@pizzaman One answer to your thought experiment is Markowitz mean-variance optimization (MVO) that is common in financial analysis. Taking just the asset data points you list you list, without biases, they mathematically optimize the portfolio's expected return and minimizing its volatility. You could call the assets A, B and C as far as they're concerned. Essentially, the model aims to find the portfolio that offers the highest return for a given level of risk, or alternatively, the lowest risk for a desired level of return.
I personally am too skeptical of any advisor's confidence in those attributes used for the math to optimize. A few changes and the results vary enormously. I come from a more crude methodology of thinking through life-changing risks that might affect my portfolio, and figuring out ways to hedge those. This is far from "optimized" or "maximizing".
I guess my thought experiment was geared more to how comfortable would someone be if their asset allocation was based solely on the financial attributes as presented in the 12 black boxes. Not running any scenarios, but based on your level of risk and what kind of returns you want over time. Theoretically this takes all biases out, including US vs Foreign markets, and gives you the risk based performance you want. Then and only then you would run it through PRC simulations to see if your allocations actually works for you. Yes/no??
@pizzaman I know, I was just pointing out that some advisors do your thought experiment for reals: optimizing the risk-adjusted return based on a mix of asset attributes of the variables you list (your "black boxes" ABCD...). But I know very few people willing to do this, without adding in constraints reflecting their biases about what those A, B, Cs are. Broadly speaking there is a big split in investing between the "quants" who use black boxes of statistics, land where they will, and those who think you have to understand the actual ABCs beneath the numbers. The use of computers is supposed to take away bias, since the program doesn't care about what constitutes the A B C or D.
@jkandell Exactly, like Pralana Retirement Calculator (PRC)! If the information in the black boxes is not good enough, then what's the point of developing your retirement financial plan??? It's not really a plan, just a he said she said sort of thing (I say that in the nicest way possible).
@pizzaman Given this is a pralana forum, it would be poor form for me to answer to that question. 🙂
Pralana PRC is awesome 🤗
@pizzaman the attributes that you may want to use may be different than the attributes I want to use so you can’t eliminate personal preferences even if you could eliminate biases which you can’t. For example, you may prefer to put more weight on historical returns and I may prefer to put more weight on forward looking returns based on market conditions. Our asset allocations might be very different but both would be reasonable approaches.
I am fine knowing I have a reasonable asset allocations based on my preferences that I know may differ somewhat from everyone else. So my answer to your question is no I would not use a black box or mean variance approach. Math works well in most situations but one would need to do more of a stochastic approach and start assigning ranges and probabilities and then your decisions would at least reflect the uncertainty in the outcome.
The use of ranges and probabilities can be a great way to show that there are many reasonable asset allocations.
My thought experiment was not intended to come up with the "best plan" given the information listed within the black boxes for the 12 asset classes. It's goal is to reduce bias as much as possible using know information about the various asset classes. Each person can come up with whatever plan works for them, but your plan still needs to be based on something. The only information within each black box would be information that can be used as input into PRC. Forward looking returns based on market conditions, for example, would not be part of the black box info. My thought experiment is meant to be used in conjunction with PRC, nothing more 😉. Yes my thinking is refining as this thread progresses 🤔.
WASHINGTON (Reuters) -Foreign direct investment flows into developing economies dropped to $435 billion in 2023, the lowest since 2005, with just $336 billion flowing into advanced economies, the lowest since 1996, the World Bank reported on Monday.
The bank released the report a week after downgrading its 2025 global economic forecast by four-tenths of a percentage point to 2.3%, warning that higher tariffs and heightened uncertainty posed a "significant headwind" for nearly all economies.
FDI flows to emerging markets and developing economies grew rapidly during the 2000s, peaking at nearly 5% of gross domestic product in the typical economy in 2008, but they have declined since then, the report said.
Trade growth also weakened significantly from 2020 to 2024, dropping to its slowest pace since 2000, while economic uncertainty spiked to the highest since the turn of the century, the bank said.
https://finance.yahoo.com/news/investment-flows-2023-developing-countries-133939089.html
I found part of an CCN article kind of funny:
Investing in US markets lately is akin to spinning plates while riding a unicycle balanced on a bowling ball. Traders have to contend with rapidly changing tariffs, mixed economic signals, uncertainty over rates and now an escalating conflict in the Middle East.
The article then continues:
Using conventional wisdom, you might assume that the United States’ historic strikes on three Iranian nuclear facilities over the weekend would send stocks lower and oil prices higher, for fear of retaliation and a potential Iranian blockade of the Strait of Hormuz, a critical shipping lane through which about a fifth of the world’s oil flows. Yet the opposite is true. Bonds are quiet.
Investors are maintaining their balancing act: It’s not entirely clear what happens next — or what position to take. If the US and Israeli strikes are largely over, and Iranian retaliation is muted, this could be a net positive for markets, lessening volatility and the threat of a nuclear-armed Iran. If the conflict escalates — particularly if Iran cuts off oil supplies to the West — that, combined with a growing trade war, could reignite inflation and a global recession.
As of today the S&P 500 is within 1% of it's all-time high! Go figure.
https://www.cnn.com/2025/06/23/investing/stock-market-dow-oil-iran
Reasons why the US Stock Market will continue to go up, at least for the next few years (OBBB):
Better off
Corporate America
Big business groups, including the US Chamber of Commerce and Business Roundtable, applauded the Senate’s passage of the bill on Tuesday.
Corporations are betting they will benefit from the legislation making permanent the tax breaks in the 2017 Tax Cuts and Jobs Act.
