By Charles Lynn Bolin

It is that time of the year for the prognosticators to make their forecasts of what the markets will be like next year and perhaps for the adventurous few to project out the next ten to thirty years. “Do I have enough saved to retire if the stock and bond markets do not keep up with inflation for twenty years?” It is not a rhetorical question to ask ourselves.

I don’t want to be the Grinch who steals Christmas, but I hope for the best and prepare for lower long-term returns. Enjoy your favorite holiday meals, especially the desserts.

After reviewing the ten-year investing landscape, I believe the risk of another secular bear market starting during this decade is high. In this article, I review the reasons for this belief and what Fidelity, Vanguard, and the Financial Elders see on the horizon. The final section reflects some of the small adjustments that I am making to my plans.

This article is divided into the following sections:

• Section 1, Overview of Secular Markets
• Section 2, Capital Markets in The Coming Decade
• Section 3, 1966- 1982 Secular Bear Market
• Section 4, 2000- 2016 Secular Bear Market
• Section 5, Strategy for The Next Secular Bear Market

OVERVIEW OF SECULAR MARKETS

Figure #1 shows the S&P 500 for the past hundred years adjusted for inflation. A dollar in 2007 would have 31% more purchasing power than a dollar in 2024 due to inflation. The chart does not include the benefits of dividends. Dividends have largely been replaced by stock buybacks since the mid-2000s and were further lowered by easy monetary policy. The DQYDJ calculator can be used to estimate the return of the S&P 500 with dividends and adjusted for inflation for the twenty-six-year period from January 1966 to December 1991 to be 3.8% and for the sixteen years from July 2000 to May 2016 to be just under 2.0%.

Figure #1: S&P 500 Adjusted for Inflation

Ed Easterling is the founder of Crestmont Research and author of Unexpected Returns: Understanding Secular Stock Market Cycles and Probable Outcomes: Secular Stock Market Insights. These books and his website formed the foundation of my retirement planning. Mr. Easterling shows the Components of Stock Market 1o-Year Rolling Returns in Figure #2. Changes in valuation are the key driver of stock market returns during secular markets. Note that valuations are currently high which suggests below-average returns in the coming decade(s). In addition, long periods of high inflation are usually associated with falling valuations. Mr. Easterling describes secular bull markets as a time for sailing, and secular bear markets as a time for “rowing” meaning active investment management.

Figure #2: Components of Rolling 10-Year Stock Market Returns

CAPITAL MARKETS IN THE COMING DECADE

The stock market rose following Donald Trump’s election victory as stock investors relished tax cuts while bond yields rose as bond investors expected rates to remain higher for longer to pay for higher deficits along with the expectation of higher inflation.

One of the key questions is “Will huge deficits weigh on GOP plan to slash taxes?” asked by Yuval Rosenberg and Michael Rainey at right-leaning The Fiscal Times. They state, “The same dynamic played out in 2017, when lawmakers settled on a 10-year cost of $1.5 trillion for their tax package, even as some pushed for a larger number. But whatever the number ends up being, it looks like a larger deficit and increased debt are likely this time around.” Republicans may add Trump’s proposed tariffs “even if those revenues have little chance of materializing”. Moody’s Ratings wrote, “Given the fiscal policies Trump promised while campaigning, and the high likelihood of their passage because of the changing composition of Congress, the risks to US fiscal strength have increased.”

I wrote a detailed technical report, Slow Growth and “Making America Great Again”, on Financial Sense in February 2017 that analyzed taxes and tax avoidance, trade, and economic growth with respect to the potential policies of newly elected President Trump. I made the point that economic growth had slowed due to demographics, declining productivity, low savings, low investment, erosion of the middle class, devastating recessions, automation leading to slow job growth, and high debt levels. Economic growth averaged 2.7% during the first three years of Trump’s presidency before COVID – much less than the 4% from the campaign rhetoric.

Right-leaning Cato Institute wrote The Tax Cut and Jobs Act of 2017 stating that “the effects of the [Tax Cut and Jobs Act] on economic growth and wages were smaller than advertised.” They add that corporate income tax cuts generated substantial benefits but that the claims about these benefits are “significant exaggerations”. The right-leaning Committee for a Responsible Federal Budget wrote in US Budget Watch 2024 that the 2017 tax cuts will increase the national debt by $1.9 trillion over ten years.

The Peter G. Peterson Foundation (Least Biased Media Bias/Fact Check Rating) writes in The Next Fiscal Cliff: Big Tax Decisions to Make in 2025, “Extending all provisions from the TCJA that are set to expire at the end of 2025 would increase deficits by $2.7 trillion from 2024 to 2033, according to CBO and JCT.” The Committee for a Responsible Federal Budget also estimates that President Trump’s preliminary plan will increase the national debt by $7.75 trillion through 2035.

I wrote in the 2017 Financial Sense article, “In 2014, 10% of importers were multinational companies which accounted for over 76% imports. There were over 400,000 companies importing or exporting with 20% of the companies both importing and exporting.” Approximately 35% to 50% of total trade is in the form of multinational companies importing and exporting between divisions. Tariffs will have winners and losers with consumers paying higher prices.

