The founder and chief investment officer of the Discipline Funds discusses how trade wars might affect the economy and major asset classes, what Treasury bonds are telling us, and whether investors should be concerned about inflation, recession, or both.
Today on the podcast we welcome back Cullen Roche. Cullen is the founder and chief investment officer of the Discipline Funds, which manages the Discipline Fund ETF. In addition, he heads up Orcam Group, a registered investment advisory firm he established in 2012. He’s authored several books, including Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance, and he has a new book coming out next year called Your Perfect Portfolio. Cullen started his career as an advisor at Merrill Lynch and worked at an event-driven hedge fund before starting his RIA firm. He received his bachelor’s degree in finance from Georgetown University’s McDonough School of Business. Cullen, welcome back to The Long View.
Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance
“Let’s Talk About Tariffs,” by Cullen Roche, disciplinefunds.com, Feb. 3, 2025.
“Weekend Reading—How Did We Get Here?” by Cullen Roche, disciplinefunds.com, April 4, 2025.
“Three Things—Tariffs, Of Course,” by Cullen Roche, disciplinefunds.com, April 7, 2025.
“American Economic Association 2021-2022 Universal Academic Questionnaire Summary Statistics,” by Charles E. Scott and John J. Siegfried, jstor.org.
“Three Things—Is a Recession Coming?” by Cullen Roche, disciplinefunds.com, Feb. 8, 2025.
“What Is Defined Duration Investing?” by Cullen Roche, disciplinefunds.com, Feb. 21, 2023.
“Defined Duration Investing,” by Cullen Roche, paper.ssrn.com, Aug. 8, 2022.
“Three Things—State of the Markets,” by Cullen Roche, disciplinefunds.com, Feb. 22, 2025.
“Why Is International Investing Working Again?” by Cullen Roche, disciplinefunds.com, March 26, 2025.
“Three Things—Weekend Reading,” by Cullen Roche, disciplinefunds.com, April 19, 2025.
“Cullen Roche: Macro Is About Understanding the World for What It Is,” The Long View podcast, Morningstar.com, Jan. 11, 2022.
“NY Empire State Index: Meaning, Benefits, Example,” by Adam Hayes, Investopedia.com, June 30, 2022.
William Bernstein’s No-Brainer Portfolio
The Humble Investor, by Dan Rasmussen
Christine Benz: Hi and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Dan Lefkovitz: And I’m Dan Lefkovitz, strategist for Morningstar Indexes.
Benz: Today on the podcast we welcome back Cullen Roche. Cullen is the founder and chief investment officer of the Discipline Funds, which manages the Discipline Fund ETF. In addition, he heads up Orcam Group, a registered investment advisory firm he established in 2012. He’s authored several books, including Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance, and he has a new book coming out next year called Your Perfect Portfolio. Cullen started his career as an advisor at Merrill Lynch and worked at an event-driven hedge fund before starting his RIA firm. He received his bachelor’s degree in finance from Georgetown University’s McDonough School of Business. Cullen, welcome back to The Long View.
Cullen Roche: It’s great to be back.
Benz: Well, it’s great to have you here at what is a very interesting time to be looking at the economy and the markets. I want to start with these tariffs. You’ve been a vocal critic of the latest round of the Trump tariff policy. You call your current state of mind TDS or Tariff Derangement Syndrome. You’ve said that the current tariff policy is born out of a fundamental misunderstanding of the global economy. Can you discuss that further?
Roche: Yeah, so that’s kind of a play on a lot of people sometimes say that anyone who opposes Trump has Trump Derangement Syndrome. To me, this is a very apolitical event. And I think a lot of the misunderstanding around this, or at least a lot of the misunderstanding from my perspective, stems from what I view as a misunderstanding of the fundamental causality at work here. And so I would emphasize four really important points about causality. And I think the first one is that there’s this narrative that the United States has been taken advantage of through free trade. And I think that this is backwards in a lot of ways and that the free trade system is actually a system that was largely built by the United States to benefit the United States. And I think that the data in aggregate bears this out in the sense that we are the wealthiest economy in human history. We have 60% of all global stock market cap. The median American is in the global top 10% of all wealth. And when you exclude some of the larger countries—India, China, Japan, Germany, France, and the UK—we actually have 50% of all global wealth.
So the idea that we’ve been taken advantage of by other nations, it just doesn’t mesh with the actual data. And I think one of the other big narratives that is being used to justify this idea is that we’re going to bring back the manufacturing job. So our manufacturing sector as a percentage of total employment has shrunk quite a bit. It’s shrunk from roughly 40% of total employment down to about 7.5% as of today. And which is interesting actually because the manufacturing sector as a percentage of GDP is still very large. We still produce $2.5 trillion in the manufacturing sector. So that’s the entire Canadian economy. So it’s not like we don’t make anything and that’s been growing fairly steadily over time. It’s just that these other sectors like services and tech have grown much, much faster, especially as a percentage of employment. And so I think that what’s going on here though is something much more fundamental about the way that the US economy is evolving away from what was once a smaller emerging-markets-style economy into a large, developed tech and services economy. And you can’t unscramble that egg at this point. You’re not going to reverse that in a way where you make a meaningful difference in manufacturing employment. And I think that this is actually all likely to get exacerbated going forward due to AI and automation.
