The Return You're Chasing Already Happened
There's a particular kind of investment decision that rarely feels reckless in the moment.
A part of the market has had an exceptional run. The companies are strong. The narrative makes sense. Every time you open your account, those positions seem to be doing exactly what you hoped they would.
So you add more.
That doesn't necessarily feel like chasing returns. It can feel prudent. Why put new money into investments that have lagged when the winners seem to be proving themselves month after month?
The problem is that your brain may be answering a different question than the one your portfolio needs you to answer.
Instead of asking, What mix of investments gives me the appropriate amount of risk for where I'm trying to go? you begin asking, What's been working lately?
That's where recency bias can quietly take control of a portfolio.
And for successful investors, particularly technology executives whose careers, compensation, and accumulated wealth may already be connected to the same companies or sector, the bigger risk isn't simply choosing the wrong investment next.
It's allowing yesterday's returns to determine how much risk you take tomorrow.
What Just Happened Feels Like What Happens Next
One of the central problems in investing is that our expectations aren't formed in a vacuum.
What we've recently experienced matters.
Robin Greenwood and Andrei Shleifer examined six different measures of investor expectations covering nearly five decades. They found that expectations for future stock returns were strongly tied to past market returns and to how high the market had already climbed.
In plain English, after stocks performed well, investors tended to expect more of the same.
But there was another important finding: those expectations were strongly negatively related to the returns the models actually projected going forward. The periods that left investors feeling more and more optimistic weren't necessarily the periods when future returns looked attractive.
A strong return is evidence of what's happened.
It's not evidence of what must happen next.
Research by Ulrike Malmendier and Stefan Nagel adds another piece of the puzzle. Studying household investing with Survey of Consumer Finances data from 1960 through 2007, they found that people's own experiences with stock and bond returns shaped how much risk they were willing to take and how they allocated their portfolios. More recent experiences carried greater weight.
Our memories, in other words, can become inputs into our portfolios.
And the freshest memories can become some of the most influential.
The Return That Convinced You Is the Return You Already Missed
This tendency shows up in what investors actually do with their money.
Erik Sirri and Peter Tufano studied money flowing into and out of equity mutual funds and found that investors based their buying decisions heavily on past performance. The relationship was particularly strong among the best-performing funds: exceptional prior performance pulled in a disproportionate share of new money.
That makes intuitive sense.
The investment with the best story is often the investment whose performance has already supplied the evidence for that story.
None of this means that last year's winner must become next year's loser.
A technology company can have an extraordinary year and keep performing well. An expensive asset can become more expensive. Market leadership can last much longer than investors expect.
That's why the lesson isn't to bet against whatever has recently performed well.
The lesson is simpler:
The return that convinced you to buy is a return that's already occurred.
Your decision today needs to be justified by what the investment contributes to your portfolio from this point forward.
How Concentration Actually Shows Up
This issue is usually more subtle in practice than an investor deliberately deciding to make a giant bet on last year's winner.
In one recent planning engagement, we worked with an executive whose compensation included salary, bonus, and recurring restricted stock units.
Those RSUs were an important part of the family's wealth-building engine. At the same time, the taxable portfolio was being built to serve an entirely different purpose: helping create enough financial flexibility for the executive to eventually step away from a high-paying career and move toward work optionality.
That distinction mattered.
Each time another block of RSUs vested, there were effectively two choices.
The first was passive: simply allow the employer shares to accumulate.
The second was deliberate: treat the vest as a new capital-allocation decision and ask where those dollars belonged given the family's overall portfolio, future spending needs, and risk capacity.
We chose the second approach.
The planning process called for vested equity to help fund a diversified taxable portfolio rather than allowing employer stock exposure to compound indefinitely by default. That taxable portfolio was spread across multiple asset classes and placed on a quarterly rebalancing schedule.
The important part wasn't predicting whether the employer's stock would outperform.
We didn't need to.
The issue was that the client's salary, future compensation, and a growing portion of financial wealth could otherwise become increasingly dependent on the same company.
And a position can become concentrated without the investor ever consciously deciding, I want more concentration.
Imagine that a $500,000 employer-stock position rises to $750,000.
Nothing was purchased.
No investment decision was made.
But the risk exposure changed materially.
Then another RSU grant vests.
Keeping those shares may feel innocuous because the stock has performed well, and because familiarity with the company can make the investment feel easier to understand than something outside the investor's immediate experience.
Another vest arrives six months later.
Then another.
Over time, what began as compensation can quietly become an investment thesis.
That's the practical danger of recency bias for investors with equity compensation. The bias doesn't always tell you to go out and buy the hottest stock.
Sometimes it simply tells you there's no reason to disturb what's already been working.
Success Can Change the Portfolio Without Your Permission
Now extend that problem across the rest of a high-income household's balance sheet.
The executive owns employer shares.
The 401(k) contains a large-cap U.S. index.
The taxable account owns another broad-market strategy.
Perhaps there are additional technology holdings accumulated over the years.
Viewed separately, none of those investments may appear particularly alarming.
Viewed together, however, they may represent substantially more exposure to the same companies, sector, and economic forces than the investor realizes.
This is particularly important for technology professionals.
Your human capital may already depend on the technology industry.
Your bonus may depend on company performance.
Your future RSU value depends on the employer's stock.
Your existing shares may represent a substantial portion of your financial capital.
And broad-market indexes can add further exposure to some of the same companies that have already driven your wealth higher.
The question, then, isn't simply, Is this a good company?
It may be an exceptional company.
The better portfolio question is:
How much of my financial future should depend on it?
Lisa Meulbroek's research into company stock held by employees illustrates the economic problem created by combining employment exposure with concentrated ownership of employer shares. Even when an employee believes strongly in the company, concentrated employer stock exposes the household to risks that could otherwise be diversified.
That distinction matters because diversification isn't a judgment about whether your company will succeed.
It's a judgment about how much of your family's future should depend on being right about any single outcome.
Why Portfolio Discipline Sometimes Feels Wrong
This is where a disciplined investment process earns its keep.
You establish what role each asset is supposed to play.
You decide how much concentration you're willing to accept.
You determine an appropriate allocation based on the return you need, the risk you can afford to take, your liquidity requirements, taxes, time horizon, and the goals the portfolio ultimately needs to fund.
Then you periodically compare the portfolio you actually own with the portfolio you intended to own.
That last step matters because successful investments don't remain politely inside their original allocations.
They grow.
For an investor receiving equity compensation, there's another layer: new shares may keep arriving even after an existing position has already become large.
That means maintaining the portfolio may require an active process for deciding what happens when shares vest.
Hold?
Sell?
Diversify?
Fund another goal?
The answer will vary by investor. Taxes, trading restrictions, holding periods, liquidity needs, charitable objectives, and the rest of the financial plan all matter.
What shouldn't determine the answer by itself is the fact that the stock has recently gone up.
Sometimes the most important portfolio decision isn't identifying the next winner.
It's recognizing how much your previous winners have already changed your risk exposure.
Don't Ask Your Memory to Vote
The solution to recency bias isn't becoming better at predicting which sector will lead next.
It isn't selling everything that's performed well.
And it certainly isn't reflexively buying whatever performed poorly.
Those approaches simply replace one forecast with another.
The better defense is an investment process that doesn't require you to reconstruct your portfolio strategy every time the market hands you a new reason to feel optimistic or pessimistic.
Build the portfolio around your objectives and risk profile.
Understand your exposure across all of your accounts.
Include employer stock and future equity compensation when evaluating concentration.
Establish parameters for how much risk you're willing to allow any one company, sector, or economic driver to contribute.
And when equity compensation vests, treat those shares as a fresh allocation decision rather than automatically assuming yesterday's allocation should become tomorrow's.
Then periodically compare the portfolio you actually own with the one you deliberately set out to build.
That leads to one useful question to ask this quarter:
Have my recent winners quietly made me more concentrated than I ever consciously chose to be?
If the answer is yes, that doesn't automatically mean those investments should be sold.
Taxes matter. Equity-compensation restrictions matter. Liquidity needs matter. Your broader financial plan matters.
But it does mean the portfolio deserves another look.
Because the job of an investment strategy isn't to own whatever just worked.
It's to maintain the amount and type of risk necessary to get you where you're trying to go, even when the rearview mirror is telling you to do something else.
Sources
Greenwood, Robin, and Andrei Shleifer. "Expectations of Returns and Expected Returns." The Review of Financial Studies, 2014.
https://academic.oup.com/rfs/article-abstract/27/3/714/1580705
Malmendier, Ulrike, and Stefan Nagel. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?" The Quarterly Journal of Economics, 2011.
https://academic.oup.com/qje/article-abstract/126/1/373/1901343
Sirri, Erik R., and Peter Tufano. "Costly Search and Mutual Fund Flows." The Journal of Finance, 1998.
https://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00066
Meulbroek, Lisa. "Company Stock in Pension Plans: How Costly Is It?" The Journal of Law and Economics, 2005.
https://www.journals.uchicago.edu/doi/abs/10.1086/430807
The Roth Conversion Five-Year Rule That Can Cost You 10%
You did the smart thing.
You retired, your income dropped, and you used that opportunity to convert part of your traditional IRA to a Roth. You willingly paid the income tax today so that those dollars could potentially grow tax-free for the rest of your life.
