K-State with its agricultural extension service, helping to educate farmers. When he retired, they moved to Deer Trail, a small town in eastern Colorado.

My grandmother worked hard, but never outside the home. In their 70s and 80s, my grandparents had a large garden that supplied our family with seemingly unlimited frozen and canned vegetables. My grandfather frequently played golf in retirement, though he played only nine holes. He also insisted on walking for the exercise it provided. He passed away at age 88.

My grandmother lived on her own until she was 100. She then moved in with my parents. Eventually, she moved to a nursing home. She was mentally competent until her last year. She never smoked or drank and was never overweight. She never took medicine or drugs. She refused to keep even aspirin in her home.

My grandparents lived modestly. Their home during retirement was left to them by my grandmother���s parents. The kitchen had plywood cabinets with plywood doors. Most of us would not want such cabinets today, but they satisfied their needs. They spent money on what they valued, which was travel.

Before the age of convenient transoceanic airplane travel, they went by cruise ship to Australia, Egypt, Greece and many other destinations. They spent several winters in Hawaii during the 1950s. It took them a week to get there���by train from Colorado to the West Coast and then by ship to Hawaii.

Some people hope to run out of money the day they die. By that measure, my grandmother Hazel was a failure. When she passed away at nearly 112, she left a $1 million estate.

Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey���s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles.

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Enjoying the Show

TWO TICKETS TO the Kia Forum: $250. Event parking: $60. One beer and one water: $28. A night with my wife at a Pearl Jam concert: priceless.

A few weeks ago, we attended a concert for the first time in more than two years. It was my 13th Pearl Jam show since becoming a fan 30 years ago. My status as a Pearl Jam follower has not wavered from the first time I heard them in the early 1990s. Now that I am in my mid-40s, I see no better way to spend money than attending the band���s concerts.

What is it about these concerts that makes it worth more than $300 each time? First, there���s the excitement that builds in the months leading up to the show. The anticipation period for this concert was 25 months, thanks to the pandemic, but usually it���s about four months between ticket purchase and the event.

While waiting for the show, I take myself down memory lane by spending time listening to songs from the band���s immense catalog. More important, I connect with old friends to see who will attend upcoming concerts. We trade memories about past shows and exchange texts about the songs we���d like to hear. I get months of enjoyment for the price of admission.

Another aspect of concerts that I appreciate: We live ���in the moment��� every second we���re there. Aside from fielding texts about what our teenage son should eat for his second dinner, we disconnected from the rest of the world. In this age of social media and the 24-hour news cycle, concerts present one of the few times you can avoid distraction for several hours. And since we didn���t have our reading glasses, we couldn���t do much with our phones beyond directing a 14-year-old to a frozen pizza.

The final thrill of a Pearl Jam concert is that it���s a fun place to talk to strangers. Nearly everyone is obsessed with the band and all are happy to be there. In the hours before the show, fans chat about their favorite albums and the number of concerts they���ve attended, and they speculate about the upcoming set list. It���s refreshing to talk openly with others���no matter their age, race or gender���knowing you have a shared passion.

While we won���t be seeing any more shows during the 2022 tour, we look forward to seeing Pearl Jam the next time they���re in Los Angeles. Let���s just hope we don���t have another pandemic-related delay.

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Big League Lessons

IT WAS JUNE 3, 2006, and I was in the starting lineup for the New York Yankees. We were in Baltimore, playing against the Orioles at Camden Yards. I went 1-for-4 in my major league debut.

A week later, I had the experience of a lifetime. June 10 was my first start at Yankee Stadium. It was a nationally broadcast Fox Saturday day game against the Oakland A’s. I hit my first major league home run. But what I remember most was the top of the first inning. An audience of 15,000 Yankees fans in the right-field bleachers conduct a roll call where they name each Yankee player. It’s truly a humbling experience to hear your name roared from the stands.

I played 2006 and part of the 2007 seasons for the Yankees before being sent to the Oakland A’s. If you’ve seen the movie Moneyball, you know how often players get traded. The A’s designated me for assignment after several games and the Pittsburgh Pirates picked up my contract. After I sustained a wrist injury that required surgery, the Pirates let me go.

