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As the Federal Reserve (Fed) approaches a leadership transition, the institution once again finds itself at the center of both economic and political attention. The current Administration has nominated Kevin Warsh to succeed Jerome Powell when Powell’s term concludes this month.1 Warsh, a former Fed governor during the 2008 global financial crisis, is widely viewed as an experienced (but potentially more politically scrutinized) choice, particularly given ongoing debates around interest rates and inflation.2
His nomination, and the broader discussion surrounding it, highlights a theme that has defined the Federal Reserve since its founding: the ongoing tension between independence and accountability. While leadership changes often draw attention, history suggests something more important for investors—policy evolves, conditions change, but disciplined investment strategies endure.
That is especially relevant today. Regardless of the changing Fed chair, staying invested is the enduring message.
To understand why leadership transitions matter less than they appear, it is helpful to step back and examine how the Federal Reserve evolved.
The Fed was born out of crisis. Following the Panic of 1907, policymakers recognized the need for a more stable and responsive financial system.3 The result was the Federal Reserve Act of 1913, which created a uniquely American central bank. Rather than a single centralized authority, it was designed as a system of 12 regional banks overseen by a central board in Washington. This structure was meant to ensure the balancing of national authority with regional input.
At its core, the structure of the Federal Reserve is built on trust: how to establish it, maintain it, and protect it from shifting political and economic pressures.
From the beginning, the Fed needed to strike a delicate balance. It was established by and is accountable to Congress yet is expected to operate independently from day-to-day political pressures. This concept, often described as being “independent within government,” remains one of its defining characteristics.4
In practical terms, Federal Reserve independence means the ability to make monetary policy decisions, especially around interest rates, without direct political interference. This insulation is meant to help prevent short-term political incentives from undermining long-term economic stability.
However, independence has never been absolute. Fed independence has been tested by sitting presidents on several occasions, especially when political pressures collided with monetary policy. A well-known example came in the 1960s, when President Lyndon Johnson reportedly confronted Fed Chair William McChesney Martin in an intense and physically intimidating exchange over interest rates.5
Throughout its history, the Fed has continuously navigated tension between autonomy and accountability. Legislative changes such as the Banking Act of 1935 strengthened its independence, while periods of war, inflation, and financial stress have tested its limits.6
This tension is not a flaw; it is a feature. It reflects the reality that monetary policy operates within a broader political and economic system. And importantly, it reinforces a key point: leadership changes may influence tone and communication, but the institutional framework remains intact.
The Federal Reserve is not a static institution. It is one that has continuously adapted in response to economic shocks.
Across each of these periods, the tools evolved, the challenges changed, and leadership shifted. Yet the broader objective remained consistent: supporting economic stability over the long term.
For investors, this history reinforces an important lesson—economic environments will change, often unpredictably, but markets and institutions adapt over time.
While structure defines how the Fed operates, its mandate defines what it is trying to achieve. Following the Federal Reserve Reform Act of 1977, the Fed was formally tasked with promoting maximum employment and stable prices.
Full employment represents a labor market that is functioning efficiently—not overheated, but not weak. It allows for structural and frictional unemployment, but is not characterized by cyclical unemployment associated with economic downturns.
To assess this balance, the Fed compares the current unemployment rate to estimates such as the noncyclical rate of unemployment (NROU), often referred to as the “natural rate.”10 As of March 2026, unemployment stood at 4.3%, close to the estimated 4.4% NROU, which suggests a labor market that is within a sustainable range.11
Sources: https://fred.stlouisfed.org/series/NROU and https://fred.stlouisfed.org/series/UNRATE
The second part of the mandate is stable prices. Although this is more straightforward in definition, it may not be in execution. The Fed targets inflation of 2% over the long term, typically measured by the core Personal Consumption Expenditures (PCE) price index, which excludes more volatile components such as food and energy.
Recent data analysis shows core PCE inflation at 3.2%, down from a peak of 5.4% in 2022, but still above target.12
Source: https://fred.stlouisfed.org/series/PCEPILFE
Balancing these two objectives is inherently complex. Policies that support employment can increase inflationary pressures, while efforts to control inflation can slow economic growth.13 As a result, monetary policy is less about precision and more about continuous adjustment.
