JUST BEFORE Thanksgiving, something odd happened on Wall Street. Three of the major brokerage firms issued remarkably similar reports declaring the death of the “60/40” approach to investing. What exactly does this mean—and should you be concerned? By way of background, 60/40 refers to a traditional and very common strategy for building portfolios: 60% stocks and 40% bonds. Historically, most university endowments, as well as many individuals, have chosen this mix of investments because it offers a reasonable balance, with growth coming from the stocks and stability from the bonds. The approach has worked extraordinarily well. Over the past 95 years, a simple 60/40 mix of U.S. stocks and bonds has returned an average of nearly 9% a year. More important, it’s been very effective at reducing risk. In 2008, for instance, when the stock market declined 37%, a 60/40 portfolio would have dropped just 17%. This wasn’t an isolated case. The 60/40 approach has come through for investors in other times of economic stress, including the Great Depression. So why is the 60/40 approach suddenly under attack? In my view, this stems from the dramatic growth of index funds. In recent years, investors have been fleeing actively managed funds—that is, funds run by traditional stock-pickers—and opting for passively managed funds. The fund performance data indicate this embrace of indexing is a smart move—and not just for ordinary investors. A simple 60/40 mix of stock and bond index funds has delivered better results than most university endowments, including Ivy League schools. For many years, it’s been awfully hard for anyone to top the humble 60/40 mix, especially when it’s implemented with a set of low-cost index funds. But this trend doesn’t serve the interests of Wall Street brokers. Because index funds pursue a largely buy-and-hold strategy, they don’t generate nearly the volume of trading commissions that active strategies do—and hence it’s no great surprise to see Wall Street analysts taking aim at the tried-and-true 60/40. They would like nothing better than to shake investors loose from these simple investments. I don’t want to dismiss these analysts out of hand, just because they might be biased. It’s important to understand their arguments. While each of the brokers’ views varied, they all focused on the same key concern: Bonds, they argued, are expensive. One broker went as far as to say they’re in a bubble. But this is where their arguments get shaky. There’s no question that bonds are expensive. Yields on U.S. Treasurys are just 1.5% to 2.3%. The question is, how best to respond? The brokers’ prescription was to move money out of government bonds, and instead buy corporate bonds and emerging markets bonds—investments that carry far more risk. They also recommend that investors buy more stocks as an alternative to bonds, favoring companies that pay larger dividends. This is a dangerous argument. No matter how you look at it, the diversification benefit of government bonds has been strong in virtually every time period. The analysts argue that this benefit could break down. But if you look at historical data, it’s hard to make that case. More important, government bonds offer investors a guarantee that stocks never will: that folks will receive their principal back. I see it as extremely unhelpful to suggest that investors move out of government bonds, and into stocks or into riskier bonds. That said, there’s nothing magical about the specific percentages in the 60/40 mix. What’s important is to build a portfolio of stocks and bonds that’s the best fit for you. That means a portfolio that accounts for your household’s financial goals, as well as your objective capacity to take risk and your personal tolerance for risk. That might end up being 60/40, but it might just as easily be 40/60, 80/20 or some other combination. What’s universal, however, is the importance of keeping things simple and maintaining a mix of stocks and government bonds. As much as Wall Street would prefer that you opt for something more exotic—and more lucrative for them—I would resist the temptation. Adam M. Grossman’s previous articles include Got You Covered, An Unkind Act and The REIT Stuff. 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"]

WHAT SHOULD BE THE first rule of personal finance? My vote: Always look for ways to stay in the center lane—that is, to take a balanced approach. As 2024 gets underway, here are 10 ways you could apply this principle. 1. Housekeeping. Over time, many of us accumulate a grab bag of investments—some good, some not-so-good. Those in the not-so-good category can pose a challenge. Suppose you own an expensive mutual fund. If it’s in a retirement account, you could exit the fund without worrying about any tax impact. But what if a sale would entail a taxable gain? It’s harder to know when a sale might be worth it—because there’s no way to know how the investment you sell will perform after you sell it, and there’s no way to know how the new investment will perform after you buy it. All too often, I’ve seen folks hold onto substandard investments to avoid a 15% or 20% tax bill, only to see that investment underperform by more than 15% or 20%. But because there’s no way to know how things will turn out, this is precisely the sort of situation where you might opt for the center lane. How? Don’t view it as an all-or-nothing decision. Instead, you might chip away at an investment a little bit each year, with a goal of eliminating the position over three or five years. 