Before the election, I saw a headline that a Democrat win would cause stock prices to plummet:

On the evening of November 3, S&P 500 futures markets were dropping sharply as the votes were being counted, and it looked like this might be right.

But then something changed, and the markets turned around and went higher.

By the close of trading on November 4, the headlines were glowing:

Then something else changed, and on November 5 the market reversed course.

People like to get very excited about drawing direct lines from election outcomes to investment results, but it is never that easy.

As I’ve written many times, when Trump got elected in 2016, people assumed energy companies would benefit. But by the end of his term, COVID happened, oil was trading at negative dollars per barrel, and energy companies were killed. When Biden was elected in 2020, people assumed energy companies would keep struggling under the new regime, but then Russia invaded Ukraine, oil prices spiked, and energy companies did incredibly well.

The world is a complicated place.

Sometimes prices move because of elections; sometimes they move because the CEO of the world’s largest company is accused of having an affair with a foreign spy.

None of us have any idea what direct impact the election outcome will have on the markets. But history tells us that it isn’t the end of the world. As this last chart shows, on the seven previous occasions since 1954 when the Dems swept the House and Senate under a GOP President, the one-year return has been positive.

Of course, we don’t know what the future holds, and the most impactful events will inevitably be the ones nobody expects. But that is nothing new. We have never known, and we will never know. That is why financial planning requires embracing uncertainty and building a framework that doesn’t need to change based on scary headlines or which party wins an election.

Personal Note:

Last week we had our client appreciation event at Eddie V’s. I had such a good time that I forgot to take pictures. The only evidence from the evening is this one Crystal took of Austin and me with our fathers-in-law.

Thank you so much to everyone who came out.

In completely unrelated news, my middle child turned 12 last week.

We took him out for crab legs to celebrate. He’ll tell you it is his favorite, but I suspect what he really likes is that his older brother is allergic and will get hives if he tries stealing any of his food.

Weekly Notes

October 2 — Robot Hedge Fund Strategies For All: When Robinhood pitched AI-powered, hedge-fund-style products to retail investors, it was a good reminder that more frequent trading tends to hurt performance and that “sophisticated” products rarely end well for everyday investors.

October 9 — When Tax-Free Munis Aren’t Tax-Free: The note explains the de minimis rule on discounted municipal bonds and why a bond’s quoted yield can be misleading once the resulting tax bill is included.

October 16 — Which Risks Are You Willing to Be Wrong About?: Using the story of his grandparents’ CD strategy, the note shows that retirement planning is mostly about choosing which risks to take, and why the best plan is one that can bend when the world surprises us.

October 23 — AI Makes Us Better at Our Jobs: The note shows how AI tools now review estate documents in minutes, and why Jevons Paradox suggests that greater efficiency may increase, rather than reduce, demand for estate attorneys.

October 30 — Predicting the Future: Five charts show why the November midterm elections shouldn’t change how you invest, from historical post-midterm returns to valuations that don’t look like a bubble.

Media Contributions

October 14 — The Average 50-Something Is Worth $1.5 Million. Most Have Far Less (USA TODAY): Jonathan Swanburg, CFP®, is quoted on how milestones like starting a family and buying a home have shifted later in life, and on why net worth peaks in the 60s before retirees start to spend down in their 70s.

Idea Worth Repeating

“Retirement planning is mostly about figuring out which risks you are willing to take.” – Jonathan Swanburg, Which Risks Are You Willing to Be Wrong About?

Over the last few weeks, some strange things have happened in the stock market.

Google was down more than 30% from its highs after dropping 12% in a single day. Intel was down 54%. Netflix lost more than half its value. Coinbase and Oracle were down around 60%. Nike was down 79% from its all-time high. Chipotle was down 55%. Some semiconductor stocks expected to power the AI revolution fell 30% to 50%.

If all you saw were these headlines, you would assume the stock market is falling apart.

And Yet

The S&P 500 is up almost 12% this year.

Two-thirds of the stocks in the index are up. Nearly half are up 10% or more. The average stock has risen about 15%.

It’s hard to believe all these things can be true at the same time. But they are.

A genuine bloodbath can happen in one area, while the market as a whole has a perfectly good year.

None of this means the broad market cannot fall from here. It can, and someday it will. But these numbers remind us that companies and markets can yield very different results, and diversification is important, even though it means you will inevitably own some things you wish you hadn’t.

