SOMEONE ASKED ME this week if he should own pork bellies in his portfolio. While he was kidding, this does get at a real question: Should you own commodities like cattle futures, gold, oil, lumber, soybeans and more? Those who favor investing in commodities typically cite two benefits. First, commodities are seen as a bulwark against inflation. This is obviously a timely concern. Second, because commodities don’t move in lockstep with stocks or bonds, they’re seen as an effective way to diversify. There isn’t, however, universal agreement on either of these points, so it’s worth consulting the data. Among commodities, gold has a particularly strong reputation as an inflation hedge. This stems mainly from its performance during the 1970s, when U.S. inflation was stubbornly high, peaking at more than 12%. Throughout that decade, gold rallied. At the beginning of 1970, gold traded at just $35 an ounce. By 1979, it had topped $500, and in early 1980 it hit $750. In the minds of many investors, this cemented gold’s reputation. Critics, though, point out that in the years that followed, gold languished—not just for years, but for decades. Throughout the 1980s and 1990s, gold mostly traded in a range between $300 and $400. It wasn’t until 2007 that gold finally got back above the $750 peak it had hit 27 years earlier, in 1980. That was an awfully long time for an investor to wait just to get back to even. Further detracting from gold’s reputation is that it did little to help investors during the recent bout of inflation. At the beginning of 2021, gold stood at about $1,900 an ounce. Where is it today? At about $1,900. In other words, during the worst inflation flare-up in more than four decades, gold did nothing to protect investors’ portfolios. What should you conclude from gold’s failure to live up to its reputation? One explanation is that the gold rally in the 1970s was just coincident with inflation but wasn’t really caused by it. Instead, two other factors may have been responsible for gold’s rise during that decade. First, the U.S. dollar, which had for decades been pegged to the price of gold, was removed from the gold standard in 1971. Without this tangible backing, many feared the dollar would devalue, and thus they sought out gold. Another factor driving demand for gold in the 1970s was the lengthy recession. This weighed on stock prices, making gold relatively more attractive as an asset class. Taken together, the persistent inflation, economic downturn and stock market stagnation of the 1970s created a sense of uncertainty for many investors. This prevailing downbeat sentiment was probably another driver of demand for gold throughout that period. Why do investors turn to gold in times of uncertainty? This is where the discussion around gold tends to devolve. One research paper points to this logic: In Babylon, during the reign of Nebuchadnezzar, an ounce of gold could purchase 350 loaves of bread. Since an ounce of gold has very similar purchasing power today, the argument goes, gold should be viewed as a timeless store of value. Others are quick to counter, though, that this loaf-of-bread argument is closer to folklore than to reliable data. Should we really base investment decisions on the price of bread 2,500 years ago? By way of comparison, reliable data on U.S. stock prices goes back barely 100 years. Because gold has such a uniquely long history, and is thus susceptible to these sorts of pseudo-quantitative arguments, it’s worth turning our attention to broader commodity market data. Researchers Claude Erb and Campbell Harvey are the authors of a well-known paper on commodities, “The Tactical and Strategic Value of Commodity Futures.” They examine the value of commodities through numerous lenses. Their conclusion on the value of commodities as an inflation hedge: The benefit is “inconsistent, if not tenuous.” What about the diversification offered by commodities? Using correlation as a measure, commodities do appear to offer a benefit. Correlation is measured on a scale from -1 to 1, with 1 indicating that assets move in perfect lockstep and -1 meaning the assets move in opposite directions. On this scale, over the past 10 years, the correlation between the Bloomberg Commodity Index and the S&P 500 has averaged just 0.4, suggesting commodities may offer a powerful diversification benefit. Gold looks even more attractive. The correlation between gold and stocks has averaged 0.1, meaning there’s almost no correlation between them. The fly in the ointment: According to data from AQR Capital, commodity prices swing wildly. Historically, global stocks have returned about 10% a year, with volatility of 13.5%. Commodities, on the other hand, have returned just 8.2% a year but with volatility of 17.5%. In short, commodities have delivered lower returns with higher volatility. This is why, despite their perceived benefits, I don’t see commodities