2. Index funds. Among the reasons I see index funds as the best choice for most investors most of the time: They can help your portfolio’s performance stay in the center lane. Of course, there’s a price to pay for owning index funds, which is that you’ll never score the sort of home run you might enjoy with a winning stock. But in exchange for that, you’ll also never suffer the sort of underperformance that an investment misstep can inflict. 3. Retirement contributions. Suppose you’re starting a new job and are offered a choice between a tax-deductible or Roth 401(k). In some cases—if you’re in a very high or very low tax bracket—it’s an easy choice. But what if you’re in one of the middle brackets—either 22% or 24%? The math in these cases is often inconclusive. This would be a good time to favor the center lane and split the difference with your contributions. 4. Life insurance. Later in their careers, folks often wonder when it would be prudent to cancel a term-life policy. In many cases, the math indicates that it would be safe to cancel only some amount of coverage. If you have more than one policy, this is possible, by canceling one and holding onto the other. What if you have just one large policy? Unless you can persuade the insurance company to dial down your coverage, you may be stuck with an all-or-nothing decision. That’s why, if you’re early in your career and in the market for life insurance, consider splitting your coverage between two or even three policies to buy yourself some flexibility. 5. Social Security. Because Social Security can be claimed at any point between ages 62 and 70, it’s the subject of endless debate. The conventional wisdom is to wait until 70 to get the largest possible benefit. I agree with that. But if you’re married, it often makes sense for one spouse to claim at least a little earlier. While this strategy may not appear mathematically optimal, the reality is that none of us knows how long we’ll live, so any amount of math is still just a guess. My recommendation: Steer clear of the age-70 dogma and instead take a center lane approach. 6. Annuities. Social Security is one of the best annuities available. But if you’re looking for additional retirement security, a single-premium immediate annuity (SPIA) might not be a bad choice. Annuities have a bad reputation because they're often loaded with opaque fees. But SPIAs tend to be the best of the bunch, and if a permanent paycheck is what’s most important, I wouldn’t get bogged down in the negativity surrounding annuities. Instead, you could split the difference by annuitizing just a portion of your assets. 7. Pensions. If you’re lucky enough to have a traditional defined-benefit pension, your employer will typically give you a choice when you reach retirement age. You can accept the benefit as a lump sum, which you can then invest on your own. Or you can opt for guaranteed monthly payments for life. Often, the math in these cases will point in the direction of the lump sum. But before you make that choice, remember Irene Triplett. When she died in 2020, at age 90, she was still receiving a pension benefit based on her father’s military service—in the Civil War. 8. Debt. Suppose you’ve just received a year-end bonus. Should you allocate some of it to paying down debt? This is another question that lends itself to an easy calculation. If the interest rate on your loan is lower than what you might earn by investing those dollars, it makes sense to invest rather than paying down debt. But when it comes to debt, there’s more to the equation. For many people, reducing debt provides a peace-of-mind benefit that can’t be quantified. And by reducing your monthly cash needs, a lower debt load buys you flexibility—to, say, switch into a different job with lower pay or even to retire early. The upshot: You might consider reducing a loan balance even when the math says you shouldn’t. 9. 529 accounts. When they were first instituted, 529 accounts were limited to higher education-related expenses. But that changed in 2018, and now 529 funds can also be used for K-12 expenses, up to a cap of $10,000 per year per student. While this new flexibility is welcome, it also makes the math harder. Not only do parents need to estimate the future cost of college, but also they now need to predict whether their children will go to a private elementary or high school. That’s one reason I recommend making incremental contributions to 529 accounts over time. In theory, you might benefit by making a larger contribution earlier. But because the total tuition obligation is so hard to estimate, you could be better off with a center lane approach. 