And so the future of manufacturing employment I think is actually likely to get even worse in the sense that that 7.5% figure is actually I think likely to go down in the coming 25 or 50 years just because we’re going to automate all those jobs away. And the third big point around the justification for this is this idea that the current account deficit is unsustainable. There’s this idea that the current account reflects the part of the trade imbalance that reflects the total amount of money that basically flows in or out of the country. And so we run a current account deficit of roughly $1 trillion per year. And that means that there’s $1 trillion that flows out of the country. We buy more than we sell.
But in the grand scheme of things, when you look at our balance sheet and income statement in totality, that number, I don’t want to say it’s insignificant, but it is not nearly as important as I think some people justifying tariffs would make it seem. And that’s because we have $30 trillion of domestic income. And then again, our private sector is unfathomably rich. We have $250 trillion of assets and $190 trillion of private-sector net worth. And so when you quantify that outflow relative to the sheer wealth and a big part of this is that that outflow has actually contributed to a lot of our wealth in the sense that it’s helped us optimize the way that our corporations operate, which is a crude value to the private-sector net worth in a really meaningful way. And so I think that when you frame that $1 trillion outflow in the grand scheme of things, it’s kind of like somebody who makes $30,000 and has $190,000 net worth, but they’ve convinced themselves that they’re going bankrupt because they pay their Mexican barber $1,000 a year. And when you frame it like that, this whole narrative just it doesn’t make a lot of sense.
And that’s not to say that the current account couldn’t become a big problem. If you started paying your barber $50,000 a year, well, that would become probably an income statement and balance sheet problem. But for the United States over the course of the last 50 years, this has not been a big problem, and I don’t see it being a big problem at present. And the fourth point that I think is misunderstood is this idea that the reserve currency has been bad for us. And I think that the reason that we’re the reserve currency, there’s a lot of mythology around this petrodollar narratives and things like that. Bretton Woods narratives that we’ve imposed reserve currency status on the rest of the world. And I think the causality there is wrong in the sense that the reason we’re the reserve currency is because people want to do business with us. We are just a gigantic productive, wealthy economy and people want dollars. And so the foreigners end up with a lot of dollars by virtue of this. And so I think that these four points are really crucial to understand because I think when you get the causality wrong, then you get the prescription wrong. And that’s where we’re at with the tariffs.
Lefkovitz: Cullen, do you find any of the various justifications given for the tariffs to be compelling?
Roche: There are. I don’t want to sound like I am sweepingly against all of this, but at the same time, I don’t find them terribly compelling either. So I think the two that are most compelling is probably the idea that you can use tariffs as a negotiating tactic. So you can potentially use this as a carrot to try to get foreigners to alter their trade policies. And that’s typically what economists have argued for, is that like Milton Friedman used to always say that the right way to deal with a country that is imposing tariffs on you is not to impose tariffs back, but to try to get them to the negotiating table where they will then agree to a free trade arrangement on their own. So in using tariffs, Trump has had some success doing this with certain countries. But so far, the worst-case scenario that can kind of happen from all this is when the other countries start to retaliate and they basically say, you know what, we’re not going to be bullied by you. And then everybody starts retaliating and things escalate and get worse and worse. And when that happens, you’re really sinking all ships in that sort of a situation.
So the other one that I would say has some credence is the national defense angle that we covid did expose some weaknesses in the supply chains here where we were overly reliant on countries like China, where because we didn’t produce enough domestically, we were forced to import a lot of this stuff. And I think there’s certainly an angle to that that I think has some validity. I do think—I’m not a military expert by any means—but I do struggle with the idea that the United States is somehow incapable of potentially defending itself in a war just because we have not only the wealthiest private sector, we have the largest military, what, in human history. So I don’t know. I think in totality, I don’t find those arguments to be super compelling relative to the potential negatives.
Benz: Hoping you can discuss the winners and losers in the current tariff regime and of course that’s a moving target. We seem to get new news every day. But maybe you can talk about when you think about sectors and industries that stand to be the biggest beneficiaries as well as those that stand to lose the most if we see the tariff stay in force. Can you talk through that?
Roche: Yeah, well, gosh. As of this weekend, it looked like Big Tech was potentially going to be a big beneficiary. I guess all you have to do is have dinner with Donald Trump and maybe you get your tariffs exempted. But I think that in aggregate, this is part of the problem is that Milton Friedman referred to tariffs as an invisible tax. And what he meant by that was that when you impose the tariff, what you’ll oftentimes do is you’ll very specifically benefit a certain sector of the economy. And what you don’t realize is the counterfactual. You don’t see the invisible tax on the rest of the economy.