To get back into shape for a return to the majors, I rehabbed with the Newark Bears of the independent leagues. Unfortunately, I never made it back to the majors. But while I was in Newark, I became infatuated with stocks and the financial markets. Maybe it had something to do with the way I was getting traded myself.

I watched CNBC as if it were a religion. One day, while preparing for a game with the Newark Bears, I saw on TV the owner of the Stanford Financial Group being ushered out of his building in handcuffs. My first thought was “uh-oh.”

You see, I’d saved a majority of the money I made in baseball. I’d invested it with Stanford Financial Group, which was a well-known firm in Texas, where I’m from. What was going on? The firm’s chairman, Allen Stanford, was charged with a “massive Ponzi scheme” by the Securities and Exchange Commission. He was convicted of spending money that he told clients was invested in certificates of deposit in the Caribbean nation of Antigua.

Fortunately, my money wasn’t mixed up with the Antiguan CDs. The state administrator, who came in to investigate, did freeze all client accounts, however. This meant I couldn’t withdraw my money, and I could only sell securities within my account and not buy.

When my funds were released after six months, it was during one of the greatest declines in stock market history. I vowed to never let this kind of thing happen to me again. From then on, I would invest my money myself. I needed to learn everything I could about the financial markets.

I was already working my way toward a degree in finance from the University of Texas at Arlington. I completed that degree and went on to earn my Certified Financial Planner designation during the pandemic of 2020. I also hold a Retirement Income Certified Professional designation from the American College.

Today, I’ve been in the financial industry for 10 years. I manage and operate 9Innings Capital Group LLC, a fee-based financial planning firm that administers $33 million in assets. Most of our clients are business professionals who have built or are creating their own firms.

I tell clients my life story because it’s taught me important lessons. The first is to be careful with whom you associate. Some people call themselves financial planners but they only care about your portfolio or they actually work for an insurance company.

Baseball also taught me a lot about life, including how to handle the ups and downs, and about doing the proper due diligence. When playing in the major leagues, you never went into a game without having information on the team you were playing. For instance, you’d make sure you knew what the opposing pitcher would likely throw depending on the count and the game situation.

In the same way, education and due diligence are paramount in financial planning. Baseball taught me that hard work may win the battle, but being ready in all situations wins the war. True comprehensive financial planning means building a unique plan for each individual, and then providing the products and services to put that plan into action. To do that properly, a financial advisor needs to be aligned with the clients’ goals. That way, everybody wins.

Kevin Thompson is a former Major League Baseball player and now CEO of 9Innings Capital Group LLC . He is a Certified Financial Planner ® and Retirement Income Certified Professional ® . Kevin graduated from the University of Texas at Arlington in 2011 with a degree in finance.

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Spend With a Smile

AS I WAS PREPARING to retire last year, I spoke with a number of friends who were also about to leave the workforce. One of the main topics of discussion: How could we best arrange a stream of income for the next three decades or so?

Among my friends, a common refrain was that they planned to spend more in their first decade of retirement. They thought their spending would fall during the second decade, because they figured they’d grow less mobile.

This fits the spending pattern of many retired Americans. Just Google “retirement spending smile.” It has nothing to do with your teeth. Rather, it’s the notion that recent retirees spend more on travel, eating out and other discretionary items. As they age, they cut back on some of these discretionary items. At some point, however, health care costs start rising, causing spending to increase again.

I don’t doubt the data—this is what many retirees experience. But I was concerned about cause and effect. Did retirees decrease their spending because they were running out of funds or were concerned that they might? It seemed intuitive to me that, given a choice, most people would prefer to continue spending at a higher rate.

Lo and behold, some smart academics at Boston College’s Center for Retirement Research decided to look into the retirement smile. Anqi Chen and Alicia H. Munnell analyzed almost 20 years of spending by retired Americans.

What did they find? Yes, the average retiree’s spending decreases about 0.7% to 0.8% annually. Over 20 years, the compound impact would lower retiree spending by perhaps 13%. But among retirees who were wealthier and healthy, spending declined at less than half that rate, just 0.3% per year. After 20 years, they’d spend about 6% less.