as a good fit for individual investors’ portfolios. For those still interested in commodities, AQR, as well as Erb and Harvey, the researchers referenced above, arrive at the same conclusion: Avoid index-based approaches to commodity investing and instead opt for active management. That’s because commodity indexes have an Achilles’ heel: They’re usually top-heavy. In the Deutsche Bank Commodity Index, for example, nearly half the fund is allocated to oil and gas, diminishing its diversification benefit. The alternative, though, is impractical in a different way. Actively managed funds are typically more expensive and less tax-efficient than index funds, with no guarantee that they’ll outpace the index, so I don’t see active management as a good alternative. If there are no good options for investing in commodities like oil, pork bellies and cattle futures, where does this leave investors? My view: I wouldn’t worry too much about owning commodities, for two reasons. First, as the data show, it’s debatable whether commodities are even necessary. The data on inflation protection and diversification is murky. Second, to the extent that there is a benefit, broad-based stock market indexes like the S&P 500 already include a number of commodity producers—from oil giant Exxon Mobil to lithium producer FMC to gold miner Newmont Corp. Owning these stocks isn’t quite the same as owning a commodity fund. But given the options, I see it as close enough. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

"HOW MUCH CAN I withdraw from my portfolio each year?" It’s one of the most common questions that retirees ask. In the past, I’ve talked about the 4% rule, a popular tool for addressing this question. Among the reasons it’s so popular is its simplicity: In the first year of retirement, a retiree withdraws 4% of his or her portfolio, and then that amount increases each year with inflation. If you have a $1 million portfolio, for example, you can withdraw $40,000 in the first year. It couldn’t be easier. There is, however, a fair amount of debate about the rule. Some contend that 4% is overly generous, while others argue that it’s unnecessarily stingy. And many question the assumptions used in the original research. Perhaps the most fundamental criticism is that the 4% rule defies human nature. Suppose you had retired in 2009, in the middle of a recession, when the stock market was depressed. If you’d set your initial withdrawal based on the value of your portfolio at that time, it would have been an artificially low number, even though that’s what the 4% rule would have dictated. Indeed, in the 14 years since, the stock market, as measured by the S&P 500, has risen from a low of 666 to above 4,000. As a result, many retirees’ portfolios have grown substantially over the past decade. But if you’d been following the 4% rule, your withdrawals would have grown much more slowly—because withdrawals under this rule are permitted to increase only at the rate of inflation and, with the exception of the past few years, inflation has averaged some 2%. Because of that, many view the 4% rule as more theoretical than useful. That’s why an alternative spending methodology has been gaining in popularity. It’s commonly known as the “guardrails” method. In simple terms, guardrails are designed to be more responsive to market returns than the 4% rule, which pays no attention to market movements. Using guardrails, retirees can withdraw more from their portfolio in years when the market is strong. But in exchange for that, retirees must accept a spending cut in years when the market is particularly weak. Because guardrails-driven spending rates are responsive to market conditions, this approach has intuitive appeal. Guardrails-based spending also typically allows for a higher initial withdrawal rate than the 4% rule. In their research, guardrails creators Jonathan Guyton and William Klinger concluded that much higher withdrawal rates—between 5.2% and 5.6%—would be sustainable over a 40-year retirement. Instead of $40,000, or 4%, on a $1 million portfolio, guardrails would allow for between $52,000 and $56,000. This aspect of guardrails also has intuitive appeal. If retirees are willing to accept a pay cut when the market is down, they should be allowed to start out at a somewhat higher rate. At first glance, it might seem impractical to ask retirees to cut their spending during market downturns. But proponents make two points. First, these pay cuts aren’t significant. In the standard guardrails formula, withdrawals are cut by just 10% during market downturns. Second, those who use guardrails know how the strategy works—and they know which discretionary expenses they’d trim if it’s necessary. Another appeal of guardrails: They offer a sort of built-in early warning system. In years when the market is weak, retirees can see how close they’re getting to a potential pay cut. Assuming