So for instance, a good example of this is something like South Korea where let’s say that South Korea imposes tariffs to protect a young growing automotive industry. And they view companies like Kia and Hyundai as essential to the development of the economy. And so they impose tariffs on US auto imports and they’re trying to restrict competition. And that’s ultimately what tariffs do and ultimately why they’re bad is because they restrict competition. And this gives Kia and Hyundai a lot of pricing power, and it gives them pricing power very specifically over their domestic consumers. And so rather than potentially having lower prices due to greater competition, those domestic consumers now they have to spend more on the domestic vehicles. And that accrues to these domestic automakers, but it makes everybody else worse off in the long run in the sense that those consumers now have less money to spend on all the other goods and services in the economy. So all the other companies in the economy potentially grow slower, they hire less. You get a lot of benefits to certain sectors inside of the economy.
But in aggregate, you’ve had this invisible tax where you don’t know that you’re worse off in the counterfactual example because people don’t see it. And so you might look at the Korean economy and say, well, look how well they’ve done, look how well the Korean automakers have done. And you don’t realize that, well, if they had opened their markets to free trade, they would have had greater competition, which would have actually been better for everybody else inside of the economy. The other sort of worrisome part about this is that, and one of the reasons why economists across the board hate it, there was a 2021 survey from the American Economic Association that showed that 95% of economists reject tariffs. And one of the main reasons is because they’re highly regressive.
And so I think one of the narratives around this is that we’re going to try to help Main Street and we’re going to hurt Wall Street. And tariffs oftentimes do the exact opposite because tariffs end up resulting in price increases for things like necessities. And the poor and the middle class rely more heavily on those things that they consume. And so this ends up being regressive in the sense that, yeah, it could hurt the stock market in the intermediate term, but I think the most wealthy investors in the stock market, they are relatively indifferent—they don’t like seeing this sort of volatility, but most of them are relatively indifferent to short-term fluctuations in the stock market. But if this really hurts the price of necessities, that has a hugely regressive impact on the people who I think we’re probably trying to help the most through something like this. And so, and then the worst-case scenario is really where if you end up getting this sort of slowdown in the economy and you get, for instance, rising unemployment, well, again, that’s going to be to the long-term benefit of the wealthy because corporations typically use their labor force to sort of manage their risks. If things get weak, they’ll shed workers, which will ultimately benefit the margins of the corporations in the long run. But it will have a devastating impact on the poor and the middle class in the short term and the long term probably.
Lefkovitz: Well, you mentioned the inflationary pressures. It seems like there are concerns about both inflation and recession. Are you concerned about one or the other or both?
Roche: Well, tariffs don’t cause proper inflation in the sense that—from an economics perspective, economists would refer to inflation as a consistent rise in the price level. So tariffs, if they’re implemented the way that it appears they’re being implemented, they cause a one-time adjustment in the price level. And so that has the potential to cause a sort of spike in the price level that might look like there is inflation coming. But it shouldn’t unless it were persistent, unless we were doing tariffs of increasing increments for years and years. I don’t think it’s correct to necessarily say that this is going to cause inflation. It’s going to make things more expensive in the price level over an acute period. But I think that in total, the risk of economic slowdown and recession is probably the more worrisome part here because all this uncertainty that’s going on, it has the potential to reduce business investment.
And business investment is really the lifeblood of the economy. It’s the thing that—a lot of people think that consumption is the thing, personal consumption is the thing that really drives economic growth. But really, it’s business spending, the large orders that companies use to build their inventory, the hiring that companies do, the innovative process of creative destruction that companies go through in the process of trying to build profits and revenue and whatnot. And in an environment like this, the likelihood that all of this is slowing down increases substantially. And that can be very damaging in the short term and potentially in the long term as well because you get a slowdown in hiring, you get a slowdown in these big purchase orders, and things like that. And so, the New York Feds Manufacturing Index came out this morning and I saw this was the, it was the lowest new-orders reading ever in the index. And so these sorts of things, we’re all kind of hoping that this will subside over the course of this 90-day freeze. But if this persists, there is definitely a rising potential that this causes a recession and potentially a relatively damaging recession.
Benz: So we want to switch over and talk about investing. But before we get into our specific questions, I wanted to discuss your approach to investing, which is very much anchored on an investor’s own time horizon. You think that investors should use that as a means of informing what they should invest in. So how soon do they need their money? Can you talk us through that principle and then we’ll get into some specific questions about the market and how to invest?
Roche: Yeah, so with my background, I somehow ended up doing a lot of consulting work for big banks, and I realized over the course of really understanding how banks operate that banks work from an asset-liability-matching perspective, meaning that a typical bank has long-term loans that they’re trying to fund their balance sheet with and they have consistent short-term outflows typically through deposit transfers. And so banks always have this inherent asset liability mismatch in their balance sheet, and they have to try to match that as best as they can so they don’t find themselves in a situation like, for instance, Silicon Valley Bank a couple of years ago, they really failed because they had too big of a mismatch. They had too many long-term bonds trying to fund their balance sheet.