10. Gifting. If you have adult children, should you help them financially and, if so, to what degree? Warren Buffett suggests this rule: Give children enough that they can afford to do anything, but not so much that they can afford to do nothing. While few have Warren Buffett’s wealth, I see this as a useful guideline. Ultimately, we want our children to be motivated to earn their own success. At the same time, life is expensive, so most parents want to help to the extent they can. What’s the solution? I recommend making gifts incrementally, perhaps annually. That will give both donor and recipient an opportunity to test the waters. You can then adjust future gifts accordingly. In his 2023 book, Decisions About Decisions, Cass Sunstein offers this useful guideline on making decisions: Try to determine what the frequency, likelihood and magnitude would be of a potential error. That can help you decide how close to the center lane you want to be. 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 (Twitter) @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

IN THE FIELD OF epidemiology, researchers have long used the term “tipping point” to describe how epidemics occur. At first, an ordinary disease moves slowly, not gaining much attention. But then, seemingly overnight, it snowballs into something far larger. Within the world of public health, this concept is well understood. But about 20 years ago, the author Malcolm Gladwell took a closer look and pointed out that tipping points can be found in a whole host of other situations far beyond epidemiology. That includes finance. Consider Lehman Brothers. In June 2007, it reported a profit of more than $1 billion, a company record. And yet, just 15 months later, it was bankrupt and sold for scrap. Despite its sterling reputation, established over 158 years, the firm unraveled virtually overnight. With the benefit of hindsight, there had been some early warning signs. In its writeup about Lehman’s record profit in mid-2007, The New York Times mentioned a loss related to subprime mortgages—but it wasn't until the eighth paragraph of the story. Even then, media reports quoted Lehman executives describing the issue as “small” and “contained.” There was no indication that this “small” issue would bring down the entire company just a year later. Why spend time talking about Lehman? While the details may not be generally applicable, it’s an example—and not an isolated one—of a financial tipping point. It’s worth studying for the same reason we study the 1929 stock market crash and the Great Depression: These were unusual events, but they remind us to take steps today to avoid financial stress tomorrow. To that end, here are five ideas to help you fortify your own finances for the long term: 1. Gather the facts. In the past, I have talked about the “Big Four”—your income, expenses, assets and liabilities. If you know these four numbers, you’ll have a solid grasp of your financial situation and you can answer most money questions. If you don't have these numbers readily available—and don't have time to gather them—consider hiring a bookkeeper to pull together the information for you. 2. Once you know the big four, ask yourself two questions. Am I okay now? And will I be able to handle upcoming financial obligations, such as a home purchase, college tuition or retirement? To find out, make a simple set of financial projections. It can be eye-opening. In my experience, this kind of exercise often ends up leaving folks sleeping better, not worse. 3. If you’re employing one of the retirement rules of thumb, such as the 4% rule or the 80% income replacement rule, be sure they apply to your situation. These rules can sometimes be too simplistic, especially when they’re age-based. Should Bill Gates really follow the same financial roadmap as every other 62-year-old? I think not. 4. If you want to guarantee you’ll never run out of money in retirement, there is one way to do it. Each year, simply limit your spending to a fixed portion of your portfolio’s value as of the end of the prior year. For example, if you had $1 million at the end of last year and your spending rule was 5%, you would withdraw $50,000 this year and no more. This is the way schools and colleges operate. As long as they stick to their spending rules, it serves them extremely well. But in exchange for this near guarantee, there's a catch: If your portfolio declines in value in any given year, you have to be willing to take a pay cut the following year. 5. Recognize that there are escape valves in our financial system if things aren’t panning out. In Lehman's case, their financial mess was beyond human comprehension. But when ordinary folks run into a simple cash crunch, there are lots of solutions. If you have federal student loans, you could explore an income-driven payment plan, forbearance or refinancing. If tuition for your children is crushing your budget, call the bursar's office. Colleges are businesses and they will negotiate—even if they say they won't. If you have bills that end up with a debt collection agency, you may be able to settle the obligation for less than the full amount owed. Even the IRS will be flexible: It has programs that allow you to pay both income and estate taxes over time. Adam M. Grossman’s previous articles include All of the Above, Not My Thing and Nothing to Chance. 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"]