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Personal Notes:

Last weekend was Halloween, and there was no unifying theme this year. My daughter was a pink ghost, one of my sons was some type of basketball enthusiast, and the other was a scary inflatable clown.

The days of my family wearing matching costumes seem to be over.

As often as I say I can't predict the future, most clients still want to know what I think will happen. So here it is:

No matter who wins the midterm elections on November 3rd, your investments will probably be okay.

Here are a few charts to make the case:

1. The S&P 500 has been higher from every midterm election to the next June since 1950. The average return is over 15%.

Streaks eventually end, and markets can fall for reasons entirely unrelated to election outcomes. But nothing in the recent historical record suggests midterm elections hurt the stock market.

2. The Fourth Quarter Returns Have Been Historically Strong In Midterm Years

Building on the first point, 4th-quarter (October through December) returns in midterm election years have historically been the highest of any quarter in the four-year election cycle.

3. But What If I’m Wrong & The Market Pulls Back?

Even if the stock market goes down after the midterms, I suspect things will still work out for those who don’t panic. Stock declines, even large, scary declines, happen all the time. Over the last few years, we’ve had surprising inflation, wars, and tariff announcements, and the secret to navigating it all has been to ignore it rather than try to predict it.

4. This Doesn’t Feel Like a Bubble

The green diamonds in this chart show the 10-year average price-to-earnings ratio for different S&P 500 sectors. Many of today’s hottest sectors, like tech and energy, trade below those averages, while the S&P 500 as a whole is right in line. These numbers aren’t indicative of arbitrarily high valuations.

5. Bonus Chart – Nvidia Doesn’t Look Like a Bubble Either

With all the talk of an AI bubble, Nvidia is now the world’s largest company and generates income well above the next-largest company, Apple. Future earnings may collapse, and valuations may plummet as a result, but nothing about this chart reminds me of the dot-com era.

Personal Note:

Last weekend we attended my sister-in-law’s Victorian Gothic-themed party, so this look is now doing double duty as my Halloween costume.

The terrible black wig is a nice reminder that I’m probably better off without hair.

AI hasn’t replaced humans, but it has made us more efficient.

As a financial planner, I think the area of estate planning is a good example. In the past, clients would send us their estate documents, and we’d read through them, take notes, and map everything by hand. It was tedious, and then we’d send the client back to an estate attorney, who would repeat the same process before making changes.

Today we upload a client’s wills, trusts, powers of attorney, and medical directives into our Wealth.com system, and in a minute or two it:

• Explains in plain English how the documents work together

• Shows who is responsible for what (executor, trustee, agents, successors)

• Maps where assets go with a flowchart

• Flags gaps, conflicts, and outdated provisions for review

• Proposes solutions and maps how those changes would impact the asset flows and taxes

• And if a client doesn’t have estate docs, the tool can help them create what they need.

Sometimes it all feels like magic.

But Isn’t This Bad for Estate Attorneys?

Probably not.

This is Jevons Paradox in action: when a resource becomes more efficient, total use often rises rather than falls. As car engines became more fuel-efficient, people commuted farther, took more road trips, bought bigger vehicles, and used more fuel.

I suspect the same will happen with estate attorneys.

As more people create free estate plans, many will discover their situation is complex and want an estate attorney to make sure everything is done correctly. When that happens, demand for estate attorneys, armed with their own specialized AI and the ability to understand the nuances of the output as they apply to the client’s situation, should increase.

Of course, there is a chance I’m completely naïve. Maybe the old rules don’t hold in the age of AI, and maybe humans will only want to take their guidance from robots. But for now, I’m embracing the technology, and I think the future will be very cool.

Disclaimer:

• I attended law school and passed the Texas bar, but I’m a non-practicing attorney. Nothing I say is legal advice.

• If you’re a client and want us to review your estate plan (and we haven’t discussed this already), send over your documents or reach out. It’s included in our planning process.

Personal Note:

Not much happened this week outside of the office, so here are a few more pictures from my mom’s 80th birthday party.

Before my grandfather died in the early 1980s, he told my grandmother to invest 100% of their savings in short-term CDs, and she could live off the cash flow for the rest of her life. At the time, interest rates were double digits, the stock market was terrible, and the strategy seemed sound.

So that is what she did.