And when interest rates blew out, they had this enormous mismatch where once they started losing some deposits, it became kind of a self-fulfilling prophecy. And so I always found it interesting that when a bank manages its risk profile, it doesn’t go through the same risk-profiling process that, for instance, a retail investor does. They don’t talk about what is your risk tolerance in that the sense of declining stock markets and things like that. They really are matching assets to liabilities, and it dawned on me—it took me 20 years of working in financial advisory to realize this—but it dawned on me that when an investor goes through a big drawdown and they sell stocks, they’re not really scared of the stock market per se. They’re scared of the uncertainty the stock market creates over specific time horizons. And so they’re selling stocks to get cash because cash gives them certainty of time and that gives them the ability to be more comfortable over a specific time horizon.
And so the methodology that I use is sort of similar to a bucketing-style strategy, I guess, where I’ve taken, I call it defined duration investment, because what I did was, I actually quantified the durations of different asset classes. So using a traditional bond-laddering methodology, what you’re really doing there is you’re defining the durations or the maturities of different instruments and then you’re building a ladder so that you have certainty over very specific time horizons, where you know the likelihood of the credit quality of an instrument, the income that’s going to be generated, and you understand this very specifically over time horizons. And so what I did was I quantified, I tried to quantify the duration of things like the stock market or commodities and then you’re able to take that methodology or that quantification and actually plug it into a financial plan where you can look at it and say, OK, well, for instance, in my methodology, the stock market is about an 18-year instrument right now.
So when we’re working from this perspective, if we’re working on a financial plan for somebody, we would be bucketing these things out in a very specific manner where we’re making sure that the investor has, say two years of emergency funds, they have enough money for the home down payment they’re going to make in the next few years. And then the stock market is this longer-term unknown and in environments like this, this sort of methodology can be really powerful because you compartmentalize the stock market very specifically in its own bucket where when the stock market is very volatile, you’re able to look at your cash or your intermediate bonds and say, well, this doesn’t scare me too much because I know that I’ve got enough dry powder to ride this out for two to three years, I’ve got my house down payment set aside. And the stock market is going to do what the stock market does over an 18-year period, and I know that if I’m thinking in decades in 10- to 20-year periods, then I’ve got that component of my portfolio bucketed in a way where I don’t need to be too concerned about what it does over a 10-day or 10-month period.
Lefkovitz: You’ve talked about expected return from equities over the long term being in the range of 6% to 7%. Can you talk about how you arrived at that number?
Roche: Yeah, so that’s the average historical figure and guessing what the future expected returns is always guesswork but I do like to think of the stock market in general as this 10- to 20-year instrument that on average has generated about a 6% to 7% real return, maybe, depending if you look at the global stock market, it’s maybe a little bit lower than that 5% to 6% or so. And that’s inflation adjusted. And the way that I came up with this methodology was actually, I sort of used a version of William Bernstein’s point of indifference, and what I wanted to quantify was something that was somewhat similar to traditional bond-duration metrics where you’re trying to take a reasonably reliable expected return over a certain time horizon that is reasonable. And so the way this ends up basically quantifying is the stock market goes through on occasion typically 40%, 50% downturns.
And so if the stock market were to—let’s say that your sequence-of-return risk was that you were hit very initially with this traumatic large 40% to 50% decline. Well, if that instrument is generating a 5% to 6% real return, 18 years is approximately the time period over which you can predictably say, OK, I’m indifferent to the way that instrument behaves because in real terms, that’s the time period over which I know that even in a worst-case scenario, that thing will still be generating an inflation-adjusted positive return. And so I’m being a little, probably overly, cautious in framing it as an 18-year instrument. But even if you say that the stock market is a 10- to 20-year instrument, I still think that’s the roughly the appropriate time horizon to think of this thing because, even if you look at the underlying fundamentals of equities, these are long-term instruments to begin with.
People often treat them as short-term instruments, but, the corporations that are in the S&P 500 are—these are old companies, they’re, I think the age of an S&P 500 company now is what, 20 years or so, 23 years, maybe I think I last read, but we’re talking decades and that’s consistent with the way that corporations just grow. And so the nice thing about this is that you reframe the way that, for instance, if you watched financial TV, you would think that the stock market was a, who knows, a 20-minute instrument, a 20-day instrument. And this methodology tries to reframe that to give people a much more quantifiable understanding of the appropriate time horizons over which to judge these sorts of instruments so that you don’t find yourself in an environment like today where you’re overreacting because you, in my view, quite literally misunderstand the way this instrument operates at a more fundamental level over appropriate time horizons.
Benz: I want to bring it back to the current environment. US stocks as of today, mid-April, are down about 9%. Of course, every market downturn is different, but I find myself struggling to find a reference point for the current one. I’m wondering, have you thought of anything? Have you lived through anything like this? Maybe you can talk about how you counsel people through a period like this.
