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Financial Advice

Weekly Wrap: Inflation Updates, Sustainable Investing Tips, and Cheap Wide-Moat Picks

Where investors stand two weeks after Russia invaded Ukraine.

Managing Interest-Rate Risk

After much telegraphing that it would do so, the Federal Reserve raised interest rates this week by 25 basis points--and signaled that there are more to come. Of course, the stock and bond markets have already priced in several interest-rate hikes in 2022. That’s at least partly why growth stocks have struggled as much as they have this year and why high-quality bonds are in the red for the year to date.

But perhaps the Fed's action is just the kick in the pants investors need to examine the interest-rate risk of their portfolios. My colleague Christine Benz offers some tips for figuring out whether your portfolio is ready for rising interest rates. Ben Johnson explains whether you should be worried about how your dividend-paying stocks may perform in a rising-rate climate. And put your bond funds through a duration stress test to see how they may respond to ongoing rate hikes.

8 Must-Own Stocks

For some things in life, we seek stamps of approval. Maybe we've built a proposal for a new product idea, hopeful that upper management will put together a small team to explore it further. Or we make a new recipe and are encouraged when our often-mum teenagers say how good it is. Or we decide to use a certain contractor for our bathroom remodel because two neighbors had good experiences--and now have stunning bathrooms.

Similarly in investing, knowing that a well-respected money manager owns a stock that you own--or a stock that you’re eyeing--can serve as a stamp of approval. So in my Our Picks column this week, I turned to some of our favorite concentrated-fund managers--seven in all, covering the growth-to-value spectrum--for stock ideas. Specifically, I focused on stocks that at least three of the managers owned; eight stocks made the cut. Six of the seven managers own Alphabet GOOGL, which we think is undervalued today. Find out the other seven stocks these managers have in common.

Emerging-Markets Fund Woes

"Investors in emerging-markets stock funds have been hit with a one-two punch," wrote my colleagues Katherine Lynch and Lauren Solberg in a column this week. Punch one: the collapse of the Russian market after Russia invaded Ukraine. Punch two: freefalling Chinese stocks amid a growing dispute between China and U.S. regulators. As I write this, diversified emerging-markets stock funds are down more than 16% this year. (Of course, given the extreme market volatility, they may be up 16% by the time you're reading this!)

Are emerging-markets stock funds worth the risk? My colleague John Rekenthaler thinks not. John has pointed out that emerging-markets stocks have lagged over most periods, offer less diversification benefits than they have in the past, and have "suspect" expected returns. "It is not clear that buying a package of stocks from countries labeled as 'emerging' makes more sense than, say, buying one from countries whose names begin with the letter B," quips John. He instead suggests sticking with wider-ranging funds where managers can decide where the risk might be worth taking; emerging markets aren't an asset class all their own, he concludes.

Those who beg to differ should review this article from Morningstar senior analyst Dan Sotiroff. Dan runs through the various risks inherent in emerging-markets stock investing and suggests how to mitigate them.

Stock of the Week: Starbucks

Starbucks SBUX CEO Kevin Johnson announced his retirement effective April 4; former CEO Howard Schultz will temporarily retake the reins of the coffee chain until a long-term successor is named, most likely by fall, according to the firm. Expecting strategic continuity, we maintained our $106 fair value estimate and Exemplary Morningstar Capital Allocation Rating of the firm, said analyst Sean Dunlop.

“Starbucks' incoming CEO will have plenty on their plate, with sharp increases in commodity and labor costs figuring to pressure operating margins through at least the next two years,” he noted. “The organized labor movement also figures to attract management attention, while periodic operating disruptions in China add another degree of execution risk.” Shares rallied on the news, but the wide-moat stock still looks undervalued to us as of this writing.