BRITISH PHILOSOPHER G.K. Chesterton, in his 1929 book The Thing, introduced an idea now known as “Chesterton’s fence.” Here’s how he explained it: Imagine two people walking along a road when they discover a fence blocking the way for no apparent reason. As Chesterton tells it, the first person looks at the fence and says, “I don't see the use of this; let us clear it away.” But the second person disagrees: “If you don't see the use of it, I certainly won't let you clear it away.” Why not remove the fence? The second person explains his reasoning. “Go away and think,” he tells the first person. “Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.” In other words, Chesterton is saying don’t remove something before understanding why it’s there. Indeed, even when something appears counterproductive—like a fence blocking a road—there’s likely a reason behind it. People don’t construct things for no reason. Chesterton’s admonition, then, is that we should seek to understand why something exists before deciding to change it. Why is this so important? As Chesterton explains, the key risk in making any change is that it may trigger unintended consequences. Perhaps the most famous example of this phenomenon occurred in China in the late 1950s. The Communist government decided that sparrows needed to be eradicated because they were damaging crops. A nationwide campaign encouraged citizens to kill sparrows, along with other pests. But because birds feed on locusts, the unintended consequence was that the locust population boomed. This resulted in even greater crop damage, triggering a famine that killed an estimated 45 million people. That's an extreme example and, to be clear, Chesterton wasn’t arguing we should never make any changes. Rather, he was simply advocating for a more structured approach to decision-making—including financial decisions. Considering a change? Here are five questions you might ask: 1. Urgency. A key challenge in making financial decisions is that, more often than not, the questions aren’t simple. Suppose you’re considering a change to your portfolio’s asset allocation. A single change could have at least three effects: If you’re making the change in a taxable account, it might generate a capital gain or loss. A shift in your asset allocation might also change your portfolio’s growth trajectory. Finally, it might change your portfolio’s risk profile. Because of this uncertainty, it’s easy to get stuck on a financial decision. There’s a solution, though. In my view, there are three priorities to weigh in making financial decisions. They are, in order: managing risk, pursuing portfolio growth and, where possible, managing taxes. Evaluating decisions through this lens can be useful because it helps to answer the question, “How urgent is the proposed change?” If you’re changing your asset allocation to reduce your portfolio’s risk level, you might decide that’s the most important thing—more important than whether it affects the future growth of your investments or if it results in a tax bill. On the other hand, if the reasons behind the proposed change are lower down on the priority list, you might proceed more deliberately, spending more time thinking about the potential for unintended consequences. For example, I’ve discussed the “magazine cover indicator.” Financial headlines have been found to be contrary indicators and shouldn’t be relied upon to drive financial decisions. With news headlines, in other words, the risk of unintended consequences is high. In fact, we just marked the 25th anniversary of one of the more famously incorrect predictions. The cover of Barron’s magazine on May 31, 1999, declared that Amazon was a “silly” idea and dismissed Jeff Bezos as “just another middleman.” To be sure, Amazon’s stock could have gone either way. Still, this is an example of where Chesterton’s fence could have been helpful. 2. Importance. Another reality of financial decision-making: Some decisions are simply more important than others. A change to your asset allocation—moving dollars from stocks to bonds, for example—might have a very significant impact. It would thus be worth careful consideration. But with other decisions, the impact might be more limited. Author Karsten Jeske, who runs the Early Retirement Now blog, is highly analytical, often carrying calculations out to three decimal places. But for some decisions, his recommendation is—unexpectedly—to “just wing it.” If we can’t be sure how a decision will turn out, but it wouldn’t make a big difference either way, we shouldn’t get too hung up on it. In those situations, in Chesterton’s terms, we don’t have to worry as much about upsetting the status quo. 3. Probability. In his 2023 book Decisions about Decisions, Harvard Law School professor Cass Sunstein offers a recommendation: Don’t focus on the likelihood of being right or wrong with any given decision. In many cases, that’s simply too difficult to know because the decision involves making a prediction. For that reason, Sunstein suggests not trying to forecast the likelihood of an event. Instead, where possible, he suggests weighing the cost of being wrong against the benefit of being right, both of which are easier to estimate without having to make a forecast. 