In 1776, Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations, a book about how societies grow rich. His view was simple and hopeful. Governments should act mainly as referees: defend the nation, enforce laws and contracts, provide a few essential public services, and otherwise let people work, build, and trade freely. When individuals pursue opportunity, productivity rises. Businesses grow. Living standards improve.
When governments more or less follow this script—keeping taxes and regulations reasonable, budgets balanced, and markets open—stock investors tend to benefit. Stocks represent ownership in real businesses. In healthy economies, those businesses usually grow over time.
For many decades, investors paired stocks with corporate bonds to smooth out the ride. The classic 60/40 (stock/bond) portfolio became a powerful wealth-building tool in a world of expanding trade, falling interest rates, and relatively stable fiscal policy.
The challenge is that governments do not always stick to the script.
Debt has grown rapidly. Spending has expanded. Policy has become less predictable. Today, the US federal debt far exceeds the country’s annual economic output. Long-term research across many countries shows a consistent pattern: as government debt rises, future annual economic growth tends to slow. Heavy borrowing pushes interest rates higher, leaves less room for productive investment, and makes economies more fragile.
This matters for investors because slower growth and higher financial stress make traditional portfolios less reliable.
Intermediate-term bonds have historically helped reduce portfolio ups and downs. But they come with a tradeoff. After inflation, they have usually delivered only modest long-term returns—typically 1-2% a year over extended periods. In periods of rising interest rates or persistent inflation, their real returns can be negative for years, quietly eroding purchasing power.
Even more important? Stocks and bonds do not always protect each other. In today’s environment, they are increasingly moving together. When economic pressure builds, both can fall at the same time, removing the diversification many investors depend on.
We believe there is a better way to build portfolios for a world like this.
Rather than relying so heavily on corporate or intermediate bonds, we favor combining growth assets with ongoing exposure to assets that have historically protected capital during difficult periods. We also believe in adjusting these positions as conditions change.
These “flight to safety” assets are not meant to replace stocks. Their role is different. They are designed to help protect purchasing power, reduce deep drawdowns, and provide flexibility when markets are under stress.
The important tool is tactical flexibility guided by time-tested patterns. When stocks and corporate bonds begin moving together—often during periods of fiscal strain, interest rate volatility, or rising uncertainty—we look to reduce risk and increase exposure to these protective assets. After a stock market decline, or when conditions stabilize, we gradually shift back toward growth assets.
Several asset classes play an important role in this approach.
Gold and other precious metals have a long history of maintaining their value during times of financial stress. Over long periods, gold has delivered real annualized returns of 4-6%. More importantly, it has often helped protect portfolios when both stocks and bonds struggled. It has served for centuries as a form of monetary insurance.
Long-term US Treasury bonds offer a different but complementary benefit. Because of their longer maturity, they can rise sharply when interest rates fall, which often happens during recessions or periods of fear. Unlike intermediate bonds, they can provide meaningful gains precisely when investors need stability most.
Cash, while unglamorous, is a vital tool. It preserves capital during market storms and gives us the ability to act when opportunities arise.
Recent history shows why this matters. In 2022, rapid interest rate hikes hurt both stocks and bonds. The conventional 60/40 portfolio lost significant ground, roughly 16% after inflation. Portfolios that included meaningful positions in gold and long-term Treasuries experienced smaller real losses and recovered more quickly as conditions improved.
Long-term studies tell a similar story. Portfolios built around broader diversification and flexibility have historically produced better risk-adjusted real returns and more durable long-term growth, even during periods of rising debt and policy uncertainty.
A brief note on a newer topic: cryptocurrency. Bitcoin and similar assets are sometimes described as “digital gold.” A modest allocation, perhaps 5-10%, may offer variety and potential upside for investors comfortable with large price swings. However, to date, cryptocurrencies have behaved more like high-risk technology stocks than dependable safe havens, often falling sharply during periods of market stress. For investors whose priority is preserving and steadily growing purchasing power, assets with long records of resilience remain the more reliable foundation.
Adam Smith’s ideas have endured because they reflect how people and economies actually work. We honor them by participating in growth when conditions support it, and by preparing thoughtfully for periods when policy and financial systems become less stable.
Moving beyond an over-reliance on intermediate bonds and toward flexible, historically validated alternatives offers a clearer path to both resilience and reasonable long-term growth.
We remain committed to navigating these challenges with discipline, evidence, and care.