Federal spending has risen from 16% of GDP following WWII to 22% in 1982 and is currently at 23%. I expect there to be a shift from spending on social programs to the military. Elon Musk wants to cut $2 trillion in US spending. Can he do it? by Tom Dempsey at NewsNation describes that the $2 trillion in Federal spending cuts would come from the $6.75 trillion (or 30%) that is currently being spent. Social Security, Medicare, Defense, and Veterans benefits amount to $3.5 trillion. It is unlikely that major cuts can be made to the Federal budget without cutting social benefits.

Consumer spending is the largest component of the economy, and Living Paycheck To Paycheck and the Role of Financial Counselors in the MFO November newsletter shows that the majority of Americans don’t have the income or savings to drive economic growth. The stock market is not the economy! The wealthiest 10%, those with a net worth of $2 million or more, own 93% of the stock market as described by Matt Phillips in Axios. Cutting corporate taxes benefits the wealthy with some hoping the benefits trickle down to the masses.

Stocks: What’s next? by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company points out that earnings estimates are no longer advancing as they were earlier in the year and the price-to-earnings ratio is relatively high. Mr. Timmer believes that the market will be more focused on federal spending and tax policy.

Slow Growth – I Don’t Think We’re in Kansas Anymore

The U.S. Census Bureau estimates in U.S. Population Projected to Begin Declining in Second Half of Century that the “low-immigration scenario is projected to peak at around 346 million in 2043 and decline thereafter, dropping to 319 million in 2100.”

Investing in a Slow Growth World by Fidelity Viewpoints (September 25, 2024) describes the view of Fidelity’s Asset Allocation Research Team (AART) for investing over the next 20 years, “the favorable trends of past decades may be giving way to a new environment of slower growth, increasing geopolitical risk, and declining globalization in which investors may want to reconsider where they seek opportunities. They conclude, “those investors whose portfolios are well diversified across a broad, global opportunity set may be best positioned to take advantage of future growth, slower though it may be.”

The Congressional Budget Office produced An Update to the Budget and Economic Outlook: 2024 to 2034 in June 2024. The CBO estimates that real GDP (adjusted for inflation) will be 1.7% to 1.8% between 2026 to 2034. The CBO estimates the cumulative deficit for the 2025–2034 period is projected to equal 6.2 percent of GDP. To finance this debt, the debt to GDP will rise to 122 percent of GDP at the end of 2034. The interest rate is estimated to be 3.3% to 3.5% during this ten-year period.

Vanguard – Shifting into Low Gear

In the short-term, Vanguard Perspective: Active Fixed Income Perspectives Q4 2024: Temperature Check states, “With strong growth and a proactive Fed, the risk of a U.S. recession next year remains low, a sentiment reflected in market prices. We remain constructive on credit but conscious of expensive valuations and possible downside risk.” Over the long term, starting yields have consistently been reliable indicators of fixed-income returns.

I created Figure #3 from Vanguard Perspective (October 22, 2024) to represent projected 10-year nominal return and volatility based on their June 2024 running of the Vanguard Capital Markets Model (VCMM). I find riskier fixed income and international equity to be attractive relative to domestic large company equity.

Figure #3: Vanguard VCMM 10-Year Return vs Volatility Projections

Valuations – Seeking Shelter

Value investor Warren Buffett is famous for the Buffett Indicator which divides the total stock market capitalization by gross domestic product. It is currently at the highest level since 1975. Berkshire Hathaway has been selling stock and according to the Third Quarter Report, now has $325 billion in cash, cash equivalents, and short-term investments in U.S. Treasury Bills out of a portfolio of $1,147 billion (28%).

Mr. Easterling (Crestmont Research) uses the historical relationship of EPS and GDP to normalize the price-to-earnings ratio. He concludes in The P/E Summary, “The current valuation level of the stock market is above average, and relatively high valuations lead to below-average returns.”

The Columbia Thermostat Fund is a twenty-one-year-old fund of funds that adjusts its allocation to stock based on the level of the S&P 500 to reflect valuations. The Fact Sheet as of the end of September shows that it had thirty percent allocated to stocks down from fifty percent in May of this year reflecting rising valuations.

Natalia Kniazhevich and Alexandra Semenova wrote ‘Dr. Doom’ Nouriel Roubini Warns of Trump Win Spurring Stagflation Shock. Dr. Roubini is well known for recognizing the early signs of the 2007 – 2009 financial crisis. He said that Trump’s policy plans of higher tariffs, devaluing the US dollar, and tough stance on illegal immigration threaten to slow down the economy and simultaneously spur inflation higher. Dr. Roubini recommends holding gold, short-term duration bonds, and Treasury inflation-protected securities.

1966 – 1982 SECULAR BEAR MARKET

Setting: The 1966 – 1982 secular bear market covers part of the civil rights movement, President Lyndon Johnson’s War on Poverty and Great Society, Women’s Liberation Movement, the 1968 Vietnam bear market, Nixon ending the convertibility of the dollar to gold in 1971, 1973 OPEC oil embargo, easing of tensions with Russia and China, Supreme Court decision in Roe v. Wade, Watergate and President Richard Nixon’s resignation in August 1974, Iranian hostage crisis, and stagflation.