4. Tax impact. Another key investment challenge: Decisions often involve weighing multiple unknowns against each other. Suppose you have an investment you’d like to sell but aren’t sure if it’s worth the tax impact. You can’t know the answer to this question because you don’t know how each investment will perform in the future. If you’d sold Amazon 25 years ago, you would have been very unhappy. If you’d sold Enron, on the other hand, you might have paid a bundle in taxes, but you’d also have sidestepped its subsequent bankruptcy. What’s the solution? No amount of research can help investors predict which way a stock will go. But if you own a mutual fund and are considering selling it, the task might be easier. According to the data, high-cost funds underperform low-cost funds, on average. So, if you own a high-cost fund, you could weigh its annual expenses against the tax cost of selling it. Suppose you have a $10,000 investment in a mutual fund that charges 1% in annual expenses. That would be $100 a year. If you switched out of that fund and into an index fund charging, say, 0.03%, you’d save nearly $100 each year going forward. Now let’s consider the tax side of the equation. If you have a $1,000 gain on the fund you own and pay 20% in taxes on that gain, the tax cost would be $200. Result: After two years, you’d come out ahead on this decision, and you might decide to proceed. 5. Alternatives. In the tax example above, you’ll notice I left something out: I assumed that the only difference between the two funds was their expense ratios. But that’s an oversimplification. Any two funds will likely perform differently going forward, and that difference could easily change the result. Very few financial questions can be evaluated with simple calculations. That’s why, especially where there’s less urgency and more uncertainty, I recommend viewing decisions in less binary terms. Instead, look for ways to split the difference, so you remain in the center lane. 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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WHEN I WAS GROWING up, one family in the neighborhood lived differently from all the others. In their garage was a Rolls-Royce. When each of the sons turned 16, a new BMW showed up in the driveway. Because it was so out of the ordinary, it caught my attention. It caught everyone’s attention. Looking back, this is what I find interesting: This kind of privileged upbringing looked like a guaranteed recipe for demotivating their children. But that isn’t what happened. Both sons today are productive and successful. One holds a PhD. The other founded a real estate firm. Maybe they’re the exception—or maybe this tells you that there’s more to successful parenting than meets the eye. It is, of course, hard to generalize. But there is research on this topic. In my work, I’ve observed a number of common themes in raising motivated, productive children. Here are the five that seem most important: 1. Priorities. Warren Buffett has said he wanted to give his kids “enough money so that they would feel they could do anything, but not so much that they could do nothing.” To be sure, Buffett is in a different category from most people, but this illustrates an important principle: The best place to start is by making your priorities explicit. The default assumption in the world of estate planning is that everyone wants to leave as much as they can to their children and to minimize the bite from estate taxes. For many families—maybe most—that’s the objective. But before you adopt this default mindset—and before you walk into an estate planner’s office—it’s important to think this through. Is it your goal to leave your children every dollar you can, or do you want to help them only with specific goals, such as buying a home? Do you have philanthropic goals? How complicated are you willing to make your financial life to minimize estate taxes? Do you want to encumber your children with trust structures after you’re gone? There are no right or wrong answers to these questions. What’s most important is to think through the questions so you can put a plan in place that serves your objectives. 