Recent geopolitical developments, particularly conflict in Iran and the closing of the Strait of Hormuz, have introduced a new layer of uncertainty into the economic outlook. Oil prices, measured by West Texas Intermediate, rose sharply from around $65 in early 2026 per barrel to over $100 in April.14 Because energy is a key input across industries, this increase has contributed to broader inflationary pressure.
The ultimate impact depends heavily on duration. A short-lived spike may have limited effects, while prolonged elevated prices could reduce consumer spending and increase the risk of stagflation. This environment places the Fed in a difficult position—respond too aggressively, and risk slowing the economy; respond too slowly, and risk allowing inflation to persist.
Research from former Fed chair Ben Bernanke provides useful context. His analysis suggests that past economic downturns associated with oil shocks were often driven more by aggressive interest rate increases than by the shocks themselves.15 This supports a more measured approach to policy, one that avoids overreacting to temporary supply-driven inflation.
Current Fed chair Powell reinforced this perspective. During a March press conference, he noted that it’s “standard learning that you ‘look through’ energy shocks, but that’s always been dependent on inflation expectations remaining well anchored.”16 Current market-based measures suggest that, for now, those expectations remain stable.
At One Day In July, portfolio construction is built on a simple principle: markets will change, but discipline should not. Rather than attempting to predict the exact path of monetary policy or economic cycles, we focus on building portfolios designed to perform across a range of environments.
A key component of this approach is the use of bonds structured to respond under different conditions. In periods of higher inflation and interest rates, they typically provide resilience through income. If growth slows and rates decline, they typically act as a stabilizer offering price appreciation.
This flexibility allows portfolios to adapt without constant adjustment. Fixed income in this context is not just a source of return, but a tool for managing uncertainty within a broader portfolio.
Today, the Federal Reserve’s independence remains under scrutiny, with political pressure and leadership changes contributing to uncertainty around future policy. Yet the principle is unchanged: effective monetary policy depends on credibility and decisions driven by economic data, not political timelines.
For investors, however, the implications are often overstated. Markets are forward looking, and attempts to reposition portfolios based on short-term expectations introduce costs and risks that can erode long-term returns. This is especially relevant given how difficult timing has historically been.
Periods of uncertainty do not invalidate a long-term strategy; they reinforce its importance. Our approach reflects a broader reality of the Federal Reserve continuing to evolve, leadership changing, and economic conditions shifting. These are not exceptions—they are defining features of markets.
Regardless of the Fed Chair, staying invested is the message. Investing for the long term remains the strategy.
One Day In July LLC is an SEC-registered investment advisor. Registration does not imply a certain level of skill or training. One Day In July LLC does not guarantee actual returns or losses. The content of this newsletter is for educational purposes only and is not investment advice. Individual circumstances may vary.
Sources:
[1] Reuters, Fed Chair Nomination (April 2026). https://www.reuters.com/world/us/senate-panel-vote-wednesday-advancing-fed-chair-warshs-nomination-2026-04-27/
[2] Fortune, Fed on Inflation and Independence (April 2026). https://fortune.com/2026/04/21/kevin-warsh-senate-banking-committee-statement-full-text-inflation-independence/
[3] The Federal Reserve, Explanation. https://www.federalreserve.gov/aboutthefed/fedexplained/who-we-are.htm
[4] The Federal Reserve, Independent Within Government (March 2017). https://www.federalreserve.gov/faqs/about_12799.htm
[5] Federal Reserve Bank of Richmond, 1965 Clash (Q3-4 2016), vol 21. https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf
[6] Federal Reserve History, Banking Act of 1935 (November 2013). https://www.federalreservehistory.org/essays/banking-act-of-1935
[7] The Federal Reserve, Annual Report of 1951 (March 1951). https://www.federalreserve.gov/monetarypolicy/files/fomcropa19510302.pdf