Investment data back to 1970 is limited. I set up Portfolio Visualizer for three portfolios starting with one million dollars in 1972 and 4% withdrawals spread monthly as shown in Figure #4. Allocations to the US Stock Market range from Very Conservative with 20% to Moderate with 60%. All three model portfolios ended with over $1.2 million nominal dollars at the end of 1981, but with less than $600,000 when adjusted for inflation. The purchasing power of withdrawals in 1981 were more than 40% lower than in 1972. Allocating 10% to gold equity instead of stocks would have improved the inflation-adjusted returns over the ten years by approximately 25%.

Figure #4: Inflation Adjusted Growth of Portfolios with 4% Withdrawals

There are 96 mutual funds still in existence since 1964. The data in Table #1 covers the October 1964 to September 1974 time period. Fixed income performed as well as stocks but without the major drawdowns inflicting anxiety. Mixed-asset funds that benefited from rebalancing also performed well. Precious metals equity did the best for total return but with much higher volatility.

Table #1: Lipper Category Metrics for October 1964 to September 1974

Figure #5 shows representative funds from the 1966 – 1982 secular bear market.

Figure #5: Representative Fund Performance (1966 – 1982)

2000 – 2016 Secular Bear Market

Setting: The 2000 – 2016 secular bear market began with the bursting of the Dotcom Bubble, technology advanced in smartphones, social media, and the internet, China and India developed into economic powers, 9/11 attack, War in Afghanistan started in 2001, the euro becomes the currency of the European Union, Iraq war start in 2003, Housing and Financial Crises (2007), President Obama is elected as the first Black President (2009), Arab Spring (2010), United States and Russia signed a treaty in Prague to reduce the stockpiles of their nuclear weapons (2010); United States, China, and Russia increase military spending; Quantitative Easing (2008-2014).

Table #2 shows the performance of Lipper Categories during the 2000s decade. Fixed income performed well. Precious Metals Equity again performed well but with high downside risk.

Table #2: Lipper Category Metrics for January 2000 – December 2009

Figure #6 shows how representative Vanguard funds performed. Bonds and actively managed mixed-asset funds performed well.

Figure #6: Selected Vanguard Fund Performance (2000 – 2010)

STRATEGY FOR THE NEXT SECULAR BEAR MARKET

My outlook matches those cited in this article and I believe the risk of a secular bear market starting before the end of this decade is fairly high. I expect a “soft landing” for the current rate easing, and barring any shocks, the stock market should do moderately well next year or possibly the next. I expect that deficits will continue to rise and the national debt to increase. Interest rates will stay higher for longer. I advocate for people to work with financial advisors to develop long-term plans based on spending needs.

If a secular bear market materializes, I will adjust my spending down and re-invest required distributions from a Traditional IRA into after-tax accounts. I set up appointments with financial advisors to begin taking withdrawals from aggressive Traditional IRAs while the stock market is still high and to reduce withdrawals from more conservative Traditional IRAs. I follow an accelerated withdrawal strategy to avoid high taxes later in retirement.

I switched from a total return approach to investing for income in conservative Traditional IRAs. I maintain diversified bond funds in these accounts, but increased allocations to moderately riskier actively managed bond funds including Vanguard Global Credit Bond (VGCIX), Vanguard Intermediate-Term Investment-Grade (VFICX), and Vanguard Multi-Sector Income Bond (VMSIX). I also purchased Fidelity Advisor Strategic Income (FADMX/FSIAX).

Enjoy a safe and happy holiday season!

By David Snowball

In everyday language, we use “chaos” to mean complete disorder or randomness – like a toddler’s playroom after a long afternoon or a desk buried under scattered papers. This kind of chaos implies there’s no underlying order or pattern at all. It suggests a temporary state of disarray that can be resolved or brought back to order.

There is, however, a second use of the term. In chaos theory, “chaos” has a precise and quite different meaning. It describes systems that appear random on the surface. These systems are unpredictable in detail but still have an underlying order and produce recognizable patterns. This kind of chaos is a permanent state, intrinsic to the system’s nature, where small changes in initial conditions can lead to vastly different outcomes.

A great example is my rubber duck. If I wander down to the banks of the Mississippi River and fling my duck into the water, I will be completely unable to answer the question “Where will your duck be in one minute or one hour?” beyond “somewhere in the river, likely.” But if you were to ask “Where will your duck be two months from now?” I could have more confidence in say “visiting New Orleans.” I can’t say exactly where or exactly when, but the river is a constrained system with predictable long-term tendencies.