Then, a couple of years later, you need some of the money.
You take a withdrawal from the Roth, assuming the logic is simple: I already paid tax on this money. It should be mine to use.
And then you discover that the IRS may want another 10%.
Not another income tax. A 10% additional tax for taking converted dollars out too soon.
That outcome feels especially counterintuitive because Roth conversion planning is often most attractive during the lower-income years immediately after retirement. Those are precisely the years when someone in their early or mid-50s may be trying to reduce a large pre-tax retirement balance before Social Security, required minimum distributions, or other income sources begin.
But there is an important catch.
Paying the tax on a Roth conversion changes the tax character of your money. It does not necessarily change when you can access it without penalty.
In other words, a Roth conversion changes your tax bill, not your timeline.
Why Converted Money Has Its Own Five-Year Clock
To understand the rule, it helps to understand why it exists.
Normally, someone who takes a taxable distribution from a traditional IRA before reaching age 59½ may owe ordinary income tax plus a 10% additional tax unless an exception applies. If that person could simply convert the traditional IRA to a Roth, pay the income tax on the conversion, and withdraw the converted dollars the next day without the additional tax, the conversion could become a side door around the early-distribution rules.
Congress specifically addressed that problem when the Roth rules were developed. The legislative history describes the conversion holding period as a way to prevent taxpayers from using a Roth conversion to receive premature retirement distributions while avoiding the early-withdrawal tax (House Conference Report 105-356).
That is where the five-year conversion rule comes in.
Under current IRS rules, each Roth conversion generally starts its own five-tax-year period. That period begins January 1 of the calendar year in which the conversion occurs, regardless of when during that year you actually complete the conversion. So a conversion completed in December 2026 is treated as beginning its five-year period on January 1, 2026.
If you are under age 59½ and withdraw converted dollars during that five-year period, the portion attributable to the amount that was taxable when converted may be subject to the 10% additional tax unless another statutory exception applies.
That last part matters. The penalty does not mean the converted amount becomes taxable income again. You already recognized the taxable portion when you completed the conversion. Instead, the rule effectively brings that previously taxed conversion amount back into the calculation for purposes of determining the 10% additional tax.
And if you complete conversions in multiple years, the clocks begin stacking.
Convert in 2026, and that conversion has one clock. Convert again in 2027, and that conversion gets another. Convert again in 2028, and now you have three separate conversion periods running at the same time.
The ordering rules make the sequence predictable. The IRS generally treats Roth IRA distributions as coming from regular contributions first, followed by conversions and rollovers on a first-in, first-out basis, and finally earnings. Within a particular conversion, the taxable portion is generally considered distributed before the nontaxable portion (see IRS Publication 590-B).
That ordering becomes particularly important if you are building what is commonly called a Roth conversion ladder.
There Are Really Three Roth Buckets
Part of the confusion around the Roth five-year rules comes from talking about a Roth IRA as though every dollar inside it works the same way.
It does not.
For distribution purposes, it helps to think about three different buckets.
Start with your regular Roth contributions. Your original direct Roth IRA contributions generally come out first under the ordering rules, and you can generally withdraw them without income tax or the 10% additional tax.
Next come your converted dollars. Conversion and rollover amounts come out after your regular contributions. Each conversion carries its own five-year period for the conversion-related 10% additional tax if you are under 59½, and that penalty generally applies only to the portion that was taxable when you converted.
Earnings come out last. Whether your earnings can be distributed tax-free depends on the separate rules for a qualified distribution, including whether the applicable Roth IRA five-year period has been satisfied and whether you have reached age 59½ or meet another qualifying condition.
That distinction is one of the most important parts of Roth planning because there is not simply one universal “Roth five-year rule.”
There is a conversion-specific five-year rule designed to determine whether the 10% additional tax can apply to converted principal withdrawn before age 59½. Separately, there is an account-level five-year requirement used to determine whether a Roth distribution, including earnings, is a qualified tax-free distribution.
Those rules often get blended together in casual explanations.
They should not be.
Age 59½ Changes the Conversion Rule
There is also an important off switch.
Once you reach age 59½, the conversion-specific 10% additional tax no longer applies merely because you are still inside a conversion's five-year period. Reaching age 59½ is one of the exceptions expressly identified by the IRS.
That means this particular trap matters most for people who retire early and begin Roth conversions in their 50s.
If you retire at 53, 55, or 57 and start converting a meaningful portion of a traditional IRA, liquidity planning becomes especially important. You may be deliberately recognizing income during a favorable planning window while simultaneously creating converted Roth dollars you do not want to rely on immediately for spending.
If you begin converting at 61 or 62, the conversion-specific early-distribution penalty is no longer the same concern because you have already crossed 59½. But the separate qualified-distribution rules can still matter, particularly when earnings are involved.
This is exactly why Roth conversions should not be done in isolation. The amount you convert is only one part of the decision. You also need to understand where your spending money will come from while those converted dollars are aging.
Consider a 55-Year-Old Early Retiree
Consider a hypothetical 55-year-old woman who recently retired after a successful career.
She has a sizable traditional IRA and expects her taxable income to be unusually low for the next several years. She sees that period as an opportunity to start reducing the amount of money that could eventually be exposed to required distributions later in retirement.
So she converts $80,000 from her traditional IRA to a Roth IRA.
Assume the full $80,000 is taxable as ordinary income. She pays the tax on the conversion that year, intentionally, because she believes shifting the money into a Roth will give her greater flexibility over the long run.
Two years later, her roof needs to be replaced.
The project costs $40,000.
She looks at the Roth account and thinks, I already paid tax on that money. Why not use it?
Assume for purposes of this example that she has no remaining regular Roth contribution basis ahead of the conversion under the IRS ordering rules, the $40,000 distribution is attributable entirely to the taxable portion of that recent conversion, and no exception to the early-distribution tax applies.
She takes out $40,000.
Because she is still under age 59½ and the conversion is still inside its five-year period, that $40,000 may be subject to a 10% additional tax.
That is $4,000.
She does not owe ordinary income tax on that same $40,000 again. The problem is the additional tax triggered by taking the converted money out too soon.
Now change one fact.
Suppose she waits until age 60 and takes the same $40,000 from that converted principal. She has crossed age 59½, so the conversion-related 10% additional tax no longer applies.
Or suppose she is still 57 but has enough regular Roth contribution basis available to cover the $40,000. Because regular contributions come out before conversion dollars under the ordering rules, that withdrawal could produce a very different result.
Or perhaps she pays for the roof from a taxable brokerage account instead. Selling investments there could create capital gains taxes depending on her basis and the investments sold, but it would not trigger the IRA's 10% early-distribution tax.
Same financial need. Different bucket. Different tax outcome.
The Roth conversion itself was not the problem. Touching the wrong dollars at the wrong time was.
A Conversion Plan Needs a Liquidity Plan
This is where Roth conversion planning starts to look less like a tax transaction and more like retirement income planning.
It is easy to focus entirely on the conversion calculation. How much room do I have in this tax bracket? How much should I convert this year? How might the conversion affect Medicare premiums later? How much could I reduce future required distributions?
Those are important questions. But there is another one that matters just as much: where will I get cash if something unexpected happens during the next five years?
If you are retiring before 59½ and planning several years of conversions, you may need a liquidity bridge alongside the conversion strategy. That could mean maintaining an appropriate cash reserve. It could mean deliberately preserving assets in a taxable brokerage account. It could mean knowing exactly how much regular Roth contribution basis you have available. It could mean sequencing conversions around known large purchases instead of automatically converting the maximum amount every year.
The point is not that converted Roth money can never be accessed early. There are exceptions to the 10% additional tax, and each taxpayer's facts matter.
The point is that you should not discover the distribution rules for the first time when the roof starts leaking.
The Five-Year Rule Is a Problem to Solve Before You Convert
A Roth conversion can be an incredibly useful planning tool.
It can help move retirement savings from an account where future distributions may be taxable into one where qualified future distributions may be tax-free. It can reduce future pre-tax balances, create greater flexibility over retirement income, and potentially improve how assets ultimately pass to heirs.
But none of those benefits mean every converted dollar should immediately be treated as available spending money.
That is why the five-year conversion rule is something to solve before you execute the conversion. Know which dollars live in which bucket. Know which five-year period applies. Know when age 59½ changes the rules. And most importantly, know where the next several years of spending will come from before deliberately moving money across the tax wall.
Because a Roth conversion changes your tax bill. It does not necessarily change your timeline.
And when conversions are part of a broader retirement strategy, that timeline should include more than projected tax brackets. It should include your actual life: the house, the travel, the family support, the unexpected expenses, and the cash you may need along the way.
If you are considering Roth conversions in your 50s, map your conversion schedule and your cash needs on the same timeline before you execute. That conversation often tells you far more than simply asking, how much should I convert this year? It is also how we help clients move through these decisions with clarity, confidence, and peace of mind.