Roche: Gosh, I don’t know, Christine. There was an earthquake here in San Diego yesterday.
Benz: I saw that.
Roche: The whole building was shaking. I got an alert on my phone that said, “go under a desk.” That was a fun one. So I don’t know. It’s interesting though. I always say that, like one of the reasons I used to do the traditional financial advisory risk-profiling process with everyone where you would give them the 10 questions and 95% of people would always answer these things the same way. And so it took me 15 years of getting the exact same answers to finally wake up one morning and say, maybe I shouldn’t do it this way because everybody answers it the same way. And that’s because everybody knows the right answer to the questions. For instance, if the stock market falls 30%, what do you do? And everybody always says, “Oh, I stay the course. I buy more.” And the problem is that oftentimes when you get into this fundamentally driven 30% type of decline, the stock market, it looks like it’s different this time. And that’s why it’s down that much.
And we’re not down that much this time around. But I think that if we found ourselves in a scenario like that, I think a lot of people would look at the stock market and say, well, we’re fundamentally changing the entire dollar regime system. And we’re changing the entire global monetary system to some degree. And we’re pulling back in a protectionist and sort of nationalist way that the United States has never really done to this extent, potentially. So in that sense, it is different. But, even during covid, I remember, gosh, toward the lows, I remember reading about Bill Gates and Warren Buffett saying, “we’ve never seen anything like this.” So it seems like it is different this time because it quite literally was different that time.
And so, there are always these sort of anomalous events that in the moment, they seem fundamentally correct. And that’s what makes the stock market so difficult to predict in the short term is that oftentimes when it’s doing certain things that are scary, it all really does make sense in the short term. And so, again, I think it’s so important to pull back and realize that I think that regardless of what happens over the course of the next 12 months or the next three and a half years, that in the long run, US corporations are going to continue to be great, great entities. Americans will continue to be the creative, innovative people that they’ve always been. And so there’s the potential that this is this disruptive event in the short term that I think in the long run probably has a, I don’t want to say meaningless impact, but this will probably be one of those events we look back on years down the road and we say, “Oh, that was silly—remember when we did XYZ with all those tariffs and stuff.”
But at the same time, I do think that if you’re in this moment and you’re very scared, I do think you have to look at your asset allocation. And if you’re really uncomfortable with it, I’m not against doing something that will alleviate that so that you don’t end up doing the sort of things that—like John Bogle always hated when investors would move all in or all out of a portfolio because they get scared and they say, ”You know what, I don’t like Trump or whatever he’s doing, and I’m going to sit out of the stock market for the next three and a half years until he’s gone.” And three and a half years is not necessarily a long enough time horizon to predict the stock market, but even over those periods, the stock market is roughly a coin flip.
And so that’s what investors are doing when they move all in or all out is they’re making this coin flip and that coin flip very often turns out to be a disastrous mistake where if the stock market is higher in three and a half years, you’re going to find yourself in a position where you’re frozen trying to get back in. And that creates almost an even worse-case scenario than the alternative where you now you feel smart for maybe having gotten out in the short term, but then you’re going to have trouble getting back in. And that’s part of the trouble with market-timing is that you not only have to time the exit right, but you have to time the entry right.
And so that’s why Bogle was always such a big advocate of staying the course, but even at times he would tilt his portfolio, and I don’t think in this environment, I don’t think there’s anything wrong with tilting it. If you’re 100% stocks in this environment, and you, for instance, you say you want your two years of emergency funds just to ride out the next few years. I don’t think there’s anything wrong with pulling back a little bit and creating a little bit of a buffer there to hedge your risks in the situation where you do find yourself in something that is potentially more financially perilous in two or three years.
Lefkovitz: As I remember, Bogle wasn’t the biggest fan of global investing. He was more of a US equities is kind of all you need. Curious for your thoughts on global diversification. The US market has obviously outperformed for many, many years now, but we have seen foreign markets outperform so far in 2025.
Roche: Yeah, I would say Bogle got 98% of everything right. This is like the 2% of things where I’d disagree with him in the sense that from a financial planning perspective, we all have domestic currency risk. And so the way that I view international investing is that owning international stocks is really a domestic currency hedge in the sense that when the dollar falls a lot, you tend to get big outperformance in international stocks. And so I view it as a situation where international investing works because it hedges your domestic currency risk. And so there are lots of ways to hedge domestic currency risk, but I think one of the safer ways to do it is to just own the global stock market as a whole. And Bogle would argue that you have a certain amount of foreign exposure just through domestic entities, but the problem is that those domestic entities, they earn their revenues in dollars.