2025 may see an intersection of both sorts of chaos: an intrinsically chaotic market system overlaid by the prospect of policy chaos initiated by the new presidential administration. In the weeks since the election, the president-elect has threatened 25% tariffs on goods from Mexico and Canada, 10% tariffs on Chinese goods, and 100% tariffs on goods from the BRIC nations, including China, if they undermine the US dollar. They might undermine the dollar by shifting exchange policies to peg prices against a basket of currencies, rather than the dollar. That seems to reflect fears of erratic US policies and burgeoning federal debt. A preliminary analysis by the University of Pennsylvania concluded that Mr. Trump’s proposals would increase the national debt by $4.1 trillion if everything went well and just under $6 trillion if it doesn’t. (What might qualify as “going poorly”? Hostile responses from countries affected by tariffs and supply chain disruptions for US companies dependent on factories in those countries. I’m setting aside prospects of war or climate disaster.) Morningstar’s John Rekenthaler forecasts a short-term spike in inflation which will be compounded if the Federal Reserve becomes less independent, as Mr. Trump promised, since he favored zero interest rates even during economic booms. Meanwhile, crypto booms.

Mr. Rekenthaler’s analysis of both candidates’ plans ends with the question, “What, me worry?” and a link to …

Quick recap: in the short term markets are highly unpredictable (chaos theory) and likely to be exceptionally so in the immediate future (Trump). In the long term, markets have predictable dynamics and central tendencies (like the Mississippi River does) that give us greater confidence the further out we look.

The question is, how do you persevere through the shorter-term chaos in order to continue capturing the longer-term gains?

Chaos and your portfolio

If you are young with a comfortable career trajectory and a reasonable long-term plan, do nothing. Both Warren Buffett, Ben Carlson, and John Rekenthaler affirm the same proposition: over long periods, no one ever wins by betting against the US markets. And, over those same long periods, no one ever loses by betting with them. In short: if you don’t need your money for twenty-plus years invest regularly and cheaply in (mostly) American stocks, stop reading this essay now and get on with life. Your money will be waiting for you when the time comes.

Not all of us have the luxury of that degree of Cynical detachment from the world.  Five strategies for the rest of us to survive chaos of both sorts.

1. Let other people worry for you. Effectively responding to sudden changes requires a degree of obsession and access to extensive data that average investors don’t have. “I saw this guy on TikTok,” or “I read Reddit,” or “I got a feeling” is not a sign that you have either sufficient data or a clue about how to read it. If you don’t have the willingness to stay put, or the skills and resources to dynamically adjust position sizes based on current market chaos levels, hire someone who does. It’s money well spent.

   There are three ways of doing that. One, hire a financial advisor who has been through it before and who hasn’t surrendered to the impulse to make change for the sake of change. Two, hire a fund manager who has been through it before and who has a record of careful adaptation to changing conditions. Consider:

   • FPA Crescent: Crescent is a moderately aggressive allocation mutual fund that aims to generate equity-like returns over the long term while taking less risk than the market and avoiding permanent impairment of capital. The fund’s focus on investing in higher-quality businesses with protective moats, good returns on capital, and exemplary management teams, combined with its ability to adapt to market conditions, makes it an attractive option for investors seeking a balance between growth and risk management.  The fund has a 30+ year record, has averaged over 10% annually since inception with one-third less volatility than the stock market, is an MFO Great Owl Fund and has high insider commitment.

   • Leuthold Core Investment Fund. Leuthold Core Investment is a tactical asset allocation fund that aims to achieve capital appreciation and income while minimizing risk through flexible portfolio management. With a focus on industry selection and the ability to adjust exposure across various asset classes, the fund has demonstrated strong performance, outperforming its Lipper Flexible Fund peers by 1.5% annually over the past decade with significantly lower volatility. The fund’s disciplined, quantitative approach to asset allocation and security selection, combined with its long-term track record of capturing over 80% of the S&P 500’s annual returns while exposing investors to less than 70% of the volatility, makes it an attractive option for investors seeking a balanced approach to risk management and returns. Devotees of ETFs should consider Leuthold Core ETF (LCR).

   Three, hire someone who can game the market for you. Where FPA and Leuthold are balanced funds that mostly tilt their portfolios as conditions change, some funds – both long-short equity and managed futures – attempt to actively, and sometimes dramatically, shift course with shifting conditions. Sadly, most such funds are overpriced failures, and few have long track records. Among the most promising options is Standpoint Multi-Asset.

   • Standpoint Multi-Asset Fund. Standpoint seeks positive absolute returns through an “All-Weather strategy.” The fund holds a global equity portfolio built from regional equity ETFs. The strategy also invests, both long and short, in exchange traded futures contracts from seven sectors: equity indexes, currencies, interest rates, metals, grains, soft commodities, and energy. The managers attempt to participate in medium- to long-term trends in global futures markets and to produce a reasonable return premium in exchange for assuming risk. The argument for Standpoint is much like the old argument for managed futures: it can provide absolute positive returns with muted volatility even when the equity markets correct, or the fixed-income markets are priced to return less than zero in the immediate future. “Our edge,” manager Eric Crittenden says, “is that we know how to build a good macro program without the traditional 2 & 20 fee structure.” It is designed to be a permanent piece of your portfolio: simple, durable, and resilient. Standpoint is trying to offer an island of predictability that investors might use to complement and strengthen their core portfolios. With positive absolute returns each year since inception (15.2% YTD in 2024), they have earned a place on your due diligence list.