[8] Stanford University, How the Fed Works (March 2020). https://siepr.stanford.edu/publications/policy-brief/how-do-federal-reserves-new-tools-really-work
[9] The Federal Reserve, What the Central Bank Does (August 2021), page 34. https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf
[10] FRED, Federal Reserve Bank of St. Louis, Noncyclical Rate of Unemployment (May 2026). https://fred.stlouisfed.org/series/NROU
[11] FRED, Federal Reserve Bank of St. Louis, Unemployment Rate (May 2026). https://fred.stlouisfed.org/series/UNRATE
[12] Bureau of Economic Analysis, Personal Income and Outlays (March 2026). https://www.bea.gov/sites/default/files/2026-04/pi0326.pdf
[13] The Federal Reserve, Inflation and Unemployment (July 2024). https://www.federalreserve.gov/faqs/money_12856.htm
[14] Investing.com, Crude Oil Futures (May 2026). https://www.investing.com/commodities/crude-oil
[15] Brookings, Monetary Policy and Oil Prices (1997). https://www.brookings.edu/wp-content/uploads/1997/01/1997a_bpea_bernanke_gertler_watson_sims_friedman.pdf
[16] The Federal Reserve, Chair Powell’s Press Conference (March 2026). https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260318.pdf
As the end of tax season approaches, it’s a natural time to reflect not just on what you owe, but on how taxes impact your long-term investment outcomes. Thoughtful tax planning isn’t just an annual exercise, it’s also an ongoing part of building and preserving wealth.1
Taxes are often overlooked, yet they play a critical role in investment outcomes. In taxable accounts—such as brokerage accounts and trusts—returns are ultimately realized in after-tax dollars, even though many projections focus on pre-tax performance. To manage this effectively, investors should focus on three key factors: asset location, investment structure, and tax drag.
Asset location refers to the type of account holding an investment. Broadly, these fall into two categories of accounts: tax-advantaged and taxable.
Tax-advantaged accounts, such as 401(k)s and IRAs, shield investors from current taxes on capital gains, dividends, and interest. In most cases, withdrawals are taxed as income (with the exception of Roth accounts, which are funded with after-tax dollars that can be withdrawn tax-free). This tax deferral allows for more efficient compounding and lower-cost rebalancing over time.
Taxable accounts, by contrast, incur taxes when gains are realized or income is generated. However, they offer important advantages. Long-term capital gains are taxed at lower rates than ordinary income and, in some cases, at 0%.2 In addition, taxable accounts allow for tax-loss harvesting, where realized losses can offset gains elsewhere or reduce a portion of ordinary income each year.
The types of investments used are important to consider. When simplicity and diversification are priorities, the two primary investment vehicles implemented in portfolios are mutual funds and exchange-traded funds (ETFs). Both can hold similar underlying assets, but their tax efficiency can differ materially. If a mutual fund sells a security, or if its shareholders redeem shares, the fund may need to sell underlying holdings in the open market, passing any resulting capital gains on to remaining shareholders.
ETFs are different. They use a creation and redemption process that allows shares to be exchanged “in-kind,” helping reduce or eliminate capital gains while investors hold the fund. Creations typically occur when demand pushes an ETF’s price above its underlying value. In this case, authorized participants (APs) deliver the underlying securities to the fund issuer (e.g., Vanguard or State Street) in exchange for newly created ETF shares. Redemptions work in reverse, with APs exchanging ETF shares for the underlying holdings. This process helps keep the fund’s price aligned with its assets while minimizing taxable events.
Source: www.schwab.com
Tax drag is the reduction in returns caused by taxation—the difference between pre-tax and after-tax performance.3 Investments that generate frequent taxable income, such as bank CDs, high-yield savings accounts or actively traded strategies, tend to experience higher tax drag.
Over time, this drag compounds. Even if two investments generate the same pre-tax return, the one with lower tax exposure can produce significantly better after-tax results.
For example, assuming a $100,000 investment growing at 7.5% with a 20% tax rate, a tax-free portfolio grows to nearly $425,000 over 20 years. A tax-deferred portfolio reaches about 80% of that value, while a portfolio taxed annually realizes only about 68%. The difference is driven entirely by taxation.