Sources
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
https://www.irs.gov/publications/p590b
Internal Revenue Service. Instructions for Form 8606, Nondeductible IRAs.
https://www.irs.gov/instructions/i8606
Internal Revenue Service. Instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
https://www.irs.gov/instructions/i5329
U.S. Government Publishing Office. House Conference Report 105-356.
https://www.govinfo.gov/content/pkg/CRPT-105hrpt356/pdf/CRPT-105hrpt356.pdf
Weekly Market Update: Rising Rates Weigh on Stocks and Bonds
Markets moved lower this week as rising interest rates weighed on both stocks and bonds.
The S&P 500 declined 1.9%, the Nasdaq fell 3.1%, and the small-cap Russell 2000 lost 2.0%. Value stocks fell 0.6%, holding up far better than growth's 3.2% decline, as higher-valuation technology companies came under the most pressure.
The equal-weight S&P 500 declined a more modest 0.9%, a sign that weakness was concentrated among the market's largest companies.
At the sector level, energy gained nearly 5% and health care rose roughly 3%. Technology was the weakest performer, falling 4.2%, followed by industrials, down 3.3%.
Bonds also traded lower as Treasury yields moved higher. Longer-maturity Treasuries fell roughly 0.3%, and corporate bonds underperformed as credit spreads widened. Elsewhere, the U.S. dollar weakened 1.1%, the VIX moved modestly higher, and Bitcoin gained more than 14%.
Key Takeaways
Consumer Spending Softened in July
Retail and food-service sales fell 0.6% in July after rising just 0.2% in June. Unlike June, when much of the weakness was tied to gasoline, July's slowdown was broader, with sales excluding autos and gasoline down 0.2%.
Some of the softness may have reflected timing. Amazon's Prime Day fell in late June, potentially pulling online spending forward from July. Even so, the broader picture points to a consumer growing somewhat more cautious. That said, spending has not stopped: retail sales remained 5.0% above year-ago levels, and restaurants and several store categories continued to report gains.
Why it matters: The consumer remains an important source of support for the economy, but the past two months suggest spending momentum is moderating. That bears watching, because a meaningful slowdown in consumer activity could eventually weigh on economic growth.
Inflation Fears Weigh on Consumer Sentiment
Consumer sentiment weakened again in early August. The University of Michigan's index fell to 51.0 from 55.2 in July, reversing two consecutive months of improvement.
Inflation remains the key concern. Only 8% of consumers surveyed expected their income growth to outpace inflation over the next year, down from 18% in December. Higher prices, including energy costs, continue to pressure household purchasing power. Sentiment and spending do not always move together, and households can stay pessimistic while continuing to spend, but persistent concern about purchasing power raises the risk that they eventually pull back.
Why it matters: Consumers are still spending, but confidence is weakening. If households begin acting on those concerns by cutting back, it could become another headwind for economic growth.
Rising Oil Prices Complicate the Fed's Path
Oil prices moved higher again this week as tensions around the Strait of Hormuz raised concerns about global energy supplies.
Higher energy prices create a difficult tradeoff. They can reduce purchasing power by raising transportation and utility costs while simultaneously adding to inflationary pressure. That complicates matters for the Federal Reserve. Minutes from the July meeting showed policymakers remain focused on inflation, with some officials open to additional tightening if price pressures fail to improve.
Why it matters: Softer consumer data would ordinarily strengthen the argument for lower interest rates. Persistent inflation and rising energy prices make that decision more complicated and could limit how quickly the Fed is able to respond to weaker growth.
Long-Term Yields Send a Different Signal Than Growth Data
The 30-year Treasury yield rose above 5.30% this week, its highest level since 2007, even as consumer spending and sentiment showed signs of weakening.
That is not the relationship investors would normally expect. When growth slows, investors often move toward Treasuries, pushing prices higher and yields lower. Instead, long-term yields remain under upward pressure as investors weigh persistent inflation against the large amount of government borrowing that needs to be financed.
Why it matters: Longer-maturity Treasuries have historically provided diversification when growth weakens and stocks come under pressure. If long-term yields stay elevated despite softer growth, that relationship may prove less reliable, at least in the near term.
Higher Rates Are Feeding Equity Volatility
The rise in Treasury yields created a more challenging backdrop for equities this week, particularly for higher-valuation areas of the market.
The mechanics are straightforward. As bond yields rise, investors can earn more from comparatively lower-risk assets, which raises the return stocks must offer to stay attractive and can pressure equity valuations. Higher-growth companies tend to be especially sensitive, because more of their expected value depends on earnings further into the future. Stocks have stayed relatively resilient despite the climb in rates, but this week showed that higher yields can still produce bouts of volatility.
Why it matters: Higher interest rates are a potential headwind for stocks, but not the only factor driving market direction. Earnings growth, economic conditions, and investor expectations will ultimately determine whether higher yields become a lasting problem or simply another source of near-term volatility.
The Tax Cost of Retiring Without a Retirement Income Map
You can have more than enough money to retire and still pay more in taxes than you expected.
The problem often isn't how much you've saved. Instead, it's how you decide to turn those savings into income.
During your working years, that decision was mostly made for you. Your paycheck arrived, taxes were withheld, and the remaining money funded your lifestyle.
Retirement changes that.
Now, you may have a traditional IRA, a taxable investment account, Roth assets, cash reserves, Social Security, a pension, and perhaps other sources of income available to you. The question is no longer simply whether you have enough.
You have to decide which dollars should fund each year of retirement.
And that's where tax planning and financial planning begin to overlap.
Retirement income shouldn't be pulled randomly from whichever account is most convenient. Before the paycheck stops, you need a retirement income map that shows where your cash flow will come from, when you'll take it, and what each decision may do to the rest of your financial plan.
Your Accounts Don't All Spend the Same on Your Tax Return
At first glance, a dollar is a dollar.
If you need $200,000 from your portfolio this year, you might assume it doesn't particularly matter whether the money comes from an IRA, a brokerage account, cash, or a Roth IRA.
But the tax return sees those dollars differently.
Generally, taxable distributions from a traditional IRA are included in ordinary income. Meanwhile, when you sell an investment in a taxable brokerage account, you're generally taxed on the gain relative to your adjusted cost basis rather than simply on the entire amount of cash you receive. Qualified Roth IRA distributions generally aren't included in taxable income.
Pension income can create another layer. Depending on how the pension was funded, payments may be fully taxable or may include a nontaxable return of after-tax contributions.
Then there's Social Security.
Depending on your other income, as much as 85% of your Social Security benefits can become included in taxable income. That doesn't mean you're paying an 85% tax rate on Social Security. Instead, it means other income can cause a greater portion of the benefit to become subject to federal income tax.
For retirees on Medicare, higher income can have another consequence. Modified adjusted gross income is also used to determine whether Medicare's income-related monthly adjustment amount, or IRMAA, applies to Part B and Part D premiums. In general, those calculations rely on tax-return information from two years earlier.
So, one large IRA withdrawal may do more than create taxable income.
It can affect the taxation of Social Security. It can influence Medicare premiums in a future year. It can change the tax treatment of investment income. And, depending on what you don't withdraw today, it can influence the size of future required distributions from tax-deferred accounts.
That's why I don't think retirement-income planning should begin with the question, "Which account has the money?"
The better question is, "What income do we want to create this year, and which accounts should create it?"
Consider a Couple With $5 Million Saved for Retirement
Imagine a recently retired couple in their late sixties with approximately $5.2 million in investable assets.
They have $3.1 million in traditional IRAs and retirement accounts, $1.3 million in a taxable investment portfolio, $500,000 in Roth accounts, and $300,000 in cash and short-term reserves.
Between Social Security and a small pension, they receive roughly $100,000 of annual income. However, their lifestyle, travel, charitable giving, family support, taxes, and other expenses require another $200,000 from their portfolio.
That's a much more realistic retirement-income question for a high-net-worth household.
They need $200,000.
Where should it come from?
The simplest answer might be the IRA.
After all, that's what the IRA was built for. So, they could call their custodian, withdraw $200,000, have taxes withheld, and move on.
Operationally, that works.
From a planning perspective, however, we haven't answered nearly enough questions.
Assuming the entire distribution is taxable, that $200,000 IRA withdrawal would add substantially more ordinary income to their tax return. It may also cause more of their Social Security benefits to become taxable and could affect future Medicare premiums.
Now consider that their taxable investment account contains securities with significant cost basis.
Instead of taking the entire $200,000 from the IRA, perhaps the retirement income map calls for $90,000 from the IRA, $80,000 from selected taxable investments, and $30,000 from existing cash reserves.
They still receive the same $200,000 needed to fund their lifestyle.
However, the tax result could be very different.
The $80,000 brokerage withdrawal isn't automatically $80,000 of taxable income. If, for example, the investments sold have a relatively high cost basis, only the realized gain is generally considered when calculating the capital gain from the sale.
Meanwhile, the cash reserve itself doesn't create income simply because it's transferred from a savings account into checking, although interest earned on that cash may already be taxable.
The important point isn't that this particular combination is the "right" answer.
It may not be.
The point is that the decision should be intentional.
Sometimes the Right Answer Is to Pay More Tax Today
This is also where retirement-income planning can easily become too simplistic.
If the goal were merely to minimize this year's taxable income, you could conclude that retirees should avoid traditional IRA distributions whenever cash, high-basis investments, or qualified Roth distributions are available.
I don't think that's the right way to look at it.
Sometimes intentionally creating taxable income today can improve the long-term plan.