Year after year, she rolled her cash from one CD into the next, but as rates fell, so did her income. She never ran out of money. The strategy worked. But when my grandmother died in 2012, interest rates had fallen to zero and so had her income.

My grandfather’s strategy was built to protect against the risks he knew best.

• Default risk - He had seen enough corporations go bankrupt to realize their bonds weren’t safe. FDIC insurance was a must-have.

• Stock market risk - He was born before the Great Depression and had recently experienced the decade of the 70s, when large-cap stocks had real returns of roughly -1.4% / year. He fully appreciated the risks inherent in equities and saw no reason for my grandmother to deal with them.

• Inflation risk - In 1970, inflation was roughly 6%. By 1974, it had climbed to 12%, and by the early 1980s, it was nearly 20%. He’d seen enough to know that long-term bonds were dangerous. By staying short-term, he was betting her income would keep pace with inflation.

It was a good plan, but I don’t think he could have imagined a world where interest rates fell to zero.1

I mention this because we’ll all face similarly tough choices.2 For example, this chart shows that today’s 10-year Treasury is more attractive in real terms than it has been in twenty years.

Some investors will look at this and decide the stock market has done well for them and that they don't need to do anything differently. Others will see this as an opportunity to lock in a fixed income for the rest of their lives.

There is no single right answer, and what is right for one person may be completely wrong for another. Retirement planning is mostly about figuring out which risks you are willing to take.

My grandfather got the risks he knew about right. What he couldn’t do was plan for the one he’d never seen. None of us can either, which is why the goal isn’t a perfect plan, but one that can bend when the world surprises us.

Personal Note:

My kids had the week off school for fall break. We used the opportunity to fly to Florida and throw my mom a surprise 80th birthday party.

It was a complete success.

Two weeks ago, I mentioned that tax-free municipal bonds were more attractive now than they have been in a long time (See: Tax-Free Munis: A Great Deal for Some, Not Right for Others.

But what I forgot to mention then is that, in today’s market, not every tax-free muni bond is actually tax-free.

The De Minimis Tax on Discounted Munis

If you buy a tax-free muni bond at a market discount less than 0.25% for each full year from the time of purchase to maturity, it isn’t a problem.

For example, buy a 10-year bond at 97.5 (100 – [0.25 × 10 years]), and you are good to go. Everything about the purchase is tax-free.

However, once you exceed that discount, all the gain becomes taxable at ordinary income rates. For example, if you bought this same bond above for 97, you would have to pay ordinary income tax on the eventual 3% gain.

Today, because rates have risen so much, many long-term bonds issued a few years ago at 100 now trade at 60 or 70 cents on the dollar. So, to compare bonds, you can’t just look at the listed yield.

I had Claude create this chart using two hypothetical tax-free muni bonds as an example:

Bond A is a 15-year bond with a 2% coupon, a price of 61, and a quoted yield of 6%. Bond B is a 15-year bond with a 4% coupon, a price of 85, and a quoted yield of 5.5%.

If you were investing based solely on the highest quoted yield, you would choose Bond A.

However, because of the de minimis tax, Bond A will create a tax bill on the 39 points of gain. Bond B will only create a tax bill on the 15 points of gain.

The chart above shows how this adjustment impacts the investment decision based on the investors’ tax rate. Bond B has a higher after-tax yield for the buyer in the highest federal tax bracket and is likely the better investment, all else equal.

Investors in a tax bracket below 31% are better off with Bond A.

The After-Tax Return Is the Only Number That Matters

This note is probably so far in the technical weeds that it is only interesting to me, but if you are still reading, use it as a reminder that, when it comes to tax planning and your investments, all the details matter.

Other Muni Taxes

Even when all the income on a muni portfolio is tax-free, the amount received gets added back to your income for calculating the tax on your Social Security benefits and setting your Medicare premiums. So if you're trying to use muni income to manage either number, just know it won’t work.

Personal note:

Today my daughter turns 9. Her party was last weekend at an arcade consisting entirely of claw machines.

She is the best.

On Tuesday, Yahoo posted the headline:

Inside the article, it says:

“The product array is Robinhood’s latest push to give retail investors increasingly sophisticated products “once reserved for hedge funds, big banks, and quant firms.”

It makes sense for Robinhood to roll this out. They make money when people trade more frequently, and trading more frequently is the kind of thing AI agents will be very good at. However, that doesn’t mean it’s good for investors.