And so you’re not necessarily getting the currency hedge through that exposure. And so I would very specifically like to own foreign firms just to hedge the currency risk and the potential that you get these environments where the dollar, if the dollar goes down a lot, you will get big-time outperformance from international stocks over time. And so for me, it’s one of those things where, even in the last 10, 20 years, the investors who were hurt the most were the ones that they had home bias, but they only owned the foreign stuff. So a European investor who actually owned, let’s just say the global market cap of stocks, and they owned 60% in US and 40% in the rest of the world, that investor actually did really well. And so the people who were hurt the most by this is just the people who had a home bias in foreign markets.
And so I loved it. Meb Faber had a piece out a few weeks back where he said, international investing worked for 98% of countries. And that’s because if you lived in all those other countries, and you diversified into the US, well, you diversified your home bias in a really beneficial way. The only people who feel, I think, silly about international investing are the Americans who for the last 15 years owned some foreign and did a little bit worse than the US market, but still did fine in total. So to me, I would say that it’s just sort of a, it’s a simple way to diversify your currency risk. Is it necessary? Maybe not. But to me, it’s one of those diversification principles where it’s something that is, it’s such a simple way to further diversify your portfolio, where when you’re going through an environment like this, especially, you’re really glad you’ve owned those international stocks because they’ve buffered your domestic exposure and your total portfolio in a way that helps you stay the course in the long run.
Benz: Wanted to switch over to fixed income. But first, I wanted to get into the time horizon framing. Can you talk about what kind of holding period you think investors should have in mind if they’re thinking about holding fixed income as a portion of their portfolio?
Roche: So this is one of the things I love about bonds is that you can slice and dice the time horizon so specifically. And this is the thing that makes stock market investing so hard is that you can’t really slice and dice the time horizons of the stock market. There are certain things like value stocks tend to look like a little shorter-duration instruments. Tech will tend to look like longer-duration instruments. But even so, you’re still talking about multidecade instruments, whether they are 15- or 20-year instruments. But in the bond market, you can slice these things up, down to daily instruments, all the way out to 30-year instruments. And so my view is typically that I actually, one of the interesting things I found when I quantify the defined duration methodology was that long-term Treasury bonds, they operate almost more like insurance.
And this actually makes sense from a more fundamental level. They’re so interest-rate-sensitive that they perform best in a deflation or a recessionary environment. And so they almost operate like an insurance component of a portfolio in these very unusual acute periods. And recessions that deflations are, they’re unusual, they’re not the norm. And so they have, in terms of the way that the actual instrument operates it, the long-term Treasury bond will typically generate a low or negative real return. But in these very acute environments, it will have this huge asymmetric return that’s very beneficial to the portfolio. Whereas something like a Treasury bill, you can structure in a way where this thing is just giving you a very reliable short-term cash flow stream. And so it’s interesting when you, like bond aggregates have become very popular in the last 20 years. And I used to use nothing but bond aggregates for a lot of my clients in our bond portfolios.
And I started to notice after the financial crisis that these instruments would expose people to an interesting behavioral bias and that not only can you see the price every day, but these instruments, when you mesh everything together, they have a constant maturity. And what that means is that, for instance, a bond aggregate has a six- or seven-year constant maturity inside of it. And that doesn’t give people certainty over reliable time periods because you’ve got the portfolio, by definition, is constantly rolling the new issuance and stuff to maintaining this constant maturity over time. And that can be behaviorally difficult because when you go through environments where, for instance, in the last few years where interest rates rise a lot, it creates a lot of uncertainty where that investor is looking at that thing. And it almost has this similar characteristics to stocks, in that the stock market has this—if you thought of the stock market as having this constant maturity of 18 years that I mentioned, well, that creates a huge amount of uncertainty in say five- to 10-year time horizons.
And the bond market is something that people typically look at their bond allocation, they say, OK, this is the safe part of my portfolio. I want this to be reliable over the short term. And then you see weeks like last week or years like 2021 and ’22 where the bond market is very volatile and they say, “Whoa, this is a lot more volatility than I signed up for in my supposedly safe component.” So I’m a big fan of disaggregating a bond aggregate into its individual components and actually ripping out the individual time horizons and owning, for instance, like I’m a big advocate of what I call T-bill and chill the strategy of basically taking a T-bill portfolio and turning it into very specific T-bill ladders where you’re taking your T-bills and you’re creating really absolute certainty over zero to 12 months, for instance. And giving people the ability to look at that and say, OK, regardless of what’s happening with the 10-year Treasury bond today, I know that my Treasury bills, they didn’t move at all during all of this, and they’re earning 4.25% right now, and I have absolute certainty of the time horizon over which I’m generating a certain amount of money and I have certainty, most importantly, of the principle over that time horizon.
Lefkovitz: You referenced the drama that we’ve seen in the Treasury market recently here in April, the yields spiking and the safe haven status being called into question. Obviously, US debt is a lingering issue. Do you have any concerns that that safe haven status for Treasuries and bonds is at risk?