2. Increase exposure to quality companies. Mr. Buffett’s declaration, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” is borne out by his enduring success and by a lot of academic and professional research. As we noted in “The Quality Anomaly,”

   The broadest sense of a quality company is one that uses its resources prudently: quality companies tend to have little or no debt, substantial free cash flows, steady and predictable earnings, and perhaps high returns on equity. Passive strategies and many active ones have a strong backward focus: they limit themselves to firms that have bright pasts, without actively inquiring about their future prospects.

   Nonetheless, the evidence is compelling that high-quality stocks purchased at reasonable prices are about the closest thing to a free lunch in the investing world. In general, you have to pay for your lunch one way or another. The only rationale for buying crazy-volatile investments (IPOs, for instance) is the prospect of crazy-high returns. The only rationale for buying modest returns (three-month T-bills) is the promise of low volatility.

   With quality stocks purchased at a reasonable price (call it QARP), that tradeoff does not occur. QARP stocks offer both higher long-term returns and lower volatility than run-of-the-mill equities.

   Higher quality investments will not always lead the market, when animal spirits run wild, trash tends to dominate in terms of pure returns.  Consider:

   • GQG Partners US Select Quality Equity or GQG Partners US Quality Dividend Income. Both are managed by Rajiv Jain, whose record of excellence stretches over decades and whose firm is entirely devoted to investing in high-quality equities.  GQG Partners primarily relies on fundamental, rather than quantitative, research to evaluate each business based on financial strength, sustainability of earnings growth, and quality of management. The investment strategy is quality first; from the pool of firms that meet its quality standards, it goes looking for undervalued companies with substantial dividends. GQG is more typically a value than a growth investor. We have previously profiled GQG Global Quality Dividend, now named Quality Dividend Income. The same discipline applies across all GQG funds. For you, the key question is whether you want direct international exposure in your portfolio at a time when tit-for-tat trade wars are discouragingly possible (and disruptive).

   • GMO US Quality ETF. The GMO ETF emulates the strategy in the five-star GMO Quality Fund. Two differences: the ETF focuses only on the US slice of the universe, and it doesn’t require a $750 million minimum initial investment (as Quality IV does). Quality has consistently been a top 10% performer. The ETF charges 50 basis points.

3. Consider a short-term high yield fund. These funds typically invest in fixed-income securities whose returns are uncorrelated to the gyrations of the Fed. Short-term high-yield bonds have provided comparable returns to the broader high-yield market but with significantly lower volatility. This is partly due to the “pull-to-par” phenomenon, where bond prices converge towards their par value as they approach maturity, reducing sensitivity to economic conditions.

   Over the course of a full market cycle, such funds tend to return about 4% per year. Over the cycle that followed the dot-com crash, 4.1%. Global financial crisis: 4.6%. Covid era: 4.3%.  The two most compelling options, based on both Morningstar’s metrics and ours, are:

   • RiverPark Short Term High Yield. Short-Term High Yield invests in, well, short-term, high-yield debt securities. Its strategy focuses on identifying opportunities where the credit ratings may not fully reflect a company’s ability to meet its short-term obligations. The fund targets investments in companies undergoing or expected to undergo corporate events, such as reorganizations or funding changes, which could enhance their capacity to repay debt. About to celebrate its 15^th anniversary, the fund, the fund has the highest Sharpe ratio (over 5.0 since inception) in existence. That is, it offers a better risk-return tradeoff than any other fund or ETF.  You might anticipate returns of 3-5% with negligible downside.

   • Intrepid Income. Intrepid Income Fund is a fixed income fund that primarily invests in U.S. corporate bonds, aiming to generate strong risk-adjusted returns and high current income while protecting and growing capital. With a focus on downside protection and risk control, the fund typically invests in smaller bond issues of less than $500 million, targeting businesses with low leverage ratios and consistent cash flows1. The fund’s strategy has demonstrated resilience while maintaining a relatively concentrated portfolio of 15 to 70 high-yield securities. You might anticipate returns of 4-5%.

4. Avoid any investment that everyone is talking about. They’re dumb in good times and disastrous in fraught ones. There are three problems with such investments.

   • They are overpriced. Everyone gets excited, then they get stupid which leads to a “buy first, regret later” impulse that pushes the price of magical investments skyward. That leads to volatility and lower returns. Morningstar’s Jeff Ptak, in reviewing the latest “Mind the Gap” study, warns:

     Narrow funds are usually more volatile by their very nature, and our findings suggest a link between higher volatility and wider investor return gaps. But volatility aside, these strategies are usually higher maintenance, forcing investors to make buy or sell decisions at what can be fraught times.

   • The vehicles that bring them to you are designed to transfer wealth from your account to the advisor’s account. To be clear: the people who offer these investments to you have zero loyalty to the investments or to their investors. Zero. MFO has chronicled a huge number of ETF conversions where, after nine months, the Space Rock Exploitation ETF suddenly becomes The AI Arbitrage Effect ETF.

   • Their best returns are past by the time you hear of them. The investing world is dominated by (a) obsessive people with vastly more resources than you and (b) passionate hucksters on TikTok whose job it is to generate a following for themselves, not security for you. That’s captured in The Rekenthaler Rule: “If the bozos know about it, it doesn’t work anymore.” (I suspect we’re the “bozos” in question.)