This suggests that people prefer to keep their spending more constant. That may not be possible if they don’t have sufficient retirement funds. Also, if they’re in ill-health, they may not feel like spending on discretionary items or, alternatively, they may have deliberately spent more when their health was better and are cutting back now that they’re less healthy.

I’m retired now. It’s too late to add to our retirement funds. But I am focused on eating well and exercising—so I’m healthy enough to spend what we’ve socked away.

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Seven Figures

A FEW WEEKS AGO, my net worth hit the $1 million mark. It was a milestone I���d been looking forward to for years.

Almost a decade ago, I performed my first net worth calculation. Back then, I was recently divorced and living on my own for the first time in my life. My only assets were three retirement accounts and a seven-year-old car, plus half the proceeds from the sale of a house my ex and I had owned.

I calculated my net worth because I wanted a starting point for evaluating my financial health. My bottom line back then was $230,544. I knew conventional financial wisdom preached that folks should have at least $1 million saved before they retire. Having a net worth of less than one-quarter of that amount���at age 45���served as a reality check. I made the decision to dedicate the next several years to shoring up my finances.

That involved setting goals���including the goal of eventually hitting a net worth of $1 million. I had no idea if or when I���d ever achieve that level of financial security. How, in less than a decade, was I able to get there?

Saving voraciously. Once I���d found my financial feet following the divorce, I was able to consistently save and invest a huge percentage of my paycheck over a four-year stretch. Starting in 2014, I began steadily increasing the amount of money I contributed to my retirement accounts. Initially, I set aside $500 each month. But within a year, I���d increased my contributions to $2,000 a month, which meant I was saving some 40% of my pretax income. I continued to contribute between $1,000 and $2,000 every month through 2018.

Winning at real estate. In late 2018, I purchased a modest-sized home in a popular Portland, Oregon, neighborhood for $375,000. The money I had been contributing to my retirement accounts was now funneled into making mortgage payments. In March 2022, I sold the home for an astonishing $600,000, thanks to the booming real-estate market of the past two years.

Getting married. In 2018, I remarried. Since my husband and I each entered into the marriage with our own set of assets, we now hold a mixture of joint and individual accounts. For the purposes of my own net worth, I only include those assets we own jointly. This includes a home in Arizona we bought together in 2019, as well as the two vehicles we own.

Where do I stand now? My retirement account balance peaked in January at $477,000, but it���s since fallen back to $436,000.

In March, I deposited a $278,000 check. That check was the proceeds from the Portland home���s sale, after deducting closing costs and the sum owed on the mortgage. Meanwhile, the value of our Arizona home has increased substantially since we purchased it in 2019. We now have approximately $200,000 in home equity.

The last component of my net worth equation is my state pension. Although my pension makes up a relatively small percent of my overall net worth���about 5%���I hadn���t previously included it in my net worth calculation. Until I turned 55, the only value it held would have been as a survivor���s benefit for my beneficiary if I���d passed away. Now that I���ve reached the minimum eligibility age for drawing benefits, I feel comfortable including it as part of my overall financial worth.

All that, plus a few other assets such as our two cars, gets me to seven figures. But arguably, my net worth is even larger. How come? I haven���t included the value of my future Social Security benefit. To buy a government-guaranteed, inflation-adjusted stream of income like that would likely cost a hefty six-figure sum.

Kristine Hayes retires this month from��her job as departmental manager at a small, liberal arts college. She��enjoys competitive pistol shooting and hanging out with her husband and their dogs. Check out Kristine's earlier articles.

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Stay Positive

AMONG THE AREAS of law that have made me miserable over 16 years of practice, it���s the adversarial roles that have made me most miserable. My experience in labor and employment law has been particularly difficult because the interaction with opposing counsel is usually contentious, each side compelled to zealously advocate for their position.

Almost any type of litigation is a zero-sum game. One side wins, the other loses. Because the outcome is never guaranteed, those involved often engage in cut-throat, zero-sum behavior.