a $1 million starting portfolio, the lower guardrail, which would necessitate a spending cut, might be set at $800,000. If that were the case, an investor could keep his eye on the market and begin preparing for a cut if he saw his portfolio drop below, say, $900,000. Despite these benefits, guardrails have their downsides. For starters, unlike the 4% rule, the guardrails approach is complicated. If the 4% rule is like riding a bicycle, guardrails are like a 747. To determine each year’s withdrawal rate, investors must work through a five-part framework, which includes these rules: the portfolio management rule, the inflation rule, the withdrawal rule, the capital preservation rule and the prosperity rule. To get a sense of the complexity of guardrails, you can try this online calculator. Just set the strategy to “Guyton-Klinger.” As you’ll see, even though the calculator does the hard part, there are still about a dozen inputs. [xyz-ihs snippet="Mobile-Subscribe"] Another downside: Retirees have to contend with much more unpredictable spending from year to year. As I noted above, guardrails will generally only require a 10% pay cut in years when the market is down. But if the market declines for multiple years in a row, as it did in 2000, 2001 and 2002, guardrails would require multiple pay cuts in a row. It’s for this reason that one critic calls guardrails a “scam” and a “horror show.” A final criticism—one that applies to both the 4% rule and guardrails—is that they ignore an important reality: Spending isn’t linear. Research has found that most retirees’ spending follows a common pattern, with spending higher during the initial post-retirement years but generally lower later in life, as travel and other activities become harder. That’s one reason it doesn’t make sense to simply extrapolate spending from the first year of retirement. Also, retirees might have one-time expenses—a home in Florida, an RV or maybe a gift to their children—that don’t fit neatly into either of these simple spending formulas. Where does that leave retirees? If neither the 4% rule nor the guardrails approach provides a complete solution—and the alternative, Monte Carlo analysis, is even worse—how should retirees decide on a spending rate? I have three suggestions. First, try to build a multi-year model that incorporates both regular spending and the one-time expenses referenced above. You could do this in a spreadsheet, though I recommend financial planning software because it does a better job of estimating taxes. Second, after building an initial model, explore variations. For example, if it looks feasible to spend $70,000 per year and to buy a $400,000 vacation home, see what it would look like if your spending were instead $100,000 or the home more expensive. This would allow you to see what general range of spending is advisable over time, making it easier to vary it from year to year within that range. My third suggestion: Don’t accept any of these spending strategies as gospel—but don’t entirely reject them, either. William Sharpe, a recipient of the Nobel Prize in economics, has described the retirement spending puzzle as “the nastiest, hardest problem in finance.” It’s not easy, so it’s wise to attack the problem with as many tools as you can. Each strategy has some merit. The 4% rule is a great shorthand tool because you can often do the math in your head. Guardrails, on the other hand, may be more complex, but the way it responds to changes in the market makes it more realistic. Many school endowments, it’s worth noting, use a hybrid approach: They withdraw a fixed percentage of their endowments, but that fixed percentage is often set in relation to a three-year moving average of the endowment’s value. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

AMONG THE FINANCIAL topics grabbing investors’ attention, inflation for many years was near the bottom of the list. In fact, between 2010 and 2019, inflation averaged just 1.8% a year, and the Federal Reserve was looking to lift that rate. Throughout 2019, the Fed lowered its benchmark interest rate multiple times, citing inflation that was running below its preferred level of 2%. But just a few years later, in the midst of the pandemic, all that changed. In summer 2022, inflation hit a peak above 9%, prompting the Fed to reverse course, raising rates in an effort to rein in soaring prices. Those efforts have been successful, with the most recent Consumer Price Index reading at just 3%. This episode, though, reminds us that inflation can be a serious issue—as it has been on multiple occasions throughout history. The earliest recorded instance of inflation was during the reign of Alexander the Great. In the fourth century BC, when Alexander’s army conquered Persia, it brought back enormous amounts of gold and silver. The precise amount is difficult to determine, but one calculation estimates that it was