   Your investment goal is not having something to brag about. Your goal is to provide security and help meet your life goals. Slow and steady is almost always a surer strategy.

5. Curb your enthusiasm: Chaotic markets can trigger fear and greed. Maintain emotional discipline, stick to your investment plan, and avoid impulsive decisions based on short-term market movements. The two easiest ways to execute this strategy:

   Focus on the immediate, not the mediated. The worst day in market history was 19 October 1987 when the market fell 22.6% in one day. Hysteria, suspicion, and fears of a continued unraveling followed. Into the maelstrom stepped Louis Rukeyser, the man who perfected the art of financial television. Uncle Lou began his first show after the Great Crash this way:

   Okay, let’s start with what’s really important tonight. It’s just your money, not your life. Everybody who really loved you a week ago, still loves you tonight. And that’s a heck of a lot more important than the numbers on a brokerage statement. The robins will sing. The crocuses will bloom. Babies will gurgle and puppies will curl up in your lap and drift off happily to sleep, even when the stock market goes temporarily insane.

   And now that that’s all fully in perspective, let me say: ouch! And eek! And medic! Tonight, we’re going to try to make sense out of mass hysteria.

   Put down your phone. Kill the damned notifications. Stay away from the clatter on social media. Kiss your spouse. Hug your kids. Walk your pup. Try a new recipe. Open the bottle of wine that you’ve been saving – for the past decade! – for a sufficiently special occasion. Every day is special (it is, after all, the only one you’ll be gifted today), so you’re right to celebrate it.

   Read history. It’s easy to conclude “This is the worst thing ever!!” only if … well, you’re clueless about what else we’ve overcome. Which is to say, a lot.

   Wander off to your local used bookshop and find a copy of Barbara Tuchman, A Distant Mirror:  The Calamitous 14^th Century (1978), a narrative woven around the family of a single French noble. William Manchester’s A World Lit Only by Fire (1992) examines the transition from medieval to Renaissance Europe. While its scholarship has faced some criticism, it compellingly shows how humanity emerged from the “dark ages” into a period of remarkable cultural and intellectual flourishing. For readers who object to the very term “dark ages” and think that Manchester was too negative on a half millennium of human history, page through Michael Gabriele, The Bright Ages: A New History of Medieval Europe (2021). The Warmth of Other Suns (2010) by Isabel Wilkerson chronicles the Great Migration through intimate personal narratives. Like Tuchman, Wilkerson weaves individual stories into broader historical movements, showing how millions of African Americans transcended systemic oppression to forge new lives.

   Bill Gates, should you care, is currently recommending Doris Kearns Goodwin’s An Unfinished Love Story. DKG is a Pulitzer Prize-winning historian and biographer who was married to the late Dick Goodwin. Goodwin was an adviser to US presidents for decades, from shaping Johnson’s Great Society agenda to drafting Al Gore’s 2000 concession speech. Of it, Gates writes, “It’s hard to deny the similarities between the 1960s and today—a time of political upheaval, generational conflict, and protests on college campuses. Whether you already know a lot about the ’60s or you’re just dipping your toe into those waters, whether you want a deep dive into the art of political writing or a charming story about a married couple who adored each other, you’ll get it from An Unfinished Love Story.” He describes “the lessons it offers about how leaders have tackled tough times” as “both comforting and fascinating.”

   I’m currently reading Kathryn Olmsted, The Newspaper Axis: Six Press Barons Who Enabled Hitler (2022). Immaculate historical scholarship and one sobering passage:

   These modern newspapers favored spectacle over substance, celebrity over leadership, and polemics over sober debate. The most successful publishers discovered they could attract readers by highlighting race, nation and empire – themes that their advertisers could also support. They could make money and gain political power by selling an exclusionary vision of their nations “us” versus “them” … [their] emphasis on individuals, personality, strength and ethno-nationalism could help promote authoritarian politics. (3)

Bottom Line:

Neither chaos nor adversity are new. Nor is overcoming them. Overcoming them begins with a simple admission: we are the co-authors of chaos. Systemic chaos produces anxiety. Our decisions either worsen the situation or meliorate it. Treating the short-term as if it were the long-term. Overreacting to intentionally sensationalized stories. Focusing on the world we can’t control, and the people we’ll never meet, rather than on what we can control and the good we do experience.

A chaos-resistant portfolio stems from three decisions on our part: (1) recognize the noise, (2) favor steady gains over the illusion of spectacular ones, and (3) step away from the noisemakers. In finances, choose indolent. In your real life, choose active. Make a difference where you can. Speak up. Speak kindly. Think kindly. Listen to understand. Volunteer. Donate. Smile at the little ones. Become an agent of anti-chaos and prosper!