I���ve slowly come to realize that the financial world has a similar dynamic. Short-term trading usually delivers zero-sum outcomes, while longer-term investing offers positive-sum results. The game that investors choose to play determines the outcome they receive.

In a zero-sum game, rational actors seeking the greatest gain for themselves will necessarily do so at the expense of other actors. Trading amounts to a zero-sum game. Buyers hope to get a better deal at the expense of sellers, and vice versa.

By contrast, in positive-sum games, the overall pie is growing, so��there are more spoils for everyone to share. Positive-sum games can be win-win situations. Investing for the long term in a broad market index fund, and thereby avoiding the risks inherent in individual stocks, is a positive-sum game because markets move up over time���and all investors can potentially win.

Moreover, the longer investors hold a diverse basket of stocks, the greater the likelihood that the engine of capitalism will produce a happy outcome. An added bonus: Investors can avoid the nasty ���winner takes all��� mentality that many short-term traders consciously or subconsciously have. For my own mental health, I prefer to play positive-sum games���whether it���s in my professional life or when investing.

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Under the Radar

RESEARCH SHOWS HOW subtle sales pitches, called nudges, can influence our buying. Think of tricks like putting the more expensive potato chips on eye-level grocery-store shelves. Over time, such nudges create spending habits. Those habits become ingrained, nonthinking ways of dealing with money.

A collection of such poor habits begun in childhood can result in a hard-to-alter lifestyle of poor saving and foolish spending. Even worse, nudging sends a stealth message, especially to children, that your worth isn���t so much who you are or even what you do, but what you have.

Today���s most effective pitches are ���under the radar,��� a marketing term that means they���re so subtle the consumer may not be consciously aware of them. Think product placement in a movie. It can work without us even noticing.

Over the past 30 years, the primary avenue for messaging has evolved from cable channels, to streaming services, to today���s popular social media and internet channels like YouTube. Social media and internet salespeople are now disguised as ���influencers.���

These are media personalities, like Ryan Kaji, whom kids and young adults enjoy watching for entertainment. What viewers don���t realize is how often the influencer is selling. The casual off-hand mention of a product���which is actually scripted���or having guests wear a promoted brand are among the under-the-radar techniques that are used. Like children, adults can also be influenced, including their financial��decisions.

Psychologists have recently identified the extra nudge of what they call a parasocial��relationship. This is when a fan feels a bond born out of affection for a celebrity.��The celebrity isn���t aware of that particular fan, so the relationship is one-way. But the viewer still feels an affinity, connection or even ���friendship��� with the celebrity that makes him or her open to consumption suggestions. Think of ���Swifties,��� Taylor Swift's ardent followers.��The celebrity expresses seemingly earnest appreciation for fan support���along with a nudge that fans should show that support through more consumption. Scripted authenticity is powerful.

The result is that young consumers���younger millennials plus the Gen Z generation born since 1997���are having lifelong financial habits and spending triggers molded without them even being aware of it. Marketers know it works better that way.

Researchers are now figuring out the tools of persuasion that can turn consumers into habitual spenders, thereby grooming them to serve the industries that feed off their dollars. It���s not all doom and gloom, however. There are countermeasures. For adults, being aware is the best defense.

For kids, many schools are initiating media and financial literacy programs. The best guardian of your children, however, is you. You can be the primary influencer in your children���s development, helping them to develop sound financial habits and sensible spending judgments.

You can turn back the one-sided parasocial influencers with actual two-way conversations. Watch what your children watch���together. Make it a family event. Don���t criticize. Instead, ask your children what they like about this person or that show, and why.

You can also introduce them to the idea that people are trying to secretly nudge them in one direction or another. Can your children figure out the trick? Tots to teens love to say, ���I see what you���re doing.��� Harness that. There are also media literacy��organizations and personal finance education websites that will help you, along with articles��on HumbleDollar.

Some parents say they don���t have the time or energy to constantly monitor the messaging to their child, or that they have more important priorities. Make no mistake: The marketers are counting on that.

Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He's also authored several educational children's books. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.