the equivalent of trillions in today’s dollars. It was this influx that created inflation at home for Alexander, and it helps us to understand one of the three main causes of inflation. In technical terms, the situation that plagued Alexander’s Greece is known by economists as “demand-pull inflation.” With its newfound wealth, Alexander’s government began to spend freely. Writing in The Treasures of Alexander the Great, historian Frank Holt describes how money was spent on lavish gifts, public events and construction projects. Alexander founded 13 new cities, the cost of which Holt refers to as “incalculable.” The result was that everyday citizens had more money to spend, and that led to rising prices. As I mentioned a little while back, the Roman empire fell into the same trap. By reducing the silver content in each of its coins, the emperor was able to effectively “print money.”  Though it was for a different reason, this wasn’t unlike the stimulus payments that the U.S. government issued in 2020 and 2021. While some of that money helped workers who’d lost their job as a result of COVID-19, this cash was distributed imperfectly. Many folks who weren’t unemployed nonetheless received windfalls, and this led to the same phenomenon—consumers feeling flush and thus able to overspend. It was for this reason that both the stock market and the housing market jumped in 2021. But stimulus payments were just part of why inflation spiked in 2022. You may recall the near-daily headlines about “supply chain issues.” That was the second factor. Beginning in 2021, as a result of the pandemic, certain components, especially for automobiles, were in short supply. That made cars difficult to get and allowed dealers to charge list prices for the limited number of cars that were available. Other factors, including Russia’s invasion of Ukraine and its impact on global shipping, contributed to shortages of goods. Because such shortages drive up costs across the economy, economists refer to this type of inflation as “cost push.”  In other words, as a result of the pandemic, global economies experienced inflation due to factors on both the demand and supply sides. This created a dangerous situation because inflation was on its way to becoming what economists refer to as “built-in,” and that’s the third type of inflation. When prices are high, workers demand higher wages to keep up with those higher prices. To pay workers more, businesses need to raise their prices, and this can lead to a cycle of wage and price increases. Once a cycle like that gets going, it’s difficult to stop. That fear, I think, explains why the Federal Reserve was so aggressive in raising interest rates and why it's been so hesitant to lower them again. At the same time, the Federal Reserve does want some amount of inflation. In fact, the Fed has an explicit goal of 2% inflation. Given the problems that inflation can cause—some argue that inflation brought about the fall of the Roman empire—you might wonder why the Fed would want any inflation at all. That, in fact, was the reality for centuries in Europe, where prices generally didn’t change at all from year to year. When inflation did enter the picture, very modestly, in the 1500s, it caused significant social upheaval. So why, despite the risks, does the Fed want to see some modest inflation each year? There are a number of reasons, but economists generally focus on one: If inflation falls too close to zero, there’s a risk it could actually slip below zero and become deflation, with prices falling from one year to the next. The reason deflation can be a problem is subtle: If consumers expect prices to be lower in the future, they might choose to delay purchases, with the hope of paying a lower price next week or next month. This causes businesses to lower prices in an effort to entice consumers, thereby compounding the problem.  Over time, deflation can lead to economic stagnation as consumers delay purchases for as long as possible. By contrast, when prices rise modestly over time, there’s no incentive to wait, and that helps to keep the economy chugging along. This risk isn’t just theoretical. For most of the past 25 years, Japan has struggled with deflation, and this has led to what observers call Japan’s “lost decades.” Prices have only recently turned positive, but it’s been a terrible period, and this is what the Fed wants to avoid. What lessons can we draw from all this? First, it’s a reminder that we should never be too sure about what the future holds. When the Fed was struggling with inflation that was too low in mid-2019, no one would have guessed that just three years later policymakers would be contending with the opposite problem. Since no one—not even the Fed—can see the future, the most important thing, in my view, is for investors to remain diversified. Starting on the bond side of a portfolio, there are Treasury Inflation-Protected