Roche: I don’t, and I also, I think to some degree, the price action was disconcerting last week, but it’s interesting to put this in perspective because I got a question from a client who asked me, “Should we be buying international bonds?” Because I like to very specifically buy only domestic because my general view is that, well, the US economy and the US government by virtue of being able to tax the most profitable entities in the world is the safest entity by definition due to that. And so their liabilities are very reliable because of this income stream that they have from the underlying economy. But I thought it was interesting because year to date, or actually I should say since the stock market peaked in the middle of February, the best-performing asset class in terms of the bond market is actually US government bonds. So the intermediate bond is up a little over 2.5% as of today since Feb. 18. And international bonds were better performing last week.
But since the stock market started getting jittery due to the tariff concerns, the US government bond market, the intermediate bonds are actually the best-performing part of the bond market. And so I do think that some of this is just due to the extreme gyrations. Interest rates went from, they were 4.3% at the end of March, or toward a March 25th or so, and they fell to 3.9%. So they went through this rollercoaster ride where they fell a lot, and then interest rates spiked a lot. And I think a big part of that is just that foreigners are now going through this rebalancing of their portfolios where they expect there’s going to be less dollars flowing out of the United States. And that means that as the United States kind of closes itself in, the foreigners are going to have less access to the US market. And so there’s, in my view, there’s been this big portfolio rebalancing effect due to that change in the potential future of the current account and the amount of dollars that are outflowing.
And so I don’t view this as a long-term change. The US financial market is still, it is just, it’s so much bigger, so much more secure, so much safer than every other financial market that I don’t see a scenario where, for instance, German bunds or Japanese government bonds become really close competitors in terms of their safe haven stature, just because the underlying economies, even if the United States were to shrink in a relative sense compared to some of these countries, it is still so much bigger across the board from every metric that by virtue of that, the liabilities of the government that is attached to that economy is still the safest instrument.
Benz: I wanted to ask about the Fed’s role in all of this. I’ve been hearing chatter that President Trump might be inclined to replace Powell with someone who is more accommodative and likely to ease interest rates. Do you have any thoughts on that? Do you think that’s realistic? And if so, what would be the risks if we had a Fed chairman pushing rates lower at a time when we’re perhaps concerned about inflation?
Roche: Yeah, that was actually really interesting last week. That headline got kind of tucked behind everything else that was going on, that there was this potential that Trump was going to advocate for being able to fire Jerome Powell. And I mean, that’s really unprecedented. The Fed independence is hallowed ground really, that the way they’re supposed to be able to operate in this sort of apolitical and very independent manner relative to the rest of the government, where they can look at, for instance, if the Treasury is running big inflationary deficits, the Fed is supposed to be able to look at that and say, well, we’re going to impose some monetary offset here. We might raise interest rates to offset some of this impact. And when they’re politically compromised to some degree, you could get the risk of a much more pro-cyclical sort of monetary policy where, for instance, if, I mean, gosh, Powell has, I think, done no matter what, his term is up in May of ’26. And I don’t think there’s any doubt really that Trump will replace him with somebody who is much more amenable to whatever Trump wants.
And in that sort of an environment, you do have the risk with that this person who’s going to be running the Fed in 2026 is just doing whatever Trump thinks is the most pro-cyclical beneficial thing for the economy, regardless of what’s happening with inflation. So, let’s say we’re in an environment where inflation is higher than expected, and you have a real estate guy running the country, essentially, and telling the central bank that, “Hey, I know what’s good for the economy. And I think that strong real estate markets are good for the economy. And I know that low interest rates are good for real estate. And so if you don’t drive interest rates lower, then, I’m going to, I’m going to go on Twitter and blast you every day.” And I think that that person is likely to follow what he wants. And so you could get the risk of this more pro-cyclical monetary policy where because they’re not quite as independent, they’re operating more in tandem with the government, which creates the risk of potentially higher inflation. A lot of this is speculation. So I don’t know how realistic all of this is, but I do think that there is certainly that risk going into the back half of his presidency.
Lefkovitz: Cullen, when you were last on the podcast, you talked about studying macroeconomics in part to avoid behavioral traps, to avoid behaving badly with our investments. Curious if you could talk about some of the traps that you think investors need to be mindful of?
Roche: So I did study, I’m not a proper economist, but I’ve studied economics. I studied economics at Georgetown, and I’ve spent way more of my time over the course of the last 20 years studying macroeconomics, mainly because, as someone who manages a lot of these really time-sensitive, mostly bond-type portfolios, I work with a lot of retirees. So people who are, they’re really sensitive to inflation and the price movements of their portfolios. And I’ve gotten just an incredible number of questions over the years about the status of, say, the reserve currency, the viability of government bonds over time horizons. And so I think that understanding these things at a more fundamental level is really helpful because you can avoid a lot of the, or at least put a lot of these bad narratives into perspective. And I think that, when I was talking about before causal errors I think that people are using to justify tariffs, I think that it kind of comes full circle with this stuff that you might be in a position where you’re looking at the volatility of bonds last week and you say, I think I need to sell all my government bonds and I’m going to move all into gold, for instance, or I’m convinced that the reserve-currency status is going to go away over the course of the next couple of years.