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Close but No Cigar

BEAR MARKET territory. On Friday, that phrase was all over the ���financial pornography��� channel, as commentator Carl Richards labels it. During trading, the S&P 500 finally dropped 20% from its early January all-time closing high. In truth, that number alone doesn���t mean much. Consider that stocks in both 2011 and late 2018 briefly encroached on 20% before bouncing back in a big way.

The media was ready last week to go with all the flashing banners and alerts. But sure enough, stocks rallied hard before Friday���s closing bell, leaving the S&P less than 19% off its all-time high���meaning we aren���t yet ���officially��� in a bear market because such things are measured based on closing prices. Making the 20% figure even more meaningless: Much of the market has already suffered a much steeper decline. The big Nasdaq stocks are down almost 30% from their peak last November and small-cap shares are back where they traded in summer 2018.

Amid what might have felt like an awful week for the stock market, diversified investors fared fine. If you simply owned a target-date��fund, gains in the bond market and among foreign stocks made for a boring week. With little mention from the media, bonds are back to cushioning stock volatility���at least for now.

Another green shoot: We���re seeing outperformance by small-cap��stocks. Normally seen as higher risk than large-cap shares, smaller companies held up better last week when major consumer��defensive companies reported poor earnings. Walmart and Target saw huge single-day declines in response to profit margin pressures. It was a rude awakening for those who had sought safety in these household names.

Last week also offered a reminder not to get too cute with your portfolio. Who���d have thought that the sort of badly pummeled stocks owned by Cathie Wood���s ARK Innovation ETF would be the place to ride out last week���s market turmoil? That kind of price action might signal we���re closer to the end of this market slide than many pessimistic TV prognosticators think.

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The Taylor Rule

IF YOU���VE TRIED TO buy a car or a home recently���or have even just been to the grocery store���I���m sure you���re aware how much prices have jumped over the past year. John Taylor certainly has an opinion on the topic.




Taylor is an economics professor at Stanford University. While not a household name, he���s a leader in economic circles. Before Jerome Powell was appointed Federal Reserve chair in 2018, Taylor was a candidate for that spot.




According to one��analysis, Taylor���s name is the one most frequently referenced in Fed policymakers��� meetings. That���s because he���s the creator of what���s known as the Taylor rule. Despite being a frequent critic of Fed policy, he and his rule are well respected, so it���s worth taking a closer look.




The purpose of Taylor���s rule is to provide a framework for interest rates���the federal funds rate, specifically. That���s the interest rate the Fed controls directly. It���s often referred to as the ���benchmark rate��� and is important because all other interest rates���from mortgages and car loans to savings account rates and bond yields���are set in relation to it. When people talk about the Fed raising or lowering interest rates, this is the rate they���re referring to. It���s enormously important.




For simplicity, I���ll describe the Taylor rule in words. If you want to see the formula itself, you can find it on the Federal Reserve Bank of Atlanta���s��website. In general terms, this is how it works: It assumes, as a starting point, that inflation and gross domestic product growth should both be about 2% in normal times. Then it dictates that the federal funds rate should be adjusted upward if the economy is running above those targets or downward if below. These inputs are referred to as the ���inflation gap��� and the ���output gap.���




The formula���s underlying logic is based on the Fed���s official��mandate: to maintain ���maximum employment, stable prices, and moderate long-term interest rates.���




This, in general, is what the Fed always does. It raises rates when the economy is running too hot, and it lowers them when things are lagging. But Taylor���s framework is different because it offers a formulaic approach to setting rates. That���s in contrast to the Fed���s current process, which is committee-driven.




In Taylor���s view, a rule-driven approach would be preferable for two reasons. First, it would keep Fed policymakers disciplined by removing the subjective element from their decision making. Second, a formulaic approach would offer the general public a better idea of where rates are headed. That���s important because, in policymaking, a key goal is to avoid surprises that might cause panic.




In fairness, the Fed does try to telegraph its thinking and its intentions. In press releases and in the chair���s Congressional testimony, the Fed provides ���forward guidance��� to communicate its expectations for the economy and for interest rates. Forward guidance refers to the carefully scripted phrases used by Fed officials, such as ���a balanced approach��� and ���considerable time.��� The Fed���s forward guidance is so carefully watched that news outlets literally parse every word. Here���s an��example.