Securities (TIPS). These are government bonds that are guaranteed to increase in value at whatever the inflation rate is. TIPS have a close cousin known as Series I savings bonds. These function mostly the same way, but at any given time, one or the other will tend to offer investors a better yield. Today, I see TIPS as the better bet. What else might you hold to guard against inflation? In 2022, when inflation was rising, stocks dropped. That might lead us to believe that stocks do poorly when inflation is high, but that’s not entirely true. While every company is different, some have more of an ability to raise prices than others. Those that have this flexibility are able to navigate inflation quite well. Looking back at 2022, when inflation was at its worst, companies on average were indeed able to raise prices. This could be seen in their gross margins, which measure the difference between their costs of manufacturing products and the prices at which companies are able to sell them. When I looked at the data in late-2022, gross margins had increased during that inflationary year even more than they had, on average, in the last pre-COVID 19 year. This helped to support those companies’ profits. And because profits ultimately drive share prices, this is a reason I see stocks as a reasonable hedge against inflation. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles. 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I SPOKE RECENTLY with a fellow who had climbed Mount Everest. The first question I asked: What was it like at the top? What I expected him to say was that the view was dramatic. Instead, he said, his time at the summit turned out to be less than he’d expected. For starters, it was 4:45 a.m., so there wasn’t a lot of visibility. In addition, it was minus 45 degrees. Because of that, he didn’t want to stay too long. Reaching the summit, it turned out, wasn’t the most memorable or the most enjoyable part of the trip. This got me thinking about the topic of regret. When it comes to personal finance, there’s the standard type of regret that’s well understood: not saving enough, or spending too much, or taking an unnecessary risk. With mistakes like these, it’s natural to feel regret—because they’re mostly within our control and the results are predictable. In such cases, we might genuinely wish we’d done something differently. But this fellow’s Everest experience fits into a different category. Though it didn’t turn out as he’d expected, he certainly doesn’t regret it. In fact, he’d gladly do it again. This highlights a reality about decision making: Sometimes, things don’t turn out as expected—but through no fault of our own. In other words, even with the benefit of hindsight, we don’t regret decisions of this sort because, despite the disappointing results, they were still reasonable choices and could easily have turned out differently. What sorts of financial decisions fit in this category? Many have started new jobs, or even new careers, that turned out to be disappointments. In other cases, maybe a move to a new home or a new city fell short. In all of these cases, it wasn’t because we failed to do our homework. Things just didn’t work out as expected for reasons beyond our control. The world of personal finance is full of unknowns, which means that many—if not most—decisions are susceptible to this phenomenon. But that doesn’t mean things are completely out of our control. Even without the benefit of a crystal ball, certain decision-making strategies can help tip the results in our favor. Here are five I recommend: Test the waters. When I was in school, I had a professor who grew up in New Zealand. Near his home, he said, there was a river that was a popular spot for swimming. The problem, though, was that sometimes a nasty type of biting fish might be in the area. Some of the more reckless kids would still just jump in, hoping for the best. Sometimes, they got lucky—but sometimes not. The smarter approach was to take a half-step into the water to assess. In his field, marketing, this approach made a lot of sense. But for a long time, I wasn’t sure whether this philosophy would apply to personal finance, where many decisions tend to be irrevocable. Recently, though, I caught up with an old friend who told me this story: After his youngest child started college, he and his wife sold their house. They no longer needed such a large home. They then gave themselves two years to decide where to move. One idea was Florida, but they weren’t sure, so they took six weeks over the winter to do some research. They started in Miami, then moved up the coast, town by town, spending a few days in each community. By the end of the trip, they’d collected a good amount of data and had largely made up their minds. The lesson: Even when it doesn’t seem like it might be possible, look for ways to test the waters on financial decisions. It might