1. Decades of data show that the more frequently retail traders buy and sell, the worse they perform.

2. When you see a firm marketing “sophisticated products” to retail investors, it rarely ends well.

Take this CNBC headline from March 2024, describing the newly created Opportunistic Trader ETF:

“[The portfolio manager] and others are betting that smaller investors will happily pay to gain access to sophisticated strategies that had previously been available to only the ultra-wealthy.”

Retail investors getting access to sophisticated strategies sounds like a good thing until you fast-forward two years and realize investors in the fund have lost more than 98%.

This isn’t to say AI agents are bad.

I have been using the new Muse agent in my personal life, and I love it. It automatically updates my family calendar based on emails I get from the kids’ teachers, and it successfully fought a rental car company that tried to overcharge my wife by $80.

But give it the impossible task of making money by churning a trading account, and the results may vary.

Personal Note:

My son told me we should try using sea urchin lures to catch bass. I told him I didn’t think it would work.

But he immediately caught a fish, so I was wrong, and we now fish my neighborhood ponds with plastic sea urchins.

Weekly Notes

September 4 — Sequence of Return Risk: Why Order Matters More Than Averages: The order of gains and losses doesn’t matter while you’re saving, but it can make or break a portfolio once withdrawals begin, which is why an emergency reserve and a flexible spending plan are worth having.

September 11 — Nobody Knows Anything: Starting from a scary AI headline, the note shows how often experts have missed the mark, from Hollywood to McKinsey to the Fed, and why investors should plan around uncertainty rather than predictions.

September 18 — Confident, Divided, and Probably Wrong: Drawing on our client seminar, the piece uses a costly election bet and a record partisan gap in consumer confidence to show that neither predictions nor feelings tell us what markets will do next.

September 25 — Tax-Free Munis: A Great Deal for Some, Not Right for Others: Using tax-equivalent yield, the note explains why municipal bonds look especially attractive in the top bracket and why investors in lower brackets need to run the numbers first.

Media Contributions

September 13 — Retirees spent their lives saving. Now they’re afraid to spend (USA TODAY): Jonathan Swanburg, CFP®, explains why retirees used to spending a paycheck find it stressful to spend their savings, and why a big expense like a costly trip can feel harder to justify once that paycheck is gone.

Idea Worth Repeating

“Neither your predictions nor your feelings tell you anything about what the markets will do next.” – Jonathan Swanburg, Confident, Divided, and Probably Wrong

Seminar Recap

On September 17, we hosted a client seminar at our office with three parts: a market recap, a look at why humans are wired to be terrible investors, and a discussion of how politics, including the upcoming midterms, can affect our decision-making. If you couldn’t make it, you can view the full slides here.

This week I’ll keep it short and offer two reminders about tax-free municipal bonds:

1. If you are in the highest tax bracket, tax-free muni bonds look better today than they have in a long time.

2. If you aren’t in the highest tax bracket, you need to do some math to understand whether they still make sense.

Calculating Tax-Equivalent Yield

Here is a chart from Tuesday showing the Treasury rates compared to the generic AA-rated municipal bond curve. TEY in the right column stands for tax-equivalent yield, and the number tells us the annual return you would need to receive on a taxable bond to get the same result at today’s highest federal tax rate (37% + a 3.8% ACA surtax, for a total of 40.8%).

If you were considering bonds or CDs in your taxable account, and you are in this highest tax bracket, muni bonds are very much worth a look.

But Remember: Most Retirees Aren’t in the Highest Tax Bracket

It doesn’t matter if you have a $10,000,000 net worth. If you are married and your taxable income after deductions falls between $100,800 and $211,400, you are in the 22% tax bracket. If your taxable income is lower, your tax bracket is lower.

Here is a chart showing how tax-equivalent yields compare for each level of taxable income.

The bond generating a tax-equivalent yield of 7.6% for someone with $770,000 of taxable income in the 40.8% bracket generates only a 5.92% tax-equivalent yield for someone in the 24% bracket and 5.11% for someone in the 12% bracket.

So, before you get too excited about the idea of tax-free income, do some tax planning, evaluate the relative credit risks, and figure out which bonds make the most sense for you.