The Fed also issues guidance in quantitative form. At each meeting, the Fed���s rate-setting committee polls its members, asking where they see the benchmark rate headed. It then publishes the results in a document called the Summary of Economic Projections.




Taken together, these communications serve a key purpose: They allow the market to adjust gradually to future policy changes. An example is playing out in real-time right now. So far this year, the Fed has raised its rate by a total of three-quarters of a percentage point. The rate on many Treasury bonds, however, has increased disproportionately more. This might seem inconsistent���until you look at the forward guidance.




In its��press release, the committee previewed ���ongoing increases.��� And its��most recent��Summary of Economic Projections specifically pointed to an increase of another one percentage point in the back half of this year. In short, the Fed does a reasonable job communicating its thinking to help the market adjust gradually.




For that reason, Taylor is less concerned with the Fed���s communications. He is much more concerned with its underlying decision-making process. On too many occasions, he argues, the Fed has left rates at unnecessarily low levels for years at a time. This has had the effect of inflating more than one asset bubble���in housing and in technology stocks, among others.




Most recently, Taylor says, the Fed was too complacent about rising inflation, repeatedly calling it ���transitory.��� If it had been following a more rules-based approach, he argues, rates would have risen much earlier. Instead, the Fed had to play catch-up this year when it finally��acknowledged��that the heightened inflation was not transitory and was, in fact, getting worse. As Taylor put it��recently, ���They are strikingly behind.���






Fed officials, though, are quick to push back against Taylor���s formulaic prescription. Recently, retired Federal Reserve Bank of Boston President Eric Rosengren��cited��2007 as an example. At that time, the Taylor rule wouldn���t have registered a problem, but Fed officials were able to detect other signs pointing to a crisis, allowing them to respond more quickly.




Former Fed Chair Ben Bernanke has made similar arguments. In a��2015 paper, written after his term ended, Bernanke argued that economic policymaking is far too complex to be delegated to a simple formula.




Among the complications: While the inflation gap is straightforward to measure, Bernanke points out that there are several ways to measure the output gap, each of which would yield a different number. In short, Bernanke says, it wouldn���t make sense to rely rigidly on a formula when at least one of its inputs is subjective.




There are other issues with the Taylor rule. In addition to the challenge described above, there���s the question of how to weight the two factors in the formula. In Taylor���s original formula, he weighted the inflation and output gaps equally. But arguments could be made for weighting them differently. After all, unemployment and inflation are both scourges. It���s debatable which is worse.




Who���s right in this debate? To be sure, Taylor makes a valid argument. Many agree that the Fed, going back at least to the 1990s, has been too permissive. Rates were held near zero well after the economy had regained its footing after the 2000 downturn. And it held rates near zero for years after the 2008 financial crisis���waiting until the very end of 2015 to increase them.




Though Bernanke strenuously disagrees with Taylor���s criticism, he also validates it by taking the time to write a rebuttal. At the same time, Bernanke and fellow policymakers have a point when they argue that a formula���any formula���would be necessarily imperfect because the inputs are subjective. Indeed, on the Fed���s��website, it describes several alternative formulas, each of which has its own reasonable basis. Also, as Eric Rosengren noted, formulas can���t see around corners.




As an individual investor, what should you conclude from this debate? In my view, the Fed���s Summary of Economic Projections says it all. It���s a dry document, but if you read between the lines, it tells us a lot.




For starters, it includes not just the average opinion of committee members but also the range of views. In addition, each update includes the committee���s prior view, making it easy to see how its forecasts have changed over time.




The upshot: Just as the stock market is unpredictable, so too is government policy. As this document reveals, even policymakers themselves���probably the most well-informed economic observers anywhere���regularly disagree with one another and regularly change their views.




That���s why an investor���s best bet, in my view, is to always maintain a balanced portfolio. At any given time, some investment will always feel out of step with current trends, and yet that itself may be the best litmus test of a well-diversified portfolio. If there���s always at least something that doesn���t feel quite right, then your portfolio might indeed be just right.

Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.

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