The package would restore a tax break from the 2017 tax package that allowed businesses to fully write off the cost of equipment in the first year it was purchased. The incentive has been phasing out since 2023.
Also, the legislation would once again allow businesses to write off the cost of research and development in the year it was incurred. The TCJA required that companies deduct those expenses over five years, starting in 2022.
Manufacturers
Manufacturers are especially happy that the bill would make significant changes to how the US tax code treats the construction of new manufacturing facilities.
Businesses will be allowed to fully and immediately deduct the cost of building new manufacturing facilities. This temporary provision is retroactive to January 19, 2025 and continues for construction that begins before January 1, 2029.
And in a bid to incentivize more chipmaking in America, the legislation would enhance tax credits for semiconductor firms building manufacturing facilities in the United States.
Small businesses and partnerships
The National Federation of Independent Business, the leading small business lobbying group, praised the legislation for making permanent a special deduction for the owners of certain pass-through entities who pay businesses taxes on their individual tax returns.
That deduction, which applies to small businesses and partnerships formed by lawyers, doctors and investors, would get increased in the House version of the bill from 20% to 23%. The Senate bill kept it at 20%.
High-income Americans
The net income for the top 20% of earners would increase by nearly $13,000 per year, after taxes and transfers, according to an analysis of a near-final version of the Senate bill by Penn Wharton Budget Model.
That amounts to a 3% average increase in income for those households.
For the top 0.1% of earners, the average annual income gain would amount to more than $290,000, according to Penn Wharton.
Americans living in high-tax states should also benefit because the bill temporarily increases limits on deductions for state and local taxes for householders making up to $500,000 annually to $40,000 per year for five years.
However, millionaires who lose their jobs will not be able to collect unemployment benefits, according to a recent provision added to the Senate bill.
https://www.cnn.com/2025/07/03/business/trump-big-beautiful-bill-business-economy
OK, is everybody sitting down? Pizza Man, Mr. invest in the USA, is seriously thinking about investing in an international small cap fund 😬. A recent article by Larry Swedroe has me reevaluating. Does anybody know anything about Avantis’ International Small Value ETF (AVDV)?
A New Era For Global Equities?
APRIL 29, 2025
•
LARRY SWEDROE
Over the past 17 years, U.S. investors have found international diversification unrewarding. From 2008 through 2024, the S&P500 Index delivered an annualized return of 10.7%, far outpacing the MSCI EAFE Index’s 3.3% and the MSCI Emerging Markets Index’s 1.9%. This outperformance was driven largely by rising U.S. stock valuations relative to their international peers: the U.S. CAPE 10 ratio climbed from 26.3 to 37, while EAFE’s fell from 25 to 18.5, and emerging markets dropped from 33.3 to15.9.
2025: A Turning Point?
In 2025, the narrative has shifted. Uncertainty around U.S. trade and tax policy has resulted in reduced consumer and business confidence, elevating the risks of a recession, and has undermined confidence in continued U.S. exceptionalism. Additionally, the
U.S. dollar
has weakened significantly, falling from 108.49 at the end of 2024 to 99.06 by late April 2025. The dollar’s slide reflects mounting concerns about aggressive tariff policies, geopolitical tensions, and threats to Federal Reserve independence, all of which have fueled talk of "de-dollarization" as global central banks reduce their dollar holdings in favor of gold and other currencies. A weaker dollar amplifies inflation, raises capital costs for U.S. firms, and reduces the relative attractiveness of U.S. equities for foreign investors.
Meanwhile, Europe is taking decisive steps to stimulate its economies. Germany, for instance, has announced €1 trillion in fiscal stimulus focused on infrastructure and defense, in response to the Ukraine conflict and shifting U.S. geopolitical commitments. The EU is also relaxing fiscal rules to allow greater defense spending and considering repurposing unused Covid-19 recovery funds and liquidating frozen Russian assets to further boost economic activity.
The Case For Global Diversification
History shows that leadership between U.S. and international markets is cyclical. While the U.S. has outperformed for an unprecedented stretch, previous cycles have always reversed. Currency effects have also played a major role: the strong dollarh as suppressed international returns for U.S. investors, but if the dollar weakens, this headwind turns into a tailwind for global equities.
Economic theory and experience both argue for global diversification, even though it can be psychologically difficult when one region dominates for so long. With U.S. equity valuations stretched and the pillars of past outperformance—low rates, globalization, dollar strength, Fed independence—now on shakier ground, the current environment may favor a broader, more balanced approach. European equities, particularly small-cap value stocks, offer compelling valuations relative to history and to their U.S. counterparts. For example, while VOO’s trailing 12-month P/E stands at 24.5, Avantis’ International Small Value ETF(AVDV) trades at just 10 times earnings.
Investor Takeaways
• The extraordinary run of U.S. equity outperformance may be giving way to a new cycle favoring international stocks, especially in Europe.
• Policy shifts, currency dynamics, and valuation gaps may align to support a rotation in market leadership.
• The flip side of the U.S. trade deficit is that the we run a capital account surplus—countries with trade surpluses, such as China and Japan, receive dollars and frequently invest the proceeds in Treasuries. If they sell less to Americans, they will have less funds to buy Treasuries. And that’s before they make an active decision to reallocate their assets elsewhere.
• Investors should consider rebalancing portfolios to capture potential upside in much cheaper international equities, particularly in small-cap and value segments.
The bottom line is that while no one can predict the future with certainty, history suggests that global diversification remains the most prudent long-term strategy.
Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future.