Another Plug for Morningstar’s Tax & IRA Guide

Regular Smart Investor readers are no doubt tired of my promotion of Morningstar’s 2022 Tax and IRA Guide. But I also suspect that many of you still have some dangling tax issues. For some, it may be getting your 2021 taxes filed. For others, it may be actually investing that IRA that you funded for 2021. For still others, it might be weighing whether to pursue a backdoor Roth IRA. Sound like you? If yes, check out our guide for, er, guidance.

--Susan Dziubinski

Editor's Picks

Fed to Investors: Just the Beginning for Rate Hikes In a mission to fight inflation, Wednesday's rate hike is likely the first of eight this year alone.

What Rising Inflation Means for Your Portfolio Continued higher inflation would have far-reaching implications for portfolio diversification, but there’s no need to panic.

8 Stocks to Own These names are widely held among some of our favorite concentrated-fund managers.

Finding the Right ESG Funds for Your Portfolio, Part 2 By taking the time to explore the different approaches to sustainable investing, you can find the right investments for your situation.

Terry Odean: Who's on the Other Side of the Trade? A noted researcher examines investors' trading behavior in the Robinhood era, the role of social media, and gender differences in investing.

Secure Act Proposed Regulations: Good News and...Other News Here's how new proposed regulations will make leaving benefits to a trust easier.

Portfolio Planning and Personal Finance With Christine Benz

Should You Tap Your Retirement Account to Buy a Home? We run down the taxes, penalties, and other risks of using retirement assets for a home purchase.

Backdoor IRA Pitfalls to Avoid Expert Ed Slott describes what you need to know if you're considering a backdoor Roth contribution.

Backdoor Roth IRA? Avoid These 5 Mistakes These errors can jack up tax--and opportunity--costs.

Mutual Funds and Exchange-Traded Funds

How to Invest Your Funny Money Playing with the funds set aside for discretionary use still requires planning and discipline.

Size Concerns Downgrade 2 Fidelity Fund Ratings Here are some ratings highlights from February.

Fund Lineup Turnover in 6 Charts These factors help explain the changes to the fund offerings of a market or firm.

Amid Rising Rates, These Equity-Income Funds Offer a Lot to Like These equity-income strategies tend to hold up better in market selloffs while providing a reasonable income stream.

China Stock Plunge Hits Emerging-Markets Funds Hard Big losses in China come on the heels of a Russian stock wipeout.

Dividend Investors: Don't Sweat Rising Interest Rates Owning quality companies that regularly return cash to shareholders is a solid strategy.

A Few Tips on TIPS Here's a look at a couple of competitive offerings in the inflation-protected bond Morningstar Category.

U.S. Equity Funds Led All Fund Flows in February Investors bought U.S. equity funds and sold bond funds against a backdrop of the Russian invasion of Ukraine.

What’s Really Inside Equity ESG Portfolios? Any stock you can think of is on the menu.


Are Delistings of Chinese Stocks on Their Way? The SEC has singled out Yum China, four others for potential delisting in 2024 over accounting standards.

What a Fed Rate Liftoff Means for Stocks Historically, stocks have done well in the months after an initial rate increase.

Auto Sales Set to Recover in 2022 Despite near-term uncertainty, there are many reasons to be optimistic about long-term demand.

8 Stocks That Are High in Quality, Cheap in Price As the market stays in correction territory, high-quality undervalued stocks including Biogen and Salesforce look poised to gain.

Is TSM Stock a Buy? When it comes to this chipmaker, invest based on fundamentals, not headlines, says Morningstar's analyst.

Sustainability Matters

4 Things to Know Before Talking to Clients About ESG Investing Sustainable investing can be an appealing, but complex, subject.

Does Investing in ESG Hurt Pension Plans? Studies focused on public pensions do not tell us much about 401(k)s and ESG.

Rekenthaler Report

The Struggles of Quantitative Investing When being smart and skilled is not enough.

Why the New Normal Didn't Arrive The prognosticators were correct about the economy, but not about shareholder motivations, in this article from the archives.


Should You Build a Portfolio of Compensated Risk Premiums? Financial expert Andrew Miller talks portfolio construction and ways you can hedge risks.

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