For example, the years after retirement but before required minimum distributions begin may give a household more control over its taxable income than it will have later. If most of a couple's wealth is sitting inside traditional retirement accounts, taking additional distributions or completing Roth conversions during lower-income years may reduce the amount left in those accounts later.
So, the goal of a retirement income map isn't necessarily to pay the least tax this year.
The goal is to make informed decisions about when the family pays tax, which assets create the tax, and how today's decision affects the years ahead.
That's an important distinction.
Tax minimization looks at one return.
Retirement-income planning looks at the timeline.
A Retirement Income Map Connects the Years
When we think about retirement planning, it's tempting to divide everything into separate decisions.
When should I claim Social Security?
How much should I take from my IRA?
Should I sell investments from my brokerage account?
Should I convert money to a Roth?
How much cash should I keep?
Individually, those are reasonable questions.
However, they're really pieces of the same decision.
A retirement income map brings them together.
Before retirement, I want that retirement income map to show what the household expects to spend, which income sources turn on automatically, which sources we control, how much taxable income we're intentionally creating, and what the decision may mean several years down the road.
For example, one year may call for heavier taxable-account withdrawals.
Another may be an attractive year to recognize more IRA income.
Another may offer room for a Roth conversion.
Later, Social Security, pensions, required distributions, or other income sources may reduce that flexibility.
The strategy can also change as tax laws, portfolio values, spending needs, and family circumstances change.
That's why a retirement income map isn't a one-time withdrawal schedule.
It's a framework for making better annual decisions.
The Details Matter
This is also where experience and careful tax analysis matter.
Not every traditional IRA dollar is necessarily taxable if the account owner has nondeductible basis. Not every brokerage withdrawal creates the same capital gain because cost basis and holding periods differ. Pension taxation can vary depending on after-tax contributions. Capital losses may offset certain gains. State taxation may differ from the federal rules discussed here.
That's why broad rules of thumb such as "spend taxable accounts first" or "always delay IRA withdrawals" can be misleading.
There isn't one universally correct withdrawal order.
The right sequence depends on the household's balance sheet, tax return, age, income sources, spending needs, estate goals, and what you're trying to accomplish over the next several years.
That coordination is the work.
Build the Retirement Income Map Before You Need the Money
Retirement shouldn't begin with a series of disconnected withdrawal decisions.
If you wait until you need cash and simply pull money from whichever account is easiest, you're allowing convenience to make a tax decision for you.
Instead, start before retirement.
Look at the next several years. Identify the income that will arrive automatically. Estimate the cash flow you'll need from your portfolio. Then determine which accounts can provide that money and how those withdrawals may affect the rest of the plan.
Some years, the answer may be the IRA.
Other years, it may be the brokerage account, cash reserves, Roth assets, or a combination of several sources.
What matters is that you've made the decision deliberately.
Because once you retire, your portfolio isn't simply a collection of accounts anymore.
It's your paycheck.
And if you're going to be responsible for creating that paycheck for the next 20 or 30 years, you should know where each year's income is coming from before you spend it.
That's the purpose of a retirement income map.
Sources
Internal Revenue Service, Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs);
https://www.irs.gov/publications/p590b
Internal Revenue Service, Publication 915: Social Security and Equivalent Railroad Retirement Benefits;
https://www.irs.gov/publications/p915
Internal Revenue Service, Topic No. 409: Capital Gains and Losses;
https://www.irs.gov/taxtopics/tc409
Internal Revenue Service, Publication 575: Pension and Annuity Income;
https://www.irs.gov/publications/p575
Social Security Administration, Modified Adjusted Gross Income and Medicare IRMAA;
https://secure.ssa.gov/poms.nsf/lnx/0601101010
Weekly Market Update: Softer Data Cools Rate-Hike Bets
Markets traded higher for a third straight week as participation broadened.
The S&P 500 gained 1.2%, the Nasdaq 100 rose 2.4%, and the Russell 2000 small-cap index rose 1.8%. Both the S&P 500 and Russell 2000 reached new all-time highs.
Growth and high-beta stocks led the market higher, though strength wasn't limited to the largest companies.
The equal-weight S&P 500 gained 1.9%, which suggests participation stayed relatively broad.
Technology rose 2.9%, and Energy was the week's strongest sector as oil prices climbed nearly 5%. International stocks generally kept pace with U.S. equities, while the U.S. dollar was little changed.
Bonds traded higher as investors reduced expectations for another Federal Reserve rate hike, with shorter-maturity bonds outperforming longer-maturity bonds. Gold continued to drift higher, while the VIX fell below 15 and remains near its lowest level of the year.
Key Takeaways
The Labor Market Softened in July
The labor market showed more signs of cooling in July. Employers cut 23,000 jobs, and previously reported gains for May and June were revised lower by a combined 103,000, suggesting hiring had already been weaker than first reported.
Even so, the broader picture hasn't fallen apart. The unemployment rate held relatively low at 4.1%, and private-sector employment rose by 30,000.
The report points to a labor market losing momentum, but not yet the kind of deterioration typically tied to a recession.
Why it matters: A softer labor market weakens one of the arguments for keeping interest rates higher. If employment continues to cool without a meaningful rise in unemployment, the Fed may have less reason to tighten policy further.
Inflation Stayed Contained
The latest inflation reports were relatively encouraging. Consumer prices rose just 0.1% in July, and producer prices were unchanged. Both came in below expectations and helped ease concerns that rising oil prices were pushing inflation broadly higher again.
Energy remains a pressure point. The energy component of CPI is still 14.5% higher than a year ago, but that increase hasn't translated into a similar acceleration across broader inflation measures.
Higher energy prices can squeeze households and businesses without necessarily setting off another broad inflation cycle.
Why it matters: Inflation remains above the Fed's target, but July's reports suggest the recent energy shock hasn't spread meaningfully into the rest of the economy. That reduces some of the immediate pressure on the Fed to respond with higher rates.
September Rate-Hike Odds Fell
The outlook for Fed policy shifted meaningfully over the week. Heading into the employment report, markets were assigning better than a 50% probability to a September hike, with persistent inflation concerns and three dissents at the Fed's July meeting keeping another increase firmly on the table.
Then the data changed the conversation. Expectations for a September hike fell after the weaker payroll report, declined again following Wednesday's CPI release, and moved lower still after Thursday's flat producer-price report. In other words, investors are looking at a different backdrop than they were several weeks ago: a softening labor market alongside relatively contained inflation.
Why it matters: With the Fed offering less forward guidance, each incoming report carries more weight. This week's data shifted the balance away from another near-term increase, though that outlook can change quickly if inflation or employment data surprise again.
AI Demand Stayed Strong
The investment boom around artificial intelligence continues to show up in the companies building its infrastructure. CoreWeave, which buys advanced chips, installs them in data centers, and leases that computing capacity to customers, reported quarterly revenue of $2.58 billion and a backlog that climbed to $104 billion.
Other AI-infrastructure companies also reported strong growth during the week, suggesting demand isn't isolated to a single name.
The story increasingly extends beyond software firms and chipmakers to the data centers, power, networking equipment, and computing capacity needed to train and run more sophisticated AI models.
Why it matters: Questions remain about how much companies will ultimately spend on AI and what returns those investments will generate. Even so, rapid growth in demand for computing capacity suggests the underlying buildout remains strong.
Small-Business Confidence Climbed
Small-business owners grew more optimistic in July. The NFIB Small Business Optimism Index rose to 99.8, its highest reading since August 2025 and above its long-term average.
That's notable given the past several years of higher inflation, elevated borrowing costs, and persistent difficulty finding qualified workers.
Those pressures haven't disappeared, but July's survey showed improvement across several categories, including a meaningful increase in hiring plans.
Since small businesses account for nearly half of private-sector employment, improving sentiment offers a useful read on conditions beneath the surface of the broader economy.
Why it matters: Rising confidence suggests some of the pressures weighing on small businesses may be starting to ease. If that continues, it could support hiring, investment, and activity even as growth elsewhere moderates.
Break The Fear That Won't Let You Enjoy What You Built
There's a point in retirement planning when the question changes.
For most of your working life, the question is straightforward: Am I saving enough?
You work. You save. You invest. You avoid unnecessary risks. And, over time, those habits help you build something substantial.
Then retirement arrives, and the question becomes very different: Can I actually use this money without worrying that I'll regret it later?
For some retirees, that question is surprisingly difficult to answer.
The financial plan may say they're fine. Their investments may be substantial. Social Security and pension income may cover a meaningful portion of their expenses.
Even after accounting for healthcare, inflation, taxes, market downturns, and a long retirement, the numbers may still show plenty of financial flexibility.
Yet the fear remains.
What if we live longer than expected?
What if the market falls?
What if healthcare becomes more expensive?
What if our kids eventually need help?
What if something happens that we haven't thought about yet?
Those aren't unreasonable questions. In fact, asking them is part of responsible retirement planning.
Research from the Society of Actuaries continues to show that running out of assets, inflation, healthcare costs, and unexpected financial shocks remain meaningful concerns for retirees.
However, there comes a point when prudence can quietly turn into paralysis.
And when that happens, the biggest risk to your retirement may no longer be running out of money.
It may be reaching the end of retirement with plenty of money left, but too many things you never gave yourself permission to do.