carry a cost, but it could be well worth it. Split the difference. In the world of personal finance, people often view financial decisions through a strict either-or lens. But often, it’s possible to instead take a split-the-difference approach. A common example: Should you wait until 70 to claim Social Security? People battle each other over this question, but it need not be viewed as a right-or-wrong type of decision. Social Security can be claimed at any time between ages 62 and 70, and no one should feel they’re making the “wrong” decision if they decide on an age that—strictly according to the calculator—might be less than optimal. [xyz-ihs snippet="Mobile-Subscribe"] Immediate annuities are another flash point in personal finance. Some view them as overpriced and unnecessary, while others see them as practical and underappreciated. My opinion is that there’s some truth to both views. Considering an annuity? You could split the difference by annuitizing only a portion of your assets. You could also purchase multiple annuities over a period of years—and from different companies—to help further split the difference. Conduct a pre-mortem. Annie Duke was a professional poker player and has written two books on the topic of decision making. One of her recommendations is to conduct a “pre-mortem” before making any big decision. Be the devil’s advocate. Think critically about what could go wrong. Then see if there are ways to mitigate those results by using, say, one of the above strategies. Cut losses. In his 20s, another old friend worked on Wall Street in a series of unpleasant investment banking positions. At a certain point, he decided he’d had enough. Despite the financial cost, he quit and enrolled in divinity school. Unfortunately, his life was cut short by illness, but I’ve always felt it was a blessing that he didn’t spend his last years stuck in a cubicle doing dreary work for endless hours. The lesson: Recognize the difference between sunk costs and future costs. In the investment realm, this might apply to a life insurance policy or a mutual fund that didn’t turn out as expected. When that’s the case, there’s no need to throw good money after bad. Buy options. A while back, a client asked about purchasing a pricey Tesla and wanted to know whether it would make more sense to buy or lease. My advice was to lease. While that isn’t what I ordinarily recommend, my thinking was that electric vehicle (EV) technology was changing quickly and, because of that, it might be worth the added cost of a lease to gain more flexibility. As it turned out, a recent move by Tesla did reward those with leases: It cut prices by 20% on its most popular model. This was devastating to those who had bought their cars—because it cut resale values—but didn’t affect those who had opted for leases. That wasn’t the sort of development I’d envisioned, but I wasn’t surprised that it happened in the fast-evolving EV market. I doubt it would have happened in the older, more mature end of the car market. The bottom line: Optionality always carries a cost. But if a situation looks particularly unpredictable, it might be worth it. These recommendations, I recognize, do carry a risk: In general, they favor being cautious and moving slowly. But there is such a thing as being too cautious. If we test the waters too carefully or think too rigorously about what might go wrong, there’s the risk that we might shy away from a whole host of decisions. In The Power of Regret, Daniel Pink makes an important observation: “People regret inactions more than actions—especially in the long term.” In fact, Pink’s survey work found that “inaction regrets outnumbered action regrets by nearly two to one.” That’s a key counterpoint to keep in mind. Yes, it’s important to make decisions carefully. But ultimately, we can’t control everything. Financial decisions will always require a balance. As Annie Duke points out, the only decision anyone should ever regret is one that wasn’t well thought out. If we’ve done our homework, that’s all we can do. Better to get to the peak of Mount Everest in the dark and the cold than not at all. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