By David Snowball

FundAlarm (1996-2011), for which I penned a monthly column, was the site that gave rise to MFO. I was drawn to Fund Alarm long ago by the voice of its founder, Roy Weitz. During the lunatic optimism and opportunism of the 1990s (who now remembers Alberto Vilar, the NetNet and Nothing-but-Net funds, or mutual funds that clocked 200-300% annual returns?), Mr. Weitz and Morningstar’s John Rekenthaler spent a lot of time kicking over piles of trash – often piles that had attracted hundreds of millions of dollars from worshipful innocents. John had better statistical analyses, and Roy had better snarky graphics.

At the end of 2000, John shifted his attention from columnizing to Directing Research. He returned to writing a daily column in 2013, which he billed as an attempt to leverage his quarter century in the industry to “put today’s investment stories into perspective.” Rather than something mildly anodyne, John offered up “Die, Horse, Die!”

Roy and John represented, for me, two ideals: very smart people who cared deeply enough to be angry, annoyed, occasionally outraged, and vigilant on your behalf while being clear-eyed enough to know that each of us was the co-author of our own misfortunes. As investors, we want wizards to solve our problems. As an industry, they were willing to manufacture wizards for us.

John Rekenthaler joined Morningstar in 1988, almost by happenstance. He was studying Shakespeare in grad school at Chicago, burned out after a year, and reconnected with Don Phillips who had also completed an M.A. in literature there before launching Morningstar. John joined as the firm’s first analyst. He announced his retirement from it on November 12, 2024, in a column entitled “Farewell (for Now).”

In 1988, the fund industry felt beholden to no one, and information about funds was limited to whatever the marketing department chose to share, however they chose to share it. His impact was immediate and foundational. Together with Don Phillips, he co-created the Morningstar Style Box in 1992, a tool that fundamentally changed how investors understand and classify mutual funds. As Morningstar’s Director of Research and later Vice President of Research, he helped develop the category classification system that became an industry standard. These weren’t merely technical innovations – they were revolutionary steps toward democratizing investment knowledge. They created a multibillion-dollar firm that initially held a multi-trillion-dollar industry to account, and more recently created the spectacularly challenging role of both watchman of the industry and active member of it. The firm now oversees more than $300 billion in assets.

But perhaps Rekenthaler’s greatest contribution has been his voice. If Christine Benz is right (“To read John is to know him”), I know him well because I’ve read his work and admired his edge. Rekenthaler’s legacy extends beyond specific innovations or insights. He preaches what William Bernstein calls Rekenthaler’s Rule: “If the bozos know about it, it doesn’t work anymore.” (I suspect we’re the “bozos” in question.) His colleagues seem to distill his writing into the adage, “don’t try to get cute and don’t buy their crap. Create a portfolio no more complex than necessary, executed as economically as possible, then get on with life.”

Mr. Rekenthaler helped create a world where independent thinking in investment analysis isn’t just possible – it’s expected. As John Tipton reflects, he embodied Morningstar’s core values of “clarity, honesty, and advocacy on behalf of investors.” In doing so, he didn’t just serve investors; he showed them how to think better about investing.

Bottom Line

It’s easy to be a skeptic about what others believe. It’s far more daunting, and far more useful, to be a skeptic about what you yourself believe. Curiosity helps. A willingness to learn hard things helps. Teaching it helps. Being immersed in it helps. Standing outside the game – not seeing every situation as one where you win or lose – helps. And a quiet self-confidence, having the inner peace to know what you are more than the sum of your errors, helps.

Thank you, good sir, for teaching us.

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“When I began at Morningstar, outside of Fidelity Magellan, which legitimately was popular because it had a fantastic track record and history of success, the largest mutual funds were funds called government-plus bond funds. Government-plus bond funds don’t exist any longer, which tells you how good they were”

“I believe future returns will indeed fail to match those of the past. But I make that statement guardedly. Just as there were more things on heaven and earth that were dreamt of in my predecessors’ philosophies, Horatio, the stock market’s possibilities also exceed my imagination.”

By Charles Lynn Bolin

President-elect Trump is picking his staff appointees who are perceived by some to be controversial, unqualified, or even extremists. The justification is often that they are disruptors who will challenge the status quo. The rhetoric is increasing about adding tariffs, eliminating agencies, reducing regulations, and cutting Federal spending and staff. Rhetoric moves markets. This article is about protecting our portfolios from chaos during times of high uncertainty.

During the first three years of President Trump’s first term, Federal spending increased by nine percent after adjusting for inflation. This was partly because the 2017 tax cuts did not generate sufficient growth to pay for themselves. During the next four years with the pandemic-era stimulus, Federal spending increased by an additional seventeen percent adjusted for inflation. Federal spending is now approximately $7.1 trillion with a deficit of $1.7 trillion that is financed by adding to the approximately $36 trillion in national debt with interest costs of $1 trillion to finance that debt. This is not sustainable.

I expect slow growth this coming decade because population growth continues to slow and is a key driver of economic growth, Federal spending is part of the economy, and cutting it will have to be offset by other drivers. Tariffs are inflationary, and interest rates will have to stay higher for longer to finance the national debt. With stock evaluations and interest rates high, returns over the intermediate term favor bonds. Another factor to consider is that the dollar has advanced nearly 40% since 2011 which has kept import costs low, but also appears overvalued.