The Habit That Built Your Wealth Doesn't Automatically Retire With You
There's a reason this transition can be so difficult.
The behaviors that helped many successful families accumulate wealth are almost the exact opposite of the behaviors retirement eventually requires.
For decades, the formula was simple.
Earn more than you spend. Save the difference. Invest it. Leave it alone. Repeat.
Every dollar you didn't spend strengthened your financial position.
Then one day, retirement asks you to reverse a habit that may have been reinforced for 30 or 40 years.
Now you're supposed to withdraw money from accounts you spent decades filling.
You're supposed to book the trip rather than save for someday.
You're supposed to help your children or grandchildren while you're alive rather than simply leave everything behind.
And you're supposed to trust that spending money today won't somehow jeopardize tomorrow.
That's a big psychological shift.
One useful way to understand that tension comes from research on what psychologists and financial therapists call money scripts.
Money scripts are underlying beliefs about money that can influence the financial decisions we make.
Researchers Bradley Klontz, Sonya Britt, Jennifer Mentzer, and Ted Klontz originally identified four broad patterns: money avoidance, money worship, money status, and money vigilance.
More recent research examining the revised Money Script Inventory continues to find support for those four categories.
For the kind of retiree we're talking about here, money vigilance is particularly interesting.
Being vigilant about money isn't inherently bad.
Quite the opposite.
Being careful, prepared, private about finances, and concerned about maintaining adequate savings can support many of the behaviors that help someone build wealth in the first place.
That's why I wouldn't look at this as something that suddenly needs to be "fixed" when you retire.
The problem is that a belief can continue doing its old job long after your circumstances have changed.
The voice that once said, We need to save because we don't have enough yet, may still be saying the same thing after you've accumulated enough to fund the retirement you planned.
The circumstances changed.
The script didn't.
The Numbers Can Say Yes While Your Instincts Still Say No
I see variations of this tension regularly in financial planning conversations.
Someone will tell me that one of their primary goals is making sure they never run out of money.
That makes sense.
So, we build the plan around that concern. We model retirement income.
We evaluate investment risk.
We account for healthcare.
We build cash reserves. We examine taxes and withdrawal strategies. Then we stress-test the plan against different assumptions.
And once we've established what needs to be protected, we can begin asking a different set of questions.
Could you travel more?
Could you comfortably spend a little more each month?
Could you take the bigger family vacation?
Could you help your children or grandchildren today?
Could you replace the car, renovate the house, or make another large purchase without undermining the rest of the plan?
Sometimes we'll model those scenarios too.
And occasionally, something interesting happens.
The plan still works.
Yet the client remains hesitant.
At that point, we're no longer dealing primarily with a math problem.
We're dealing with the emotional residue of a lifetime spent protecting against the possibility of not having enough.
That's where the money-script concept becomes useful.
A projection can show us whether a particular level of spending appears financially sustainable. However, it can't automatically erase a belief about money that's been reinforced for most of someone's adult life.
That's an important distinction because another spreadsheet may not solve a problem the spreadsheet has already answered.
When "Enough" Never Feels Like Enough
One of the most difficult questions in wealth management is deceptively simple: How much is enough?
There's almost always another level of financial security available.
If $2 million feels safe, perhaps $3 million would feel safer.
If $3 million feels comfortable, perhaps $4 million would remove the uncertainty.
Then $4 million becomes $5 million.
The finish line can keep moving because the real objective was never a particular portfolio value. It was the feeling of certainty that the portfolio was supposed to provide.
Unfortunately, money can reduce uncertainty, but it can't eliminate it.
You can't know exactly how long you'll live.
You can't know what markets will do every year.
You can't know exactly what healthcare will cost.
And you certainly can't anticipate every financial need your family may have over the next several decades.
A good financial plan accounts for uncertainty. It doesn't pretend uncertainty can be eliminated.
That distinction matters.
Otherwise, you can continue accumulating more financial security while never actually feeling more secure.
Why Spending From the Portfolio Can Feel So Different
There's another wrinkle here.
Not all money feels the same when it's time to spend it.
Research by David Blanchett and Michael Finke using Health and Retirement Study data found that retirees consumed a much larger percentage of available lifetime income, such as Social Security and pension income, than they did from accumulated savings.
Their findings suggest that retirees' willingness to spend can depend partly on how the money reaches them.
That makes intuitive sense.
A Social Security check arrives and feels like income.
A pension payment arrives and feels like income.
But taking $10,000 out of an IRA can feel very different.
You've watched that account grow for decades. You've been taught not to touch it. You've probably celebrated when the balance went up and worried when it went down.
Now your retirement plan is telling you that the account exists, at least in part, to be spent.
Financially, that may be completely rational.
Emotionally, it can feel like moving backward.
And that's why the transition from accumulation to retirement can't be treated as purely a portfolio-management exercise.
Consider the Couple Who Keeps Saying "Maybe Next Year"
Imagine a retired couple who has done almost everything right.
They saved consistently.
They invested prudently.
They avoided excessive debt.
Their retirement income is coordinated. They maintain appropriate reserves. And their portfolio gives them considerably more flexibility than their basic lifestyle requires.
For years, they've talked about traveling more in retirement.
They've also talked about helping their grandchildren while they're young enough to see what that help makes possible.
Yet every year, the conversation sounds roughly the same.
Maybe we'll take the trip next year.
Maybe we should wait before giving the kids anything.
Maybe the market will be better.
Maybe we should keep a little more in reserve.
So, the money stays invested.
Another year passes.
Then another.
Nothing is necessarily wrong with that decision. Some people genuinely prefer spending less. Others intentionally want to leave a larger estate. Those are perfectly legitimate choices.
The question is why the decision is being made.
Is keeping the money part of the plan?
Or does spending it simply feel dangerous?
Those are two very different things.
This is a composite example based on recurring themes I've encountered in financial planning conversations. It doesn't represent the circumstances of any one client.
Your Financial Plan Should Help Separate Fear From Fact
This is where I think financial planning can play a role that goes beyond calculating a withdrawal rate.
The purpose isn't to convince someone to spend more money.
It's to help separate three things that can easily get mixed together: what needs to be protected, what the financial plan can reasonably support, and what fear is preventing you from doing.
First, we have to protect what matters.
That means understanding your recurring lifestyle needs, maintaining appropriate reserves, considering healthcare and long-term care risks, evaluating taxes, testing the portfolio against difficult markets, and accounting for the legacy you actually want to leave.
Those aren't fears to dismiss.
They're planning problems to address.
Then, once we've established those guardrails, we can test what's possible.
What happens if travel spending increases?
What happens if you help the family today instead of leaving all of the money later?
What happens if you spend more during the early years of retirement?
What happens if markets disappoint us?
What happens if inflation remains higher than expected?
The objective isn't to figure out the maximum amount you could possibly spend.
It's to understand the range of choices available to you without putting the priorities we've already protected at unnecessary risk.
Then comes the harder part.
If the plan says you can afford something and you still can't bring yourself to do it, it's worth asking:
What am I actually afraid will happen?
That's a different question than, "Can I afford it?"
And sometimes, it's the more important one.
The Goal Wasn't Just to Accumulate
This matters because retirement isn't simply the final stage of an accumulation plan.
It's the stage when some of the money finally gets to do the job you spent decades preparing it to do.
Perhaps that job is providing financial independence.
Perhaps it's creating experiences with your spouse while you're both healthy.
Perhaps it's helping children or grandchildren at a time when the money could materially change their lives.
Perhaps it's giving more to organizations you care about.
Or perhaps it's simply creating the ability to make ordinary financial decisions without worrying that one purchase will somehow undo 40 years of disciplined saving.
Research on retirement spending gives us some reason to pay attention to this issue.
Blanchett's more recent work finds that inflation-adjusted household spending generally declines as retirement progresses, including among relatively well-funded households.
That doesn't mean every retiree will spend less or that early retirement spending should automatically be increased.
However, it does challenge the assumption that every dollar preserved for later will necessarily have the same value to your life when later finally arrives.
At the same time, caution still matters. Research from EBRI shows that retirees face legitimate longevity and late-life financial risks, and asset-decumulation patterns vary considerably from household to household.
That's why this isn't an argument for reckless spending.
It's an argument for intentional spending.
Give Yourself Permission to Trust the Plan
For some people, the hard part of retirement planning isn't building the portfolio.
They've already done that.
The hard part is believing they no longer have to approach every dollar as though they're still preparing for an uncertain future.
And that's where I think good planning earns its keep.
The goal isn't simply to produce a probability-of-success number and hand you a report.
It's to help you understand what you can control, prepare for what you can't, and make informed decisions about the life you want to live with the resources you've built.
Sometimes the plan will tell us to be careful.
Sometimes it will tell us to wait.
Sometimes we'll need to change the investment strategy, reduce spending, increase reserves, or rethink a goal.
But sometimes the analysis has already done its job.
The risks have been considered.
The contingencies have been modeled.
The money is there.
And the thing standing between you and the life you planned isn't the portfolio anymore.
It's the fear that the portfolio was supposed to solve.
The goal was never to hold on tightest.
It was the freedom to use what you built.
