The 93.6% Decision Most Investors Skip

Greetings,

July’s pre-order incentive for my book, Real Wealth, is now live, and this one is for the investors who have already mastered the basics and are ready to go deeper. Pre-order this month, tell me you did at tylergardner.com/book, and I’ll send you Beyond the Basics: Investing and Money Management 2.0, a full one-hour digital video presentation delivered straight to your inbox in early August, yours to keep.

We’ll cover portfolio “tilting,” the details of asset location, sector rotation for those of you who just can’t help yourselves, and how to mitigate sequence of returns risk early in retirement. Pre-order now and you’re also locked in for every monthly incentive through the December 1st release date.

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And Now for That 93.6% Decision Most Investors Skip…

Many of you continue to ask about specific allocation breakdowns, and you’ll get exactly that in this week’s podcast episode, where I build the actual portfolios fund by fund, ticker by boring ticker. But in this week’s newsletter, I want to give you something (hopefully) far more useful: the three most practical things I’ve learned from managing portfolios, things I wish someone had told me before I spent years learning them the expensive way. None of this is revolutionary, and that will always be the point.

Tip #1: Spend your energy on the split, not the funds. One of the most famous (and most misquoted) findings in all of finance: the landmark Brinson study found that 93.6% of a portfolio’s variability comes from its allocation across asset classes. Note the word variability. Not returns. This study gets butchered daily by people claiming “90% of your returns come from allocation,” which it never said, and which follow-up research (Ibbotson and Kaplan, 2000) showed simply isn’t true. It’s the financial equivalent of a game of telephone, except everyone playing manages money professionally and the sentence never gets funnier. I know, bummer.

But what the study actually found is far more useful for the DIY investor: your stock/bond/real estate/alts percentages determine almost everything about how your portfolio behaves over time.

So here’s the practical tip: the one decision worth your time is that initial split itself: 90/10? 70/20/10? Everything downstream is a rounding error with a ticker symbol. Picking the perfect fund inside those percentages is choosing the throw pillows before you’ve picked the neighborhood. And if you’re doing this yourself, that’s genuinely liberating news: the part that matters most is the part you’re most qualified to decide, because it’s about your life, your timeline, and your stomach, you know, the three subjects on which you are the world’s leading expert.

Tip #2: Before you buy international, check what you already own. Here’s where I depart from the standard three-fund orthodoxy, and I want to be clear that thousands of reasonably smart people disagree with me. Loudly. Often in my comment sections, sometimes with charts or reminders of how many letters they have after their names. So take this one as my personal approach, not gospel.

The classic argument for a big international slice goes something like this: nobody knows whether the U.S. or the rest of the world will outperform going forward. And that’s 100% correct. Nobody does. I certainly don’t, and I say this as a man who once confidently predicted the Subaru Outback would never catch on in Vermont, where it is now functionally the state bird. But that argument (the international one, not the Outback one) assumes that buying a U.S. index fund means betting only on the U.S. economy, and that assumption stopped being true decades ago.

Roughly 40% of S&P 500 revenue is generated overseas. When you buy the U.S. market, you’re buying Apple’s sales in China, Microsoft’s cloud contracts in Europe, and Coca-Cola’s remarkable ability to appear in every corner store on the planet, including ones that don’t appear to have electricity. Bogle himself made exactly this case, to the mild horror of the three-fund faithful: American multinationals already hand you the world’s profit centers, wrapped in American accounting standards and shareholder protections. So your fun fact of the day, deployable at your next dinner party: the famous “3-fund Bogle portfolio”—U.S. stocks, international stocks, and U.S. bonds—wasn’t actually endorsed (or created) by Bogle. It came from Taylor Larimore, the great Boglehead evangelist who popularized it in Bogle’s honor. So now you know something that most people charging 1% to manage your money do not.

The practical tip inside the opinion: before adding any fund because you feel underexposed to something, look at what your current funds actually hold. The largest U.S. companies are multinationals by revenue, not just by branding: their earnings already carry significant exposure to foreign demand, currency movements, and global economic cycles. You may be more internationally diversified than you were taught.