**Assumptions: $100,000 starting portfolio balance, 7.5% rate of return, 20% tax rate.
Recent federal tax changes continue to shape planning opportunities for investors. The One Big Beautiful Bill Act (OBBBA), passed in 2025, made permanent many provisions from the 2017 Tax Cuts and Jobs Act.4 Current income tax brackets remain in place, and the standard deduction increased to $16,100 for single filers and $32,200 for married couples in 2026. The cap on state and local tax (SALT) deductions has also been raised, which may impact older taxpayers through an additional deduction.5
Retirement savings limits have increased, with 401(k) contribution limits rising to $24,500 and IRA limits to $7,500.6 New rules also require higher-income earners to make catch-up contributions on a Roth basis, while individuals in their early 60s can take advantage of expanded catch-up provisions. Estate and gift tax exemptions remain elevated, allowing for continued tax-efficient wealth transfer.
At the same time, several energy-related tax credits are expiring or phasing out. Taken together, these changes highlight the importance of revisiting tax strategies and making the most of available planning opportunities.
Tax efficiency extends beyond account structure and investment vehicles. It also includes how companies return capital and when investors choose to act.
Corporate tax regimes and capital allocation decisions can influence after-tax returns. Share buybacks are often more tax-efficient than dividends, as investors typically defer taxes until shares are sold. Dividends, by contrast, are generally taxable in the year they are received.
Timing also plays a critical role. While deferring taxes is often beneficial, it is not always optimal to hold an investment solely to avoid realizing a gain, particularly if the investment is high-cost or underperforming.
Consider an investor with a 20-year horizon who purchased a fund for $10,000 that is now worth $12,000. The fund has returned 9% annually, while a comparable index has returned 10%. If held, the position may grow to approximately $67,253. However, if the investor sells today—paying $400 in taxes—and reinvests the remaining $11,600 into the higher-returning index, the value could grow to $78,039.
While no one enjoys paying too much in taxes, this example highlights an important principle: a modest tax cost today can create significantly greater after-tax value over time.
One of the most valuable steps an investor can take is aligning their strategy with their time horizon. Longer horizons not only enhance compounding but also magnify the benefits of tax efficiency. Taxes paid today are dollars that can no longer compound tomorrow.
Thoughtful asset location, the use of tax-efficient vehicles like ETFs, and disciplined strategies such as tax-loss harvesting can meaningfully improve after-tax outcomes over time. While taxes are often viewed as secondary, they are one of the few variables investors can actively manage.
A well-constructed portfolio isn’t just diversified and low-cost—it is deliberately tax-aware, helping the investor to keep more of what the market provides. As tax season reminds us, thoughtful planning today can help preserve more of those returns over time.
One Day In July LLC is an SEC-registered investment advisor. Registration does not imply a certain level of skill or training. One Day In July LLC does not guarantee actual returns or losses. The content of this newsletter is for educational purposes only and is not investment advice. Individual circumstances may vary.
This newsletter should not be construed as tax advice. Please consult with a tax professional to make decisions concerning such matters.
Sources:
[1] One Day In July, Tax Planning. https://www.onedayinjuly.com/tax-planning-in-your-investment-portfolio
[2] IRS, Capital Gains and Losses. (2025). https://www.irs.gov/taxtopics/tc409
[3] Investopedia, Tax Drag.https://www.investopedia.com/terms/t/tax-drag.asp
[4] IRS, OBBA. (2025). https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions
[5] Tax Foundation, State and Local Tax. https://taxfoundation.org/taxedu/glossary/salt-deduction/
[6] IRS, 401(k) Limit Increases. (2025). https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
When most people think of investment risk, they picture bright red numbers, alarming headlines, and portfolios rapidly declining in value. For decades, both the media and the financial industry have contributed to this view.1 Risk is often reduced to volatility and measured by beta, standard deviation, max drawdown, or downside capture.
While these statistics are useful, they miss the most important risk individuals face: having liabilities that exceed their assets.
Understanding investment risk requires broadening our perspective. Instead of focusing on days or quarters, individuals should think in years and decades. Three high-level risk categories are market risk, liquidity risk, and credit risk. Underlying these are geopolitical, policy, inflation, currency, economic, and business risks. These forces affect everything from your home to large cap stocks, and changes in any of them can lead to price volatility.
Let’s examine how these risks play out in practice.
Market risk:
Market risk refers to the potential of financial loss due to factors affecting an entire market. It is systematic by nature, meaning it is not tied to a single business or sector.