So, name the fear. Understand where it may be coming from. Hold it up against the facts. Then give your financial plan permission to do something more than protect the money.
Let it help you use the money with purpose.
Because there comes a point when financial security isn't just having enough.
It's trusting that enough can finally be enough.
Sources
Klontz, Bradley T., Sonya L. Britt, Jennifer Mentzer, and Ted Klontz. "Money Beliefs and Financial Behaviors: Development of the Klontz Money Script Inventory." Journal of Financial Therapy, Vol. 2, Issue 1, 2011.
https://journals.newprairiepress.org/jft/article/id/5669/download/pdf/
Reiter, Miranda, Jesse B. Jurgenson, and Dee Warmath. "Evaluating the Klontz Money Script Inventory-Revised (KMSI-R): Factorial Validity, Internal Consistency, and Measurement Invariance with a Diverse Sample." Journal of Family and Economic Issues, 2025.
https://link.springer.com/article/10.1007/s10834-025-10055-7
Blanchett, David, and Michael Finke. "Retirees Spend Lifetime Income, Not Savings." Financial Planning Review, Vol. 8, Issue 3, 2025.
https://onlinelibrary.wiley.com/doi/full/10.1002/cfp2.70010
Blanchett, David. "How Spending Evolves in Retirement: A Smile, a Smirk, or Something Else?" Financial Planning Review, 2026.
https://onlinelibrary.wiley.com/doi/10.1002/cfp2.70032
Society of Actuaries Research Institute. "2024 Retirement Risk Survey: Report of Findings." Published 2026.
https://www.soa.org/globalassets/assets/files/resources/research-report/2024/2024-retirement-risk-survey-series-final-report.pd
Employee Benefit Research Institute. "Asset Decumulation Over Retirement and the Role of Guaranteed Income Streams." EBRI Issue Brief, 2026.
https://www.ebri.org/content/asset-decumulation-over-retirement-and-the-role-of-guaranteed-income-streams
Weekly Market Update: Stocks Set Records as Tensions Ease and Oil Retreats
Markets rebounded this week as geopolitical tensions eased and oil prices declined. The S&P 500 gained nearly 4% and set a new all-time high, with the Dow Jones, S&P 500 Equal Weight, and Russell 2000 also setting records.
Technology, Consumer Discretionary, and Communication Services led all sectors, as the mega cap tech stocks known as the Magnificent 7 gained nearly 6.5%.
Energy was the worst-performing sector as oil prices fell nearly 7%, with defensive sectors also lagging the rally.
Bonds gained as oil and Treasury yields fell. Shorter-maturity bonds outperformed as easing inflation fears trimmed the odds of a rate hike, while high-yield corporates outperformed as credit spreads re-tightened, a sign of risk appetite.
The U.S. dollar strengthened slightly, the VIX declined, and gold rose to its highest level since mid-June.
Key Takeaways
Fed Holds Rates Steady for a Fifth Meeting
The Fed held its benchmark rate at 3.50% to 3.75% for a fifth consecutive meeting, the second under Chair Kevin Warsh. Three officials dissented in favor of a quarter-point increase, the most in that direction since 2016, and Warsh offered little guidance on the path ahead.
Stocks declined and Treasury yields rose to multi-year highs after the decision, with the 30-year yield trading near a 19-year high, on concern the Fed was not moving fast enough on inflation and might have to raise rates more later. Markets place around a 60% probability on a hike at the September meeting.
Why it matters: The Fed is providing less guidance about its intentions, which makes its policy path harder to forecast and, in turn, has made interest rates more volatile.
Oil Whipsaws on Middle East Tensions
Oil spiked more than 30% in July as the U.S.-Iran conflict escalated again, with West Texas Intermediate crude above $90 a barrel. It has since reversed by nearly 20% as a planned U.S. strike was paused and talks turned to reopening the Strait of Hormuz, a critical route for global oil trade.
Crude now trades near $75, roughly where it stood before the latest flare-up in early July. The headlines and move in oil prices are the latest in a pattern that has repeated multiple times this year, with each escalation followed by a round of de-escalation and one set of headlines countered by the next.
Why it matters: The conflict and swings in oil prices have added to interest-rate volatility and uncertainty about Fed policy.
Big Tech Earnings Split on AI Payoff
Several of the Magnificent 7 reported quarterly results this week, and investor reactions diverged sharply. The difference came down to how much growth each could show in return for its AI spending.
Microsoft rose 16% after its Azure cloud business grew 43%, the biggest one-day market-value gain for a stock on record, and Amazon gained 10% after its cloud division drove the first ever $200 billion quarter. In contrast, Meta declined as its heavy AI spending and a profit miss weighed on its ad business.
Why it matters: Investors are differentiating among the big tech companies, rewarding clear returns on AI spending and turning more cautious on the rest.
Q2 Growth Slowed but Core Demand Held Firm
The U.S. economy grew at a 1.5% annualized rate from April through June, down from 2.1% in Q1. The slowdown traced mainly to an increase in imports, which count against GDP, and a decline in government spending.
A measure of private demand that combines consumer spending and business investment rose 3.9%, more than double the 1.7% pace of the first quarter, as consumers continued to spend.
Why it matters: The economy's core held up despite the slowdown, with consumer and business demand still growing even as the headline number cooled.
Manufacturing Hit a Four-Year High in July
A widely followed gauge of factory activity, the ISM's manufacturing index, rose to 55.6 in July from 53.3 in June, its strongest reading since 2022. A level above 50 signals expansion.
The improvement was broad: production led the gain, new orders held firm, factory hiring expanded for the first time in nearly three years, and cost pressures eased.
Why it matters: Manufacturing continues to strengthen after several sluggish years, when elevated interest rates and reduced capital spending weighed on activity.
The Market Does Not Need a Recession to Correct
When markets fall, investors often assume something must be wrong with the economy.
They start looking for evidence of a recession, weakening employment, falling consumer spending, or deteriorating corporate profits.
However, markets don't need an economic contraction to experience a meaningful decline.
Sometimes prices simply get ahead of fundamentals.
Indeed, according to Ned Davis Research, moderate corrections of 10% or more happen, on average, once per year. Market declines greater than 15-20% happen once every 2-3 years according to their research.
That’s because valuations can become stretched, interest-rate expectations can change, or investors can crowd into the same companies or sectors.
Additionally, sentiment can shift after a modest earnings disappointment.
And when markets are priced for an unusually favorable outcome, it doesn't take a crisis to force a reset.
That distinction matters because markets and the economy aren't the same thing.
The economy measures activity across businesses, consumers, employment, and production. Markets, on the other hand, reflect what investors are willing to pay today for the cash flows they expect to receive in the future.
As a result, the economy can remain relatively stable while stock prices decline. Corporate earnings may still be growing. Consumers may still be spending. Businesses may still be investing. Yet markets can fall if those outcomes are weaker than investors expected or if the price attached to those outcomes becomes harder to justify.
To be sure, we're seeing some of the forces that can create that vulnerability today.
For example, investors have become more selective about whether artificial-intelligence spending will translate into revenue, cash flow, and profits.
At the same time, higher oil prices and Treasury yields have brought inflation and interest-rate risk back into focus. None of this means a broad correction is underway.
However, it does illustrate how expectations can become more fragile even when the economy isn't falling apart.
In other words, a correction doesn't require a recession. It only requires the market's expectations to change.
Markets Trade on Expectations, Not Just Economic Conditions
One of the most important distinctions we make when evaluating markets is the difference between what's happening in the economy and what investors had already assumed would happen.
The economy tells us what's happening today. Markets are forward-looking, meaning they attempt to price what may happen next.
That means a company can continue growing revenue and profits while its stock declines. If investors expected faster growth, stronger margins, or a clearer return on investment, otherwise respectable results may still disappoint.
Suppose a company reports that earnings increased 10 percent from the prior year. On its own, that sounds like a good result, right?
Well, if the market had expected earnings to grow 15 percent, the stock may still decline. The company hasn't stopped growing, and the business may not be fundamentally impaired. Its results simply weren't strong enough to support the assumptions already reflected in its share price.
The same principle applies to the broader market.
Prices don't fall only when economic conditions become bad. They can also fall when conditions remain good but no longer appear good enough to support current valuations.
That's why a correction can occur before a recession becomes visible in the economic data. It's also why a correction can happen without a recession ever arriving.
Valuation Determines the Margin for Error
Now, a key factor we look at when it comes to market corrections valuations.
That’s because valuation affects how forgiving the market will be when expectations aren't met.
When investors are paying relatively modest prices for future earnings, some uncertainty may already be reflected in stock prices. A company may be able to report a mixed quarter or lower its outlook without producing an extreme reaction.
However, that dynamic changes when valuations become elevated.
A higher valuation often reflects confidence that revenue will keep growing, profit margins will remain strong, interest rates will cooperate, and management will execute with few setbacks. The more favorable assumptions already included in the price, the less room there is for disappointment.
The Federal Reserve describes elevated valuation pressure as a condition in which asset prices are high relative to economic fundamentals or historical norms, often alongside a greater willingness by investors to accept risk.
To be sure, elevated valuations don't tell us exactly when prices will decline, but they can increase the potential for larger losses when expectations change.
That's why a market priced for perfection doesn't need a recession to decline. It may only require the future to look slightly less perfect.