Tip #3: Let the headline pass before you touch anything. After last week’s discussion of inflation plays, the most common question I got was some version of “so when should I shift my portfolio into those inflation-proof allocations?” And I want to answer it clearly, because this might be the most practical tip of the three: you shouldn’t. Not because the headlines are wrong, but because acting on them is, by definition, active management. Every reallocation triggered by news is two market-timing decisions: when to get out of what you own, and when to get back in. Decades of data say professionals fail at that pair of decisions with impressive consistency, and they have Bloomberg terminals, research departments, and lunch meetings about it. You have a phone and a hunch.

But here’s the part that should let you exhale: a basic index fund already is an inflation hedge. Period. Companies raise their prices during inflation. That’s what inflation is. It’s not some mysterious vapor. Those higher prices flow through to revenues and earnings, which is why stocks have outrun inflation by roughly four to five percentage points a year over the last century.

So the tip, in one sentence: when a headline makes you want to change your allocation, wait until it stops being a headline. The news will change next quarter. Your allocation shouldn’t. That was true last week, it’s true today, and it’ll be true the next time the news invents a reason to tinker (which, if history is any guide, is scheduled for approximately seventeen minutes from when you finish reading this line).

And if you want the full breakdowns of a few sample portfolios and how the initial allocation percentages work in practice, check out this week’s episode of Your Money Guide on the Side. If you find the show useful, a review helps more than you’d think, as it’s how new listeners find the show, and how I know I’m not just another random guy walking through the woods of Vermont talking about money to squirrels.

Listen to This Week's Full Episode

Two Things I’m Currently Thinking About

1. Every story ends in a wedding or a funeral, and that’s why we either loved or hated the ending to The Sopranos. Shakespeare, bless him, left us exactly two ways to end a story: everybody gets married (comedy) or everybody dies (tragedy). Four hundred years later, we have streaming platforms, prestige television, and CGI budgets exceeding the GDP of Iceland, and we are still working (mostly) with the same two exits. Wedding or casket. Pick one, then plan emotional response accordingly.

Fair warning: the next paragraph spoils the endings of La La Land and The Sopranos. Yes, they’re 10 and 19 years old respectively. Yes, you’ve had time. But if you’re still saving them for a special occasion, I honor that, and you may skip ahead to #2.

Which is why the endings that refuse to pick remain the ones we can’t stop arguing about. La La Land had the audacity to let two people love each other and not end up together, and audiences walked out of theaters looking like they’d been personally divorced. And then there’s The Sopranos, which solved the wedding-or-death problem by simply cutting to black mid onion ring—arguably the most original ending in television history, or an act of consumer fraud, depending on which uncle you ask at Thanksgiving. There is no middle position. Nobody has ever said “the Sopranos finale was fine.”

So here’s what I’ve unilaterally decided that says about us: we don’t actually want complex stories; we want closure. An ambiguous ending is an unpaid invoice, and it will sit in the inbox of your brain forever. David Chase understood this and did it anyway, which makes him either an artist or a menace.

And seeing as I’ve been thinking about that ending for nineteen years, I’ll say artist.

2. There’s Someone Better Out There (A Message From Hollywood): Here’s a game I want you to play right now. Name a romantic comedy. Almost any one will do. Now check the opening act: is our hero already in a relationship? They are, aren’t they. And is that partner (through absolutely no fault of their own beyond being mildly boring at dinner parties) someone the movie desperately wants you to despise? Ninety-nine times out of a hundred, the answer is yes. Hollywood’s most reliable romantic formula isn’t boy-meets-girl. It’s boy meets girl-who-already-has-other-boy, but don’t worry, he’s the worst, and we’ll all hate him by minute seven.

The message, delivered in surround sound since roughly the Eisenhower administration: your current relationship is not that good, and there is always someone else out there. Someone better. Someone waiting in a bookshop or a rain storm.

And here’s where it connects to Thing One, because the wedding ending isn’t just convenient for closure, it’s also a cover-up. These movies end at the altar (or the first kiss) precisely so we never see the following Monday (or even the second kiss). We never have to accept that the thrilling new person will quickly become the regular old person who loads the dishwasher like a raccoon and has a few thoughts about thermostats. We get the honeymoon, permanently freeze-framed, and we’re left to assume it lasted forever. Shakespeare would be proud. Your current partner, not so much.

And Before You Go…

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As always, hope this gives you something to think about throughout the week ahead.

—Tyler