Disclaimer: This note isn’t intended as a recommendation to buy or sell munis. Muni bonds have default risk, and some are extremely risky. If you pay state income tax, that impacts the calculation. My goal is to show you where munis are today and remind you to do the math.

Personal Note:

On Monday nights for the next few weeks, I get to coach lacrosse teams for my 6th- and 8th-graders. We’re playing indoors at Rice in their air-conditioned practice facility, and I never want to go back outside to another 105-degree field ever again.

Yesterday we hosted a seminar at our office. The first part was a market recap; the second reminded us that humans are wired to be terrible investors; and the third explained how politics (and the upcoming midterms) can affect our decision-making.

You can find a full copy of the slides here.

For today’s note, I’ll jump to two stories from the last section:

The first is about betting on elections.

In 2016, Sam Bankman-Fried - who later became famous for founding the FTX crypto exchange and committing fraud - worked at Jane Street. He designed a system that predicted Trump’s victory before major news outlets did.

Jane Street’s thesis was that if Trump won, the markets would tank. So, they used that insight and placed billions of dollars in short bets that would benefit when the market fell.

They were right about Trump winning, but wrong about the market reaction, and they lost $300 million.

The second is about consumer confidence.

Back in April, I wrote a note titled “Investing While Sad” and made the comment that the Michigan Consumer Sentiment Index was at record lows.

Mason, our rockstar intern, broke the numbers down further so I could talk about them in the presentation. What he found was that:

Young people are a little less confident than older people. (52 v 58)

Lower-income people are a little less confident than higher-income people. (45 v 61)

And lower-wealth people are also a little less confident than higher-wealth people. (46 v 67)

But the real divide is Republicans versus Democrats. Republicans are currently at 90, and Democrats are currently at 32.

This is the widest gap in history, and whether someone feels confident in our economy right now doesn’t really depend on how old they are, how much money they make, or how much wealth they have; it depends almost entirely on who they vote for.

Keep these points in mind before you start rebalancing your portfolio. Neither your predictions nor your feelings tell you anything about what the markets will do next.

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Personal Note:

Big thank you to everyone who came out to yesterday’s seminar, and special thanks to Mason for help with the charts.

This week, every news organization wrote a headline that said something like, “ Anthropic Researchers Believe More Than 10% Chance AI Kills Us All.”

This sounds scary until you remember that nobody knows anything.

Music industry experts didn’t think the Beatles would be any good. Movie industry experts didn’t think John Wick or Star Wars would make any money. The experts in the NFL didn’t think Kurt Warner, NFL and Super Bowl MVP, was worth a draft pick.

Barry Ritholtz’s book, “How Not to Invest,” uses some great stories to make this point, and Ben Carlson’s recent blog post does the same.

In The End of a Golden Era for Investors, Ben cites a McKinsey study that said:

A coming collapse in investment returns means that people that age today will have to work seven years longer or save almost twice as much to end up with the same nest egg as those of roughly a generation ago.

The punchline: the study was originally published in 2016 and turned out to be completely wrong.

The world is full of similar examples.

In February, the Fed projected rates would fall. By June, they changed their minds and projected rates would go higher.

This change largely happened because they didn’t predict we would invade Iran.

The truth is, nobody knows how AI will impact society, and as a financial advisor, I have no idea how markets will react to whatever does happen. But that is nothing new.

As Howard Marks pointed out in his memo, The Folly of Certainty

The rare person who in October 2022 correctly predicted that the Fed wouldn’t cut interest rates over the next 20 months was absolutely right . . . and if that prediction kept them out of the market, they’ve missed out on a gain of roughly 50% in the Standard & Poor’s 500 index. The rate-cut optimist, on the other hand, was absolutely wrong about rates but is likely much richer today.

Economists and AI researchers are usually very smart, but that doesn’t make them any better at predicting the future. Between now and the time AI is supposed to kill us all, an infinite number of things will change. Some will be good, and some will be bad. All we can know for sure is that predictions about the world ending rarely come true, and investors need to plan accordingly.

Personal Note:

Lacrosse is back! I’m still the President of Fort Bend Lacrosse and now the VP of the Houston Youth Area Lacrosse League. These are community rec programs.

My passion project is trying to create something in my area where kids can play for fun, without getting involved in the private equity-fueled travel sports complex. Maybe that means most of these kids won’t become professional lacrosse players, but that is probably okay.