A company might still report higher revenue, but investors may become concerned that expenses are rising faster. A new product may continue attracting customers, but the path to profitability may take longer than anticipated.
An industry may still have a compelling long-term future, but investors may decide they've already paid too much for that potential.
None of those developments requires an economic collapse. They simply require investors to reconsider what they're willing to pay.
Interest Rates Can Reset Prices Without Breaking the Economy
Interest rates can create another source of market pressure.
The value of an investment partly depends on the cash flows investors expect to receive in the future. When the return available elsewhere in the market rises, investors may apply a higher required return to those future cash flows. That can reduce what they're willing to pay today.
At the same time, higher bond yields give investors a more competitive alternative to stocks. Investors may become less willing to accept equity risk when high-quality fixed-income investments offer more attractive yields.
Consequently, the market may demand a lower stock price, a higher expected return, or both.
This effect can be particularly significant for growth companies whose valuations depend heavily on profits expected many years from now. Even when the underlying business outlook remains positive, a change in rates can reduce what investors are willing to pay for those distant earnings.
Bonds can also decline as interest rates rise. Therefore, a period of higher yields can place pressure on both stocks and fixed income without signaling that a recession has begun.
The market may simply be adapting to a different cost of capital.
That's also why inflation matters to investors even when economic growth remains intact. If inflation causes interest rates to stay higher than investors expected, asset prices may need to adjust around that new reality.
Again, the economy doesn't have to contract for that adjustment to take place.
Positioning Can Magnify an Otherwise Ordinary Disappointment
Market corrections aren't driven by fundamentals alone. They're also influenced by how investors are positioned.
When enthusiasm builds around a company, sector, or investment theme, more investors begin owning the same assets for many of the same reasons. Rising prices attract additional capital, recent performance reinforces confidence, and the trade can become increasingly crowded. That process can continue longer than many investors expect.
However, crowded positioning can work in reverse.
A modest disappointment may lead some investors to reduce exposure. Those initial sales push prices lower, which can encourage additional selling from investors who were comfortable with the risk only while prices were rising. Before long, the decline can appear disproportionate to the news that caused it.
The headline may be the catalyst, but valuation, positioning, and sentiment often determine the size of the reaction.
That's another reason markets don't need a recession to correct. A crowded trade can unwind because the expectations supporting it have changed, even when the broader economy remains relatively stable.
Today's Environment Shows the Ingredients, Not the Outcome
The current market environment helps illustrate these forces, but it's important not to overstate what the recent data tells us.
The market hasn't experienced a broad correction simply because some growth and technology investments have come under pressure. Instead, investors have started applying greater scrutiny to companies making large artificial-intelligence investments. The question is shifting from how much those companies can spend to whether that spending can generate sufficient growth, cash flow, and profitability.
Meanwhile, renewed inflation concerns and higher interest rates have complicated the valuation backdrop. These developments don't prove that a correction is coming, and they certainly don't tell us when one might occur. They do, however, show how the assumptions supporting market prices can change.
A company can remain profitable while investors become less willing to pay a premium for its future growth. The economy can remain intact while interest rates force investors to reconsider valuations. A popular investment theme can continue having long-term potential while the stocks associated with it experience a short-term reset.
The current environment makes the subject timely. It doesn't serve as evidence that a broad correction has already occurred.
For evidence of the thesis itself, history provides a cleaner example.
The Fourth Quarter of 2018 Offers a Useful Example
During much of 2018, the Federal Reserve described asset valuations and investor appetite for risk as elevated. The economy, meanwhile, remained in an expansion.
Then, during the fourth quarter, market volatility rose sharply and equity prices declined. That drop reduced valuation pressure in stocks and corporate bonds, even though the underlying economic expansion continued.
The Federal Reserve later reported that economic growth remained solid during the second half of the year, with real gross domestic product growing a little less than 3 percent for 2018 as a whole.
The economy didn't enter a recession in 2018. According to the National Bureau of Economic Research, the expansion that began in June 2009 continued until economic activity peaked in February 2020.
That doesn't mean the 2018 decline was unimportant or that investors knew the economy would continue expanding. It means a meaningful market reset occurred without a concurrent recession.
Investors reassessed valuations, interest rates, global growth expectations, and their appetite for risk. Stock prices adjusted even though the economic expansion still had more than a year to run.
That's the distinction investors often miss.
A market decline may reflect concern about what could happen next. It may reflect a lower price investors are willing to pay for the same earnings. Or it may simply reverse some of the optimism that had already been built into prices. It doesn't automatically mean the economy has entered a recession.
How We Read a Market Decline
In our investment process, we don't treat every pullback as evidence that the long-term plan is broken. Over the years, we've learned to ask the same question first, before anything else. Is the market repricing expectations, or is the economy actually deteriorating?
That single question does most of the work. The market can reprice for all the reasons we've described, stretched valuations, higher rates, crowded positioning, a modest earnings disappointment, without the economy changing at all. So the first thing we look for isn't a headline. It's evidence of genuine financial stress.
Credit conditions tend to tell us the most. When investors grow truly concerned about borrowers' ability to repay, that worry shows up in credit markets before it appears almost anywhere else. When credit spreads stay calm while stocks fall, the decline usually looks more like repositioning than a fundamental break.
When spreads widen meaningfully, we pay closer attention. That's the same signal we've relied on through past pullbacks, and it rarely misleads us.
From there, the rest of the read fills in around that question. We look at whether weakness is broad or concentrated, because a decline led by a handful of highly valued companies tells us something different from weakness spreading across most sectors and company sizes.
We look at whether corporate fundamentals are deteriorating across the market or whether a smaller group of companies is simply failing to meet elevated expectations, because there's a real difference between profits falling throughout the economy and a profitable company disappointing investors who wanted more.
And we consider whether interest rates are changing the return investors demand, because a higher discount rate can lower prices even when the expected cash flows haven't weakened at all.
None of those readings, though, answers the only question that ultimately matters to you. Does this decline change your plan?
That's where we finish, every time. We return to the purpose of the money.
Has your time horizon changed?
Have your near-term spending needs increased?
Is there enough liquidity in place?
Has your willingness or ability to accept risk changed?
We also look at whether prior performance has quietly left the portfolio more concentrated than intended, because an investment that did well can grow into a larger position and leave you more dependent on one company, one sector, or one outcome than you meant to be.
A correction that doesn't change your goals, time horizon, or cash-flow needs may not require any change to the long-term strategy.
However, a portfolio that was too concentrated, too aggressive, or too dependent on near-term withdrawals may reveal a weakness that deserves attention.
This approach doesn't let us predict the market's exact bottom.
Nothing does.
But it does help us tell the difference between normal repricing, broader financial stress, and a portfolio problem that actually requires action. That distinction is the one that protects the plan.
Diversification Matters When Leadership Changes
The purpose of portfolio construction isn't to eliminate every decline. That isn't realistic.
Instead, the goal is to build a portfolio that doesn't require every part of the market to perform well at the same time.
Market leadership changes. Growth can outperform value for an extended period before the relationship reverses. Domestic stocks can lead international markets until valuation differences begin to matter. Longer-term bonds can provide diversification in one environment and struggle when inflation and interest rates rise. No allocation works best under every condition.
That's why diversification isn't simply about owning more investments. It's about reducing the portfolio's dependence on one company, one investment style, or one economic outcome.
The SEC describes asset allocation as dividing investments among categories such as stocks, bonds, and cash. It also emphasizes that investors should look beneath fund labels and examine underlying holdings, because owning several funds doesn't necessarily create meaningful diversification.
Diversification can't prevent losses or guarantee better returns. However, it can reduce the risk that weakness in one narrow part of the market disrupts the entire plan.
Rebalancing provides another layer of discipline. When one area has risen far beyond its intended allocation, rebalancing can reduce unintended concentration.
When another area has fallen below its target, the process can create a systematic way to restore exposure without relying entirely on emotion or short-term predictions.
The SEC identifies asset allocation, diversification, and rebalancing as related tools for managing portfolio risk over time.
Adequate liquidity matters as well. Investors who have their near-term spending needs covered are generally in a better position to tolerate volatility. They're less likely to become forced sellers during a decline and less dependent on correctly predicting when the correction will end.
In our experience, these decisions are best made before markets become unsettled. It's far easier to build discipline into a portfolio when nothing is going wrong than to manufacture it in the middle of a selloff.
Build for the Reset Before It Arrives
Corrections are uncomfortable because they create uncertainty without providing a clear endpoint.
Nevertheless, they're a normal part of investing.
A durable investment plan shouldn't depend on the economy avoiding every slowdown, interest rates moving exactly as expected, or investors remaining permanently enthusiastic about the same companies.
It should assume that valuations will occasionally reset, market leadership will change, and prices will sometimes decline even when the economic backdrop remains relatively stable.
Therefore, the important question isn't whether the market will experience another correction. It will.
The more important question is whether your portfolio was built to withstand one.
A pullback isn't automatically evidence that the plan has failed. Sometimes it's simply the market adjusting expectations, demanding greater discipline, and returning prices to a level that better reflects the risks ahead.
The market doesn't need a recession to correct. Likewise, a disciplined investor doesn't need to predict every correction to be prepared for one.