Inflation is one of the most important components of market risk for individuals. Preserving and growing purchasing power over time is essential to ensuring assets continue to exceed liabilities. Holding cash may feel safe, but inflation can erode wealth through a slow “death by a thousand cuts,” and low-yielding assets carry opportunity cost.
For example, if a CD earns 3% while inflation averages 3%, purchasing power does not grow. By contrast, a diversified portfolio that earns an average of 7% over time would outpace inflation more meaningfully — though such returns are not guaranteed and can fluctuate significantly from year to year. In some periods, a CD may outperform a diversified portfolio. However, over longer horizons, even a 3% to 4% difference in average annual return can compound substantially and materially affect long-term outcomes.
Purchasing Power Source (as of Jan 2026): https://fred.stlouisfed.org/series/CUUR0000SA0R"/>https://fred.stlouisfed.org/series/CUUR0000SA0R
Geopolitical shocks like wars, sanctions, or trade disputes can ripple through the interconnected global economy. Russia’s invasion of Ukraine in 2022 led to large-scale sanctions by the U.S. and European governments, triggering significant volatility in oil markets.2 Renewed conflict in the Middle East — including U.S. and Israeli strikes on Iran — has sharply heightened that volatility, with Brent crude and U.S. oil benchmarks climbing to multi-month highs as traders price in the risk of disrupted supply through the Strait of Hormuz, a chokepoint for roughly 20% of global oil shipments. Global oil benchmarks surged as much as 13% in a single session, and analysts suggest that the threat of ongoing supply disruptions could add a “geopolitical risk premium” of more than $10–$14 per barrel to prices.3
Government policy can also create dislocations. Following the pandemic-era supply chain disruptions in the early 2020s, inflation surged. The Federal Reserve responded by raising interest rates from near 0% to over 5%, pushing bond prices sharply lower and pressuring equity valuations.4
Liquidity risk:
Liquidity risk is a quieter hazard, as defined by the inability to sell assets quickly at a reasonable price during times of stress. When markets are stable, liquidity is often taken for granted. It reemerges during crises.
Harvard University’s endowment during the 2008 financial crisis provides a classic example. After allocating heavily to illiquid alternatives — private equity, private credit, hedge funds, and real estate — Harvard struggled to generate cash when markets fell.5
As asset prices declined and credit markets froze, the university faced the possibility of selling assets at steep discounts, locking in losses. Luckily, Harvard was able to issue bonds to cover their short-term cash needs. Unlike institutions, individuals cannot issue bonds and have limited options to raise emergency cash. They would likely be forced to sell assets at unfavorable prices or take on onerous personal debt. Being forced to sell at depressed prices can permanently impair the ability to meet long-term obligations.
The risk can largely be mitigated by investing in highly liquid public assets, such as broad-based ETFs. Even during the depths of the 2008 crisis, SPY (State Street SPDR S&P 500 ETF Trust) maintained strong daily trading volume, providing ample liquidity to investors.
SPY Volume Source (as of Dec 2010): https://finance.yahoo.com/quote/SPY/history/?period1=1167350400&period2=1293753600
*This ETF is displayed for educational purposes only and does not constitute investment advice or a recommendation to invest in any security.
Credit risk:
In fixed income (bond) markets, credit risk is paramount. Credit risk is the potential for loss if a borrower fails to repay a loan or meet contractual obligations (referred to as a default). It applies to all borrowers who cannot create currency to repay their debts.
Investors in U.S. corporate bonds earn a “spread” above comparable U.S. Treasury bonds to compensate for default risk and potential loss severity. During crises, these spreads can widen dramatically, causing bond prices to fall. In early 2020, high-yield bond spreads rose from under 4% to nearly 11%. Even investment-grade bonds were affected, with spreads rising from roughly 1% to over 4%.6
Corporate Spreads Sources (as of Jan 2021): High Yield https://fred.stlouisfed.org/series/BAMLH0A0HYM2 and Investment Grade https://fred.stlouisfed.org/series/BAMLC0A0CM
Although high-quality corporate bonds often have low correlation with equities, that relationship tends to shift during stress.7 In crises, correlations often rise as investors reassess credit risk. The experience of 2022, when both stocks and bonds declined amid surging inflation and rapid Federal Reserve rate hikes, serves as a reminder that diversification benefits can vary depending on the source of the shock.8 By contrast, U.S. Treasuries typically benefit from a “flight to safety,” with yields falling and prices rising, providing ballast to portfolios.