If you aren’t familiar with the state of youth sports in the US, check out this article from the NY Times:

The Pay-to-Play Childhood - Private leagues have made youth sports expensive, hypercompetitive, and all-consuming. Investors are making a killing.

While I’m all for long-term optimism, the short term still matters, and proper planning still requires some amount of caution.

Difference Between Accumulating & Spending

When someone describes a portfolio that will accumulate over time, the order of gains and losses doesn’t affect the outcome.

Take this hypothetical from the Trump account website as an example:

Put $1,000 in when a child is born, and it will be worth $243,000 by the time they are 55 if returns are historically average over the long term.

It doesn’t matter whether any particular year is good or bad. The long-term average is the only thing that counts.

However, that changes once an investor begins making regular withdrawals.

The three portfolios in the chart above all start with $1 million, have the same average return of 7%, and withdraw $60,000 plus inflation each year. The orange-line investor, who benefited from large early gains, had a wonderful retirement. The yellow-line investor, who suffered large early losses, ran out of money.

There are two primary solutions:

1. Maintain a sufficient emergency reserve you can use in a downturn.

2. Create a flexible spending plan that allows you to reduce expenses when your portfolio declines.

Neither option feels good or necessary when the market is going higher, and neither will prevent the next bear market. But when the stock market has its next major decline, you’ll rest a little easier knowing you have a plan.

Personal Note:

Last weekend I was in DC for my fantasy football draft with friends from law school.

I may have picked a terrible team, but I had a great time doing it.

Weekly Notes

August 7 — Situational Awareness: Using the recent implosion of the Situational Awareness hedge fund, the piece walks through how 400% leverage on a concentrated set of AI-related positions turned sound long-term theses into a forced liquidation once margin calls hit.

August 14 — Your Portfolio Doesn’t Care Who Wins: With midterm elections approaching, the note pushes back on the idea that political outcomes should drive investment strategy.

August 21 — Remembering Why We Own Bonds: After a year where stocks posted double-digit gains and bonds lost 0.69% through July, the piece revisits why an allocation to bonds still matters.

August 28 — The Market Went Up. It Also Got Cheaper. A breakdown of the S&P 500’s year-to-date return shows nearly all of the return has come from earnings growth rather than rising valuations.

Quote We Love

Need to Shred Things?

If you’re in the Houston area and have documents to be shredded, feel free to bring them to our office.

You can bring them with you if you attend our seminar on September 17th; you can bring them with you if you have an account review; or, if you just want to bring them up on another day, you can block off time using this calendar link, and we’ll make sure we’re ready for you. https://calendly.com/cmckeon-tsawm/15min

Sometimes it may feel like the stock market is going up because we’re in a bubble where everything is getting irrationally more expensive. But this chart tells a completely different story.

The green bar on the right shows the Year-To-Date total return of the S&P 500. The three blue bars to the left break that total return into its three components.

1. Dividends. The cash flow is distributed to the shareholders

2. Earnings. The profits the companies are generating.

3. Optimism About the Future (Price / Earnings Multiple). The amount investors are willing to pay for today’s earnings based on their expectations for the future.

Of the S&P 500’s year-to-date total return, .85% came from dividends, and 21.89% came from earnings.

The crazy part is that if investors were willing to pay as much for those earnings today as they were at the beginning of the year, the market would be 9.74% higher than it is right now.

In other words, the stock market has gone up, AND it has also gotten less expensive.

As random as share prices can feel day-to-day, long-term results are driven almost entirely by earnings. And today’s earnings have been really good.

We can debate where the earnings are coming from and where they will go from here, but the fact that earnings, not investor enthusiasm, have been doing the heavy lifting is a good sign.

That doesn’t mean the ride will always be smooth, or that multiples can’t compress from here. But it’s a reminder that under the daily noise, the market still makes sense.

Personal Note:

This afternoon I'm heading to Washington, DC for my annual fantasy football draft with 11 friends from law school. This will be our league’s 19th season.

I can’t tell you a single player’s stats, and my selections are usually not the best, but I suspect it will be a good time.

But stocks and bonds are very different tools that serve very different purposes, and sometimes you just need a reminder of why we have an allocation to bonds in the first place.

1. Regret Minimization

Prof. Harry Markowitz won the Nobel Prize in economics in 1990 for his pioneering work on diversification and Modern Portfolio Theory. However, when describing how he first set the asset allocation for his portfolio in the mid-1950s, he told Jason Zweig,

“I should have computed the historical covariances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it–or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions fifty-fifty between bonds and equities.”