So the real question isn't whether you can see the next correction coming. It's whether your plan is ready when it does.
Sources
Federal Reserve Board, Financial Stability Report: Asset Valuation Pressures, November 2018; https://www.federalreserve.gov/publications/2018-november-financial-stability-report-asset-valuation-pressures.htm
Federal Reserve Board, 2018 Annual Report: Monetary Policy and Economic Developments; https://www.federalreserve.gov/publications/2018-ar-monetary-policy.htm
National Bureau of Economic Research, Determination of the February 2020 Peak in US Economic Activity, June 8, 2020; https://www.nber.org/news/business-cycle-dating-committee-announcement-june-8-2020
U.S. Securities and Exchange Commission, Investor.gov, Asset Allocation and Diversification; https://www.investor.gov/introduction-investing/getting-started/asset-allocation
Stock Market Corrections Are Normal — Ned Davis Research (PDF); https://www.ndr.com/hubfs/NDR/Business%20Developer/pdfs/EDU_8_WM_public.pdf?hsLang=en
July Market Update: A Loud Month, a Quiet Market
July gave investors plenty to think about.
Geopolitical tensions flared again in the Middle East. AI stocks pulled back after a strong start to the year. And the Federal Reserve had another rate decision to make.
Yet when the month was over, the market had barely moved.
The S&P 500 returned -0.1%.
Beneath that flat headline, though, there was quite a bit going on. Energy led every sector with a +12.6% return as geopolitical tensions pushed oil prices higher. Financials followed at +6.2%. The more defensive corners of the market held up well too, with Real Estate (+2.5%), Health Care (+2.4%), and Consumer Staples (+2.1%) all gaining ground.
Technology was the outlier. The sector fell -3.4% as AI stocks gave back some of the gains they'd built up earlier in the year.
Bonds had a tougher month.
The U.S. Aggregate Bond Index returned -1.3% as Treasury yields moved higher. The culprit was familiar: rising oil prices, tied to the renewed U.S.-Iran conflict, brought inflation concerns back to the surface. Investment-grade corporate bonds lagged with a -1.5% return, while high-yield corporates held up a bit better at -0.3%.
Overseas, the picture was mixed. Developed international markets gained +2.0% and outperformed the S&P 500. Emerging markets went the other way, returning -3.0%, as the same U.S. tech selloff weighed on South Korean stocks.
Markets Turn Back to the Middle East as Tensions Resurface
The ceasefire from earlier this spring didn't hold.
Renewed conflict between the U.S. and Iran brought back the same headlines and the same concerns we saw earlier in the year. Once again, uncertainty around the Strait of Hormuz raised the risk of reduced oil supply. Late in the month, there were signs of another round of de-escalation, but the situation remains fluid.
This matters for the same reason it did the first time around.
After all, energy prices feed directly into inflation. And inflation, in turn, shapes what the Federal Reserve decides to do next.
In July, the Fed held interest rates steady for the fifth consecutive meeting. But it wasn't a unanimous call. A handful of officials pushed for a +0.25% rate hike, pointing to the renewed inflation risk.
If this feels familiar, that's because it is.
We've now moved through this same cycle several times this year. Conflict escalates. Oil prices rise. Tensions ease. And then the pattern repeats. The specific headlines shift from week to week, but the market has absorbed this same shock more than once.
The Fed's split decision reflects that uncertainty. Officials are debating their next move, but for now they're choosing to gather more information rather than react to the latest headline.
And here's the part worth remembering: despite all the noise, the net impact on markets has been limited. Stocks rebounded from the March selloff, and the S&P 500 has returned nearly +10% this year.
AI Stocks Trade Lower as Investors Shift Focus from Growth to Discipline
Second-quarter earnings season kicked off in July, and the biggest names in AI all reported: Alphabet, Microsoft, Meta, Apple, and Amazon.
These are the companies pouring money into data centers and the other infrastructure needed to power artificial intelligence. This quarter, they laid out their forecasts and their spending plans.
Something had changed in how investors received them.
For the past two years, the AI conversation was all about scale. How much are these companies spending? How fast are they building? How big could the opportunity get? This quarter, the focus shifted to a different question: profitability and return on investment.
In plain English, investors started pushing back on the spending.
Companies whose investments are clearly translating into growth, like Microsoft's cloud business, were rewarded. Companies whose spending has outpaced their cash flow, or started to weigh on profit margins, saw their stocks move lower.
The market is no longer content to reward growth and big spending numbers on their own. It's asking a harder question: is the spending actually profitable, or are expenses climbing faster than revenue?
This is a healthy development.
Every major technological buildout eventually reaches a point where investors stop rewarding growth for its own sake and start looking for results to match. July was the month that question arrived for AI.
As that scrutiny set in, semiconductor stocks and other parts of the AI trade gave back some of their earlier gains, with investors questioning whether the current pace of spending could last.
But it's worth keeping the pullback in perspective.
The volatility stayed relatively contained. For instance, the equal-weight S&P 500, a proxy for the average S&P 500 stock, set a new all-time high late in the month, and seven of the eleven sectors finished higher. Credit spreads, which measure how worried the market is about credit risk, widened only modestly and remain very tight by historical standards. And even after the pullback, semiconductor stocks are still up nearly +60% for the year.
As for the companies doing the spending? They're forecasting even higher spending levels in the quarters ahead.
What This Means for Investors
July was a busy month that, on the surface, went almost nowhere.
Geopolitical tension returned. AI leadership wobbled. The Fed stood pat, but not without disagreement. And through all of it, the S&P 500 finished essentially flat.
That's a useful reminder.
A lot can happen in a month without much of it showing up in your account balance. The headlines were loud, but the market's response was measured, and in some ways more disciplined than it's been in a while.
That discipline is the theme worth holding onto. Whether it's a geopolitical shock the market has already learned to absorb, or a shift toward asking harder questions about AI spending, the through-line is the same. Markets are starting to separate noise from results.
For long-term investors, that's not something to fear. It's something to build around.
Monthly Market Update: Stocks Set Broad Records as Rates Climb
The S&P 500 Index returned +2.7% in August and set a new high. Five of the eleven S&P 500 sectors traded higher, with four outperforming the broad index. Energy (+7.0%) led all sectors, followed by Technology (+6.2%) as the sector rebounded from a July selloff and Materials (+6.0%) as gold gained nearly 10%. Utilities (-4.8%) led to the downside, followed by Industrials (-2.6%) and Real Estate (-1.9%).
Bonds traded higher despite Treasury yields rising throughout the month, with the U.S. Bond Aggregate returning +0.4%. Investment-grade corporate bonds modestly outperformed with a +0.5% total return, while high-yield gained 1.0%.
International stocks traded higher in August. Developed markets gained 2.0% and underperformed the S&P 500, while emerging markets returned +3.4% and outperformed as international tech stocks rebounded alongside U.S. tech stocks.
Stocks Set New Highs as Rates Climb
Equity markets traded higher in August, with strength extending across most broad stock market indexes. The S&P 500, Dow Jones, Russell 2000, and equal-weight S&P 500 all set new all-time highs during the month, and the Nasdaq 100 approached its June high.
The breadth of records was notable because the indexes capture very different parts of the market, from mega-cap tech to small-caps and the average S&P 500 company.
Market leadership has shifted multiple times this year, alternating between broad participation and concentration. August looked different, with strength spread across a wide range of companies and equity market segments.
The bond market offered a counterpoint to the strength in stocks. Treasury yields faced broad upward pressure during August, with the 10-year yield climbing above 4.75%, the highest since January 2025, and the 30-year approaching 5.30%, its highest level since 2007.
The rise in longer-term yields reflected several concerns, including persistent inflation, elevated government borrowing, and renewed uncertainty around energy prices.
Near the end of the month, Fed Chair Kevin Warsh's Jackson Hole speech signaled that the Fed's next move could be a rate hike rather than a rate cut, which added further upward pressure on Treasury yields. Despite the rate volatility, corporate credit spreads remained relatively calm and sit near record lows, suggesting investors are more concerned about the path of interest rates than companies' ability to repay their debt.
Markets Learn to Live with Headline Volatility
Geopolitics have dominated headlines this year, but their impact has changed as the year progresses. Oil prices continue to move when Middle East developments alter the outlook for global energy supply.
The difference is that investors appear less willing to treat each new headline as an economic shock. Earlier this year, the start of the conflict and disruption in the Strait of Hormuz caused oil prices to surge and contributed to a broad stock market selloff. Since then, investors have experienced several rounds of escalation and de-escalation.
Oil still jumps on new developments, but markets are increasingly waiting for evidence that a headline will affect energy supply, inflation, and economic growth before reacting as dramatically as they did in March.
Artificial intelligence is the second dominant market theme. Investors continue to debate whether the large sums being spent on data centers, computer chips, power generation, and networking equipment will ultimately generate adequate returns, but the companies making those investments keep moving ahead.
Nvidia's earnings report provided another indication that demand for AI infrastructure remains strong, with quarterly revenue more than doubling from a year ago. Spending plans across the industry keep rising as companies race to add computing capacity and build the infrastructure needed to support AI.
There are still questions about the eventual return on the hundreds of billions being spent, but the debate in financial markets has done little to slow the companies making the investments.