2. Guidance. In her book Raised Healthy, Wealthy & Wise, wealth planner Coventry Edwards-Pitt stresses this point: Even in families where children don’t need to work for a living, people are happiest when they do have direction in their career. This might seem like an obvious point, but it’s often harder for wealthy families than it is for others. Wealthy parents need to be more intentional in guiding their children and in letting them know their expectations. Setting expectations early, in fact, is key. Don't wait until college or later to let children know that they can't rely on the “Bank of Mom and Dad” to support them. To be clear, this doesn’t mean that you can’t ever help your children. What’s critical, though, is that they get on a defined path—and then stick with it long enough to achieve traction. As Edwards-Pitt points out, the concept of happiness is misunderstood. What matters most is direction and purpose. According to the research, a sense of purpose leads to “overall well-being and life satisfaction, improves mental and physical health, increases resiliency and self-esteem and decreases the likelihood of suffering depression.” 3. Modeling. In Boston, where I live, there’s the stereotype of the wealthy family that drives old cars, intentionally wears tattered clothing and turns the heat down to 65 in the winter. Sometimes, I think, they take this conspicuous frugality too far. But as a parenting technique, some amount of intentional frugality can be useful. That's because children won't always do as their parents say, but they will do as they see their parents do. Modeling some thrifty behavior helps communicate values to your children in a way they might not accept if you simply lectured them. [xyz-ihs snippet="Mobile-Subscribe"] Does this mean you have to live like a church mouse to communicate values to your children? Not at all. It just means that, at least in a few ways that are obvious, you make choices that children notice. That way, even if you don’t say it, they’ll absorb important values. 4. Teaching. Some things can be modeled, but parents need to go out of their way to teach certain financial concepts. Unfortunately, money is a taboo subject for many people. But if you’re comfortable doing so, I see value in helping children understand the basics of a budget. Let them know what it takes to run a household. Even if you aren’t willing to share the specifics of your own finances, I recommend getting involved in your children’s finances. When they start to earn money for themselves—even if it’s just from babysitting—help them think about allocating the proceeds. Teach them about the major categories: spending, giving, saving and, of course, taxes. Help them open their first investment account—ideally a Roth IRA. But don’t do it for them. Instead, teach them how to do it. 5. Communicating. One of the challenges for children in wealthy families is that they’re often kept in the dark. Consider, for example, a middle-aged child who has been receiving cash gifts annually from her elderly parents. One logical conclusion might be that her parents are very wealthy and that she stands to receive a significant inheritance. But another, equally logical conclusion might be that her parents used to be wealthy, but because of their generous gifts over the years there won’t be much left at the end. Both are reasonable conclusions and I’ve seen both scenarios unfold. As a parent, you might not feel any obligation to communicate to your children the details of what they should expect down the road. But if you’re the child on the other end of this, it can be detrimental both financially and emotionally to have no idea. For better or worse, wealth does create some unique obligations and I believe this is one of them. Clear communication helps everyone plan accordingly. Ultimately, parenting requires a delicate threading of the needle. Push too hard and kids will rebel. But push too little and, as Buffett feared, they might end up directionless. Taken together, I believe the above five principles can help improve the odds for both parents and children. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, he advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

THE U.S. STOCK MARKET has historically delivered similar returns under both Democrat and Republican administrations. For that reason, my view is that investors shouldn’t worry too much about who occupies the White House, and I tend to stay away from investment discussions that involve politics. But sometimes, the news coming out of Washington dominates the headlines in a way that can’t be ignored. Such is the case today. Moreover, with the stock market faltering recently, investors have been asking questions about the new administration’s policies and wondering how they might respond. To think through this question, we can start with a closer look at the two policies that have received the most attention: the imposition of higher tariffs and the creation of a new cost-cutting department under the leadership of Elon Musk. Tariffs raise a number of concerns. Most obvious is that they could result in higher prices for American consumers. Some consumers are already stretched thin by the recent spike in inflation, and further price increases would be unwelcome. On top of that, tariffs can have broader implications for the economy. When prices are higher, people can’t afford as much, and that can cause the economy to slow. When the economy slows, corporate profits fall and that, in turn, can lead to lower stock prices.  