In other words, we have no idea what the future holds. The stock market may keep going up, or it could fall. Interest rates may keep rising, or they could go back to zero.

Given the inherent uncertainty about what happens next, an allocation to bonds is an effective tool for managing future regret.

2. Cash Flow Needs

My belief that stocks will outperform bonds over the next 30 years is nice, but completely irrelevant to an investor with near-term goals and spending needs. Owning some amount of high-quality short-term bonds is a good way to manage the risk of being forced to sell stocks when they are down.

3. Take Advantage of Higher Interest Rates

Bond prices have fallen because interest rates have risen. If you liked bonds during COVID when the ten-year US Treasury was near 0.5%, you should love the same bonds today now that they’ve climbed back to over 4.7%. In dollar terms, $1 million of a ten-year Treasury in 2020 generated $5,000 per year in income. Today those same bonds would generate $47,000.

But What If Interest Rates Keep Going Up?

Humans tend to over-index to whatever has recently happened. When things go down in value, people tend to think they will go down forever, and when things go up, people tend to buy thinking prices will go up forever.

But change is inevitable.

That is why diversification matters: if we do it right, at any given moment, at least one asset in the portfolio will disappoint us. If everything is going up at the same time, we may be taking more risk than we realize.

We’re less than three months away from midterm elections, and since nothing inspires people to make terrible investment decisions like their political beliefs, here are some preemptive charts to remind you that the market probably won’t collapse if your preferred candidates don’t win.

First up, volatility around the midterms is normal, and the third quarter has historically been among the weakest.

But that doesn’t mean you should sell.

If you had sold after the first quarter of this year anticipating a bad 2Q, you missed more than 17% of upside in the S&P 500. I just bring it up as a reminder that it would be historically normal for the market to trend down before trending back up.

Second, the strategy should not change based on who you think will win.

Roughly 50% of the time, your preferred party is not in power, and I suspect it will always be that way.

Since 1926, the stock market has trended higher regardless of which party has been in office.

And if you only invested when your preferred party held the presidency, you’d be notably worse off.

It is easy to feel that this midterm election and this moment in history are different. But the world rarely ends, and the best investment strategy is generally the one you can stick with regardless of who is in office.

Need to Shred Things?

If you’re in the Houston area and have documents to be shredded, feel free to bring them to our office.

You can bring them with you if you attend our seminar on September 17th; you can bring them with you if you have an account review; or, if you just want to bring them up at another time, you can block off time using the link below, and we’ll make sure we’re ready for you.

https://calendly.com/cmckeon-tsawm/15min

Personal Note:

Summer is over, and my kids went back to school this week.

They are now 3rd-, 6th-, and 8th-graders.

Leopold Aschenbrenner enrolled at Columbia at 15 and graduated valedictorian at 19 with a B.A. in economics, mathematics, and statistics. He is a notably smart person with interesting ideas.

In 2024, at age 23, he wrote a viral manifesto on the future of AI and used that as a white paper to launch a hedge fund. By October of 2025, Fortune had written a lengthy profile of the new wunderkind, and the fund grew exponentially.

But being smart and having interesting ideas did not prevent him from losing $35 billion dollars last week when his hedge fund, Situational Awareness, was forced to liquidate its positions in response to margin calls.

There is a lot to be written about the details of the blow-up, but for the purposes of this note, I’ll simply emphasize that his trading ideas were not the problem and his long-term projections for the stocks he selected may prove to be perfectly correct over the next ten years.

However, by using 400% leverage on a concentrated set of positions, he severely narrowed his fund’s range of survivability. And being right in the long term never matters if you can’t survive all the short-term events along the way.

So while the AI trade is novel, and the fund’s gains and losses are staggering in size, we’ve seen this story before. The lesson Leopold learned last week is no different than the one homeowners learned in 2008.

Just because the bank is willing to lend you money doesn’t mean it is a good idea to take it.

Personal Note:

The kids are back from camp, and we all survived. This is their last weekend of summer, and then it is back to school.

Weekly Notes

July 3 — Two Years Too Early: Small caps underperformed large caps by 8.8% in 2023, 13.5% in 2024, and 8% in 2025 — then flipped to outperform by 12.3% in the first half of this year. The reversal is used as a reminder that a trend being directionally correct and being timeable are two very different things.