FRENCH HISTORIAN Alexis de Tocqueville toured the U.S. in the 1830s and chronicled his observations in a book titled Democracy in America. What mainly impressed him was Americans’ focus on trade and commerce. They have a “purely practical” mindset, he wrote, and concluded that “the position of the American is quite exceptional.” In the years since, others have picked up on this concept of “American exceptionalism.” Despite recent political and economic crosscurrents, the gap between the U.S. economy and its peers has only widened, especially over the past dozen years. Between 1990 and 2012, according to an analysis by author Larry Swedroe, corporate earnings in the U.S. grew no faster than in other countries. But since 2012, American companies’ profits have multiplied while—in aggregate—international companies’ earnings have stagnated. As a result, markets in the U.S. have far outpaced their international peers. This has made investing outside the U.S. feel like a losing proposition for quite some time. On the surface, this seems easy to explain. In the U.S., entrepreneurship is key to our DNA, and our regulatory regime makes it easy to get a business started. Hewlett and Packard got their start in Packard’s garage. Gates and Zuckerberg founded trillion-dollar companies in their dorm rooms. Jensen Huang launched Nvidia from a booth at Denny’s. By contrast, on the other side of the Atlantic, regulations make it harder to build a business. There aren’t any companies in Europe comparable to the “Magnificent Seven” technology firms in the U.S., and there are just a handful elsewhere in the world. In the European Union, working hours are strictly limited. In 2023, when the French government tried to raise the official retirement age from 62 to 64, more than a million people took to the streets to protest. Through this lens, the U.S. economy's outperformance seems to make sense. But this story may be oversimplified. Indeed, since the beginning of this year, markets in the U.S. have begun to falter. Domestic stocks are mostly in negative territory, while stocks outside the U.S. have delivered solid positive performance. This has people taking a second look at the question of American exceptionalism. Specifically, the question investors are asking is: To what degree should a portfolio be diversified internationally? This isn’t such an easy question. Ask the Vanguard Group to construct a portfolio, and it’ll be split roughly 60-40 between domestic and international stocks. Vanguard’s view is that there’s no reason to favor any one country or region of the world over another, and thus investors’ portfolios should simply reflect the relative weightings of world markets. But Vanguard's founder, the late Jack Bogle, took an entirely different view. He didn’t hesitate to tell people that his personal portfolio was 100% domestic. U.S. stocks, he felt, were entirely sufficient. There is, in short, no consensus on this question. Still, to gain clarity, we can consult the data. In a 2023 paper titled “Still Not Crazy After All These Years,” hedge fund manager Cliff Asness examined the outperformance of domestic stocks, performing what’s known as attribution analysis to uncover the sources of that performance. His conclusion: The lion’s share of domestic stocks’ impressive gains over the prior 15 years wasn’t due to earnings growth. It wasn’t, in other words, due to the exceptionalism of American companies. Instead, those companies’ stocks had, for the most part, just become more expensive. Even though U.S. stocks have given up some of their lead this year, that valuation gap is still very significant. Using the price-to-earnings (P/E) ratio as a measure, domestic stocks today are still 40% more expensive than their peers in developed markets outside the U.S. Boosters of a domestic-only approach are quick to reply that American stocks deserve higher valuations. There is no "Magnificent Seven” anywhere outside the U.S., they argue, and these companies’ scale and impressive growth warrant higher valuations. But that argument quickly falls apart. As Asness points out, domestic and international stocks traded at comparable valuations as recently as 2007. The valuation gap is a new phenomenon. According to the Swedroe analysis referenced above, another factor has contributed to domestic stocks’ outperformance: Between 2008 and 2024, the U.S. dollar appreciated nearly 20% against international currencies. This depressed the value of international stocks for U.S. investors, thus further boosting the relative performance of domestic stocks. There is, however, no guarantee that this trend will continue—and, indeed, it could reverse. To be sure, there are unique aspects to the U.S. economy, and de Tocqueville’s observations have validity. But a quantitative analysis suggests that the extreme U.S. outperformance we’ve seen over the past dozen years may not continue indefinitely. Despite some erosion this year, domestic stocks still carry elevated valuations compared to international markets, and the U.S. dollar is still expensive. This is worth paying attention to, because ultimately valuations do matter. Investments that are expensive usually don’t offer the same prospective returns. That’s certainly what history suggests. While it may be hard to remember, there have been multi-year periods when international stocks have outperformed the U.S. market. In fact, a chart of domestic vs. international stocks looks a little like a sine wave, with performance alternating over time. For that reason, I continue to recommend an allocation to international stocks. How much? I suggest something in the neighborhood of 20%. According to the data, that’s enough to deliver a diversification benefit, but not so much that it introduces significant currency risk. A final note: You might notice that I haven’t mentioned the proximate cause of the valuation shifts we’ve seen this year—the new administration’s tariff policies. I’m not focusing on this specifically because I see it as just one example of how markets can shift unexpectedly. In choosing an international allocation—or any other aspect of your portfolio—I recommend taking the long view. My advice: Choose a structure that you think will make sense regardless of who is in the White House or where the economy happens to stand at any given time. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. 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IN SUMMER 2011, a rural Illinois man named Wayne Sabaj was in his backyard picking broccoli, when something caught his eye. Half buried in the dirt, he found a sealed nylon bag. Inside was $150,000 in cash. For Sabaj, who was unemployed and had, in his words, “spent my last $10 on cigarettes,” this was a godsend. Though it remains a mystery who had buried this particular stash of money, these sorts of finds are not uncommon. With some regularity, homeowners doing renovations unearth money buried in backyards, basements and bedroom walls. Often, the money dates back to the Depression era, when there was greater concern about the solvency of banks. But that’s not always the case: I was born long after the Great Depression—and I’ve seen cash hidden in some unusual places around homes. While these stories are humorous, I would argue that people who squirrel away cash like this are not altogether irrational. In fact, I would go a step further and say that—as long as they don't forget about it—these folks are actually making the right decision with their money. Why? The reality is that many, if not most, of our financial decisions are driven by emotional goals and not by any kind of logical or numerical cost-benefit analysis. While perhaps less colorful than hiding money in the broccoli garden, we all make financial decisions that are motivated by what makes us feel good. Whether it is a $5 latte, $1,000 phone or $100,000 sports car, every one of us allocates money in ways that bring us happiness, even if our spending might seem irrational to the next person. In my view, a cash hoard is no different. Whether it is in the garden or in the bank, if this is what provides you with happiness and security, then I would say it is, by definition, the right way to allocate your resources. And it's not just cash. People often struggle with financial decisions when the “right” answer from a numerical standpoint doesn't feel like the right answer from an emotional standpoint. Consider three examples: Suppose you live in New York City, where the cost of living is 50% or 100% higher than it might be somewhere else. Yes, you could move and keep more money in your pocket. But you'd also be giving up a lot in terms of quality of life, so you stay. Let’s say you have a very low-rate, 30-year mortgage. The math would say that you shouldn't pay down this mortgage any faster than you need to, even if you have the financial wherewithal to do so. But emotionally, you like the feeling of being debt-free, so you pay it off. Suppose your grandmother left you a handful of shares in a collection of companies that you don't completely understand. Sure, you could sell them and diversify the proceeds. But each time you open your monthly statement, the shares remind you of your grandmother, so you decide to keep them. I wouldn't criticize any of these choices. Just because they seem like purely financial decisions doesn't mean that they need to be decided on a purely quantitative basis. I don't see them as being any different from the choices I mentioned earlier—to drive a fancy car, for example. All of these choices are, in fact, rational decisions in the sense that they bring the individual happiness or security. For that reason, you shouldn't worry if you make such decisions. I will, however, add one caveat: Decisions like this are all okay as long as they are in the context of an overall financial plan that is designed to get you where you want to go. I definitely would be concerned and would recommend a change if your excessive cash holdings, your sentimental attachment to a stock or your decision to live in a high-cost city were jeopardizing your retirement. But if a certain financial choice will bring you happiness—and it won't greatly hurt you—then I wouldn't be concerned. Your financial assets should bring you happiness and peace of mind. If that means burying them in the backyard, that's okay. Just don't forget where you put them. Adam M. Grossman’s previous articles include Laying Claim, Proceed with Caution and Old Story. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]