In addition, there’s the risk that other countries could retaliate in response to U.S. tariffs, imposing their own tariffs on American goods. That could hurt domestic manufacturers. It’s for all these reasons that economists are nearly unanimous in seeing tariffs as a bad idea. What about the new Department of Government Efficiency (DOGE)? This initiative too is raising concerns because it seems to be focused primarily on reducing government headcount. Since the federal government employs about three million people, the worry is that significant cuts could materially affect unemployment. Compounding that would be a dynamic economists call the multiplier effect. When people lose their jobs, they aren’t able to spend as much, and that can lead to a slowing of the economy. They might also sell their houses, leading to downward pressure on home prices. A further concern is that, if the government workforce is cut too significantly, critical services might be impacted. That, I think, summarizes the key concerns around these new policies. The question, though, is how to respond, and that’s the hard part. It’s hard because the negative scenarios I described above are all realistic but not necessarily guaranteed. The use of tariffs, for example, could end up being temporary and just a negotiating tactic to achieve political aims with other countries. If that’s the case, then there would be little, if any, inflationary impact.  Even if higher tariffs were put in place permanently, they aren’t guaranteed to cause the spike in inflation that many fear. That’s the view of Scott Bessent, the new U.S. Treasury secretary, who explained the administration’s thinking in a recent interview. Even critics of the administration have argued that higher tariffs may result in only modestly higher inflation. In November, Alan Blinder, an economist who served in the Clinton administration, wrote an opinion piece that carried the headline “Trump’s Economic Plan Has Inflation Written All Over It.” But when he broke down the math on prospective tariffs, his conclusion was that consumer prices might rise, at most, by 3%. And Blinder notes, it would be a “one-shot price increase.” Similarly, DOGE’s efforts to cut back on the federal workforce may not have the negative impact that many fear. To be sure, the impact is negative for those who lose their jobs, and I don’t minimize that. DOGE’s objective, though, is to reduce the government’s annual deficit, which has reached alarming levels in recent years. Reducing the deficit would help bring down interest rates. That would benefit both the government as well as everyday consumers. And since interest payments now account for one-seventh of the federal budget, the impact of reducing interest rates could be considerable. In short, the ultimate impact of these new policies is not a foregone conclusion. Proponents and opponents each have their own views, but it’s too early to know for sure how the administration’s policies will affect the economy now and into the future. As you think about your own portfolio, you may find the following analogy helpful. Nassim Taleb, author of The Black Swan, compares investment markets to a pool table. When you hit the first ball, you can be pretty sure where it’s going to go. A skilled player might even be able to control what happens when that first ball hits the next one. But beyond that, it’s anyone’s guess. Things are just too random. That image, I think, does a good job illustrating the dilemma investors face today. It’s hard enough to know what will happen in the short term. It’s even harder to know what will happen in response. And it’s nearly impossible to know how that will all net out to affect investment markets a year or two or three from now. And thus, it’s nearly impossible to know what action an investor should take. That might sound like an unhelpful conclusion, but the good news is that we don’t need to be able to see the future to guard against negative outcomes.  Instead, this is the approach I recommend: As a thought experiment, let’s assume that all of the negative predictions are borne out—that the tariffs and cost-cutting do result in a recession and a stock market downturn. If we assume that these negative outcomes are guaranteed, investors can then ask themselves a question which is, I think, much easier to answer. How should my portfolio be positioned for a market downturn? The good news: This is a question that investors should always be asking themselves. It has, to a great degree, a straightforward answer: An investor’s best defense is asset allocation and diversification. If you have sufficient resources outside the stock market—in some combination of bonds and cash—you should be well positioned to weather even a multi-year disruption to the market. 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. [xyz-ihs snippet="Donate"]