To evaluate a Chaos Protected Portfolio, I selected between 1,600 to 3,300 funds from each of the 2000, 2010, and 2020 decades and ranked them based on risk and return metrics. The top-ranked funds were combined and ranked by risk-adjusted performance for the Dotcom, Great Financial Crisis, and COVID full cycles as well as the past twenty-five years.

There are some loose similarities between now and the Dotcom Full Cycle from September 2000 to October 2007 as shown below. The end result was that the S&P 500 fell 45% during the Dotcom bear market.

• The S&P 500 price-to-earnings ratio hovered between 27 and 46 during 2000 and 2001 compared to nearly 31 now.
• The dollar fell 25% from 2002 to 2008.
• Inflation hovered between 2.0% and 3.5%.
• The Federal Funds rate went from 6.5% in mid-2000 to 1% in 2004 and back up to 5.3% in 2007.
• Real Gross Domestic Product went from 4% in 2000 to 1% in 2001 to 3.8% in 2004 and back down to 2% in 2007. A mild recession occurred.
• Gold went from $293 per ounce in 2000 to $696 in 2007. It is now $2,685.

Table #1 shows some of the best-performing Lipper Categories during the Dotcom full cycle from September 2000 to October 2007. For comparison purposes, over the full cycle, the Ulcer Index of the S&P 500 was 22, the annualized percent return was 1.9%, and the Martin Ratio was -0.1. The Ulcer Index measures risk as the depth and length of drawdowns, and the Martin Ratio is a measure of risk-adjusted returns.

Table #1: Lipper Categories for the Chaos Protected Portfolio (Full Cycle September 2000 to October 2007)

I created an all-weather portfolio for the past twenty-five years as shown in Table #2. There is a tradeoff between risk and return. A younger me aggressively invested one hundred percent in stocks, while an older and more conservative me now holds a traditional 60% stock to 40% bond allocation based on matching withdrawal needs with time horizons using the Bucket Approach. The Chaos Protected Portfolio reflects my personal biases that one should maintain diversified portfolios, and in the coming decade, I expect bonds to perform better than stocks on a risk-adjusted basis. The Chaos Protected Portfolio would have returned 5.9% with a maximum drawdown of 22% over the past twenty-five years compared to a return of 10% for the S&P 500 with a maximum drawdown of 51%. MFO Risk for the Chaos Protected Portfolio is estimated to be “2” for Conservative, and the APR rating is Above Average.

Table #2: Chaos Protected Portfolio (25.8 Years)

I used Portfolio Visualizer to see the current asset allocation of the portfolio which is about 37% stocks with seven percent allocated to international stocks.

Figure #1: Chaos Protected Portfolio Asset Allocation

Figure #2 shows how the Chaos Protected Portfolio would have performed during the Great Financial Crisis compared to the same funds that maximized the Sharpe Ratio and to the Fidelity Balanced fund. The returns are adjusted for inflation. It would have taken seven years for the Fidelity Balanced Portfolio to catch up to the level of the Chaos Protected Portfolio. This is known as “sequence of return risk”.

Figure #2: Chaos Protected Portfolio Performance During the Great Financial Crisis

I am currently reading How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement by Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar which was released in September. There is a wealth of information in it even for those of us already in retirement. She points out that sources of withdrawals should be based on market conditions, and mixed asset funds may not be as advantageous as a mixture of stock and bond funds for selecting where to withdraw funds. She advocates allocating ten percent to cash because in some years both stocks and bonds may perform poorly. Another point that I find useful is to structure your portfolio to be flexible with withdrawals and match discretionary spending to market conditions.

Extending tax cuts are likely to have a positive effect on stocks in 2025 and perhaps 2026 but with high valuations, returns will probably be dampened. High standard deductions and lower tax rates will help retirees. There will be winners and losers in tariff wars. Deregulation will help financial institutions, but increase risk.

I use Fidelity to manage a portion of my assets using the business cycle approach, and Vanguard to manage a portion using a low-cost buy-and-hold approach. I manage the rest based on my expectations. I have adjusted part of my portfolio along with the concepts in this Chaos Protected Portfolio article and the Bucket Approach advocated by Ms. Benz. Through small adjustments and rebalancing, my allocation to stocks has been reduced by about three percentage points. I view this as taking a little risk off the table after the recent rise in the stock market. I concentrate risk in my Bucket #3 for long-term growth and to minimize taxes.

I maintain diversified bond funds in my conservative tax-advantaged accounts. With interest rates high and a soft landing likely, I recently increased allocations to moderately riskier actively managed bond funds including Vanguard Global Credit Bond (VGCIX), Vanguard Intermediate-Term Investment-Grade (VFICX), Vanguard Multi-Sector Income Bond (VMSIX), and Fidelity Advisor Strategic Income (FADMX/FSIAX).  This is consistent with this article of building a Chaos Protected Portfolio. I prefer these funds to High Yield funds.

I have appointments set up with my advisors next year to withdraw from more aggressive tax-advantaged accounts instead of conservative accounts to further pull a little risk off the table while replenishing Bucket #1 for living expenses.

Enjoy a safe and happy holiday season!