Among the major risk categories, credit risk is often the easiest to reduce or avoid through disciplined portfolio construction.
Distinct from the three external risks mentioned above, one internal risk that is not compensated is concentration risk. This is also referred to as unsystematic or business risk. This arises when an outsized portion of returns depends on a single company or sector. Because this risk can be diversified away at minimal cost, financial theory suggests investors should not expect additional return for bearing it.
Concentration risk is one of the few risks investors can almost entirely eliminate through diversified funds spanning companies, sectors, asset classes, and geographies.
The divergence between traditional risk metrics and the true risk individuals face stems from an objective mismatch. Many common statistics were designed for professional portfolio managers, who often think in quarters rather than decades and focus on price movement instead of client outcomes.9 This has led to an overemphasis on short-term volatility and an underappreciation of long-term drags such as excessive fees and the erosion of purchasing power.
Risk cannot be reduced to a single number, nor can it be perfectly quantified. For individuals, managing risk involves both qualitative measures, like your emotional response to short-term losses, and quantitative measures that can assess your capacity to take on risk.
Risk is not something to be avoided entirely. It is something to understand and manage. Returns are the reward for bearing risk. When risk is thoughtfully taken, diversified, and aligned with long-term goals, short-term discomfort can ultimately lead to long-term success.
Sources:
[1] Markowitz, Harry M. "Portfolio Selection: Efficient Diversification of Investments." (1959). https://books.google.com/books?hl=en&lr=&id=GZDyAAAAQBAJ&oi=fnd&pg=PP2&ots=7cEqUbLAHW&sig=Gs_QxRNl-a5DfWRrbSwnmwEcWgU#v=onepage&q&f=false
[2] International Energy Agency. "Ukraine’s Energy Security." (2025 October 22). https://iea.blob.core.windows.net/assets/5e369891-b922-4f4c-9e02-079e4acc56f8/Ukrainesenergysecurity-Apre-winterassessment.pdf
[3] Goldman Sachs. "How Will the Iran Conflict Impact Oil Prices." (2026 March 3). https://www.goldmansachs.com/insights/articles/how-will-the-iran-conflict-impact-oil-prices
[4] Federal Reserve. "The Federal Reserve’s Responses to the Post-Covid Period of High Inflation." (2024 February 14). https://www.federalreserve.gov/econres/notes/feds-notes/the-federal-reserves-responses-to-the-post-covid-period-of-high-inflation-20240214.html
[5] Harvard Magazine. "Harvard Financial Losses Extend Beyond the Endowment." (2010 January 1). https://www.harvardmagazine.com/2010/01/harvard-2009-financial-losses-grow?_gl=1*1orw802*_ga*MTQzMzk0NjU2NS4xNzcyNDcwMDY5*_ga_NRT2D6GKXJ*czE3NzI0NzAwNjkkbzEkZzEkdDE3NzI0NzAxMjkkajYwJGwwJGgw
[6] Federal Reserve. "The Corporate Bond Market Crises and The Government Response." (2020 October 7). https://www.federalreserve.gov/econres/notes/feds-notes/the-corporate-bond-market-crises-and-the-government-response-20201007.html#:~:text=The%20Covid%2D19%20pandemic%20led,bonds%20came%20to%20a%20halt
[7] Molenaar, Roderick, et al. "Empirical Evidence on the Stock–Bond Correlation." (2024). Financial Analysts Journal, 80(3), 17–36.https://doi.org/10.1080/0015198X.2024.2317333
[8] Morning Star Indexes. "Asset Class Diversification May Not Have Worked in 2022, but its Long-term Value to Investors Remains." (2023 January 19). https://indexes.morningstar.com/insights/perspective/blt9cf6f96b4ec83d66/asset-class-diversification-may-not-have-worked-in-2022-but-its-long-term-value-to-investors-remains
[9] National Bureau of Economic Research. "Portfolios for Long-Term Investors." (2021 February). https://www.nber.org/system/files/working_papers/w28513/revisions/w28513.rev0.pdf
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