July 10 — Jim Rogers & The Only Way to Make Money Off Pessimism: Revisiting an annual tradition, the note tracks fifteen straight years of media coverage in which Jim Rogers predicts an imminent, “worst in his lifetime” market crash. The pattern is offered as a case study in why prognosticators who traffic in doom rarely face consequences for being wrong.

July 17 — Trump Accounts: Take the Free Money, But . . . Using an 8-year-old as an example, the piece runs the numbers on a $5,000/year Trump account that grows to nearly $4 million by age 70 — and compares the tax outcome under a Roth conversion versus simply using a taxable custodial account or a 529 instead. The takeaway: opening an account is a no-brainer since the free money requires nothing else, but funding it is a separate decision that depends on the specific goal.

July 24 — When Society Gets Margin Called: In South Korea, 1.2 million retail trading accounts were margin-called last month, and roughly 360,000 were wiped out entirely after two major tech stocks plunged. The note draws a line from that episode to record leveraged-ETF issuance and retail trading volume in the US, arguing the same dynamics aren’t unique to one country.

July 31 — Different Incentives, Different Advice: A Morgan Stanley analyst’s $300–$600 price target on SpaceX is used to illustrate a broader point: the firm earned over $100 million in advisory fees on the IPO and brought in more than $70 billion in new wealth-division assets last quarter. The piece argues that advice isn’t necessarily wrong just because the source has different incentives — but the distinction matters.

Idea Worth Revisiting

From When Society Gets Margin Called:

Media Feature: Crystal McKeon Quoted Across National Outlets

Crystal McKeon, Chief Compliance Officer at TSA Wealth Management, was featured this month in four separate publications covering retirement planning and investing: MarketWatch (on what not to do if you’re behind on retirement savings), ThinkAdvisor (on the DOL’s proposal for alternatives in 401(k)s), PLANADVISER (on the risks of retirees investing in adult children’s business ventures), and MarketWatch again (on why a $100,000 portfolio doesn’t stretch as far for young investors as it used to).

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When I listen to people talk about their investment strategies, it seems that a lot of them take advice from people with incentives very different from their own.

For example, the other day I was talking to someone about SpaceX, and they argued it was a good buy at today’s levels because a Morgan Stanley analyst had put a price target on SpaceX between $300 and $600 per share.

The analyst is a very smart person, and I’m sure his spreadsheets are beautiful. But Morgan Stanley, the company writing the analyst’s paycheck, made over $100 million in direct advisory fees for orchestrating the SpaceX debut, and their wealth division brought in more than $70 billion in new assets in Q2, thanks in part to promising new clients access to a share allocation in the IPO. They also help manage the SpaceX workplace plan, which will continue to provide a significant source of revenue for the company in the years ahead.

This isn’t to say the analyst is wrong, and I certainly don’t accuse him of lying. What a man wishes he generally believes to be true. But he is incentivized to love and believe in SpaceX more than most.

It is also worth remembering:

• The billionaire crypto entrepreneur who forecasts Bitcoin reaching $1 million has much different incentives than you.

• The CEO who is excited about his company’s business outlook has much different incentives than you.

• The YouTube personality who is revealing “all the secrets the big banks don’t want you to know” has much different incentives than you.

• The person who has nothing to lose has much different incentives than you.

Again, just because they have different incentives doesn’t automatically make them wrong. It just means that what makes sense for them may not make sense for you. And that is a very important distinction.

For whatever it is worth, at this point in my career, my incentive is for my business to be as sustainable as possible, which means not doing anything that is incredibly risky, cutting edge, or without historical precedent. And since I work primarily with stocks and bonds, I’m biased to believe those are the best tools for an investor to use.

This means I will never be the advisor who encourages his clients to use their 401(k) s to speculate on a new food truck venture or buy a bunch of apartment buildings.

Those things may be right for some people, but probably never me.

And since I mentioned SpaceX, here is an updated chart (See Houston, We Have an IPO and Price vs. Valuation) comparing the current SpaceX listing to the average path of the top 10 US IPOs by size.

Be careful out there.

Personal Note:

I don’t pick up my kids from camp until tomorrow but here is a picture from drop off.

Hopefully they still remember us.