I need to sell all of my US-dollar-denominated assets and buy only other stuff. And I think that when you come back to a more fundamental understanding of all this and put it in the proper perspective, you’re able to avoid making those sorts of all-in, all-out maneuvers that can oftentimes be really disastrous. And so it’s, again, I’m not necessarily against tilting things the way that John Bogle might have, but I think in total, you do want to stay diversified, and you want to stay the course. And I think understanding these things at a more fundamental level helps you stay the course especially in the course of these very acute, volatile environments like we’re going through today.
Benz: I wanted to ask about the fund that you run, Discipline Fund ETF. It lands in our tactical asset-allocation category. And I just checked, it had a positive return that lands it in the category’s top 4% for the year to date. Can you describe the strategy in play at that fund?
Roche: So I actually, like you, Christine, I’m a big lover of John Bogle’s work. And I’ll never forget watching an interview with him where he described after 1999 how he had shifted his portfolio from 70/30 stocks to 30/70. And I thought to myself, this is the guy who everybody says is the passive stay-the-course guy. But what I loved about that interview and what he did there was that he very specifically said that he altered his portfolio, but remained fully invested, but he did it because he needed to stay behaviorally comfortable with his portfolio. And so by making this tilt, he wasn’t trying to necessarily outperform the market or something like that. He was just looking at valuations and saying, well, I’m very uncomfortable. This is an unprecedented level of valuation. And I’m worried about future returns. And although valuations don’t have a lot of predictive short-term value, they do have some predictive 10- to 20-year value.
And I think Bogle was looking at that and he said, “I’m going to shift down to 30/70 stocks/bonds to help me stay the course, to help myself stay comfortable.” And when I built this fund, what I was dealing with was I was dealing with a lot of investors who have these multi-temporal portfolios, and the time horizon that I always found the most troublesome to deal with is actually this intermediate time horizon. It’s that five- to 15-year time horizon, the one that it’s not really long enough to just ride out big stock market downturns and the 18-year perspective that I mentioned before. But it’s longer than your Treasury bills or your intermediate-bond portfolio. And it’s actually interesting when you blend a 60/40 portfolio, what you end up with in my defined duration methodology is an instrument that has about a 12-year duration. And that’s a hard one to compartmentalize for people, especially when you’re 60% stocked, you’re really getting an excess amount of the volatility from the 60% piece.
And so that can exacerbate some of the short-term unpredictability. And what I did was, rather than taking Bogle’s methodology of just using valuations, I built a model that has a bunch of other countercyclical metrics, things like credit spreads, for instance. Credit spreads tend to be a very countercyclical type of instrument in the way that they perform over time. And they tend to be much more reliably countercyclical than something like the valuation metrics such as CAPE, which have tended to have a pretty skewed pro-cyclical element to them in the sense that a part of this is this American exceptionalism argument where margins have increased in the United States and that’s resulted in much higher valuations. And so valuations haven’t had this sort of mean-reverting tendency that Bogle might have witnessed in the years that over which he was an investor over his lifetime. And so I had to adjust this because you couldn’t rely only on valuations. And the goal of this methodology is to do something similar to what Bogle was trying to implement, where you’re doing something that’s very systematic, something that is really, it’s helping you stay the course.
So our bands are also 70/30 to 30/70 in the portfolio. And the design of it is really implemented to help you remain more behaviorally robust over time horizons, where when the stock market goes through a big boom, we’ll underperform very reliably, but you’ll capture a good chunk of the stock market upturn. And in environments like today, where we’ve seen the stock market become very volatile, the portfolio will do the opposite, where it helps you remain more behaviorally resistant to a lot of the stock market volatility because of the way that it is countercyclically rebalancing away from the dominant trend in the stock market over time.
And so I kind of ripped it off of John Bogle. I’m trying to implement something similar, but I’m also using it in the context of this financial planning-based process where it is very specifically designed to target that kind of like 10-year time horizon where it’s not a long-term instrument, it’s not a short-term instrument. So we use it in that bucket that is that little bit longer intermediate bucket where I think that over 10-year periods, it will generate reliable real inflation-adjusted returns. But it’s that sort of unknown time horizon for a lot of people, the one that can be the most behaviorally challenging because it has a lot of the characteristics of the stock market at times, but doesn’t give you the ability to just say, I’m going to ride this out over a 20-year time horizon.
Lefkovitz: Interesting. I wanted to follow up on the credit spreads. What are credit spreads do you think are telling us today?
Roche: Credit spreads are rising and saying, hey, there’s a lot of sensitivity to what is going on in the economy. Dan Rasmussen actually just wrote a great book where he implements a similar style strategy. In the book he said that he pretty much only uses credit spreads actually to implement something, a similar sort of countercyclical strategy. His book, by the way, is called The Humble Investor. It’s fantastic. But right now credit spreads are, I don’t want to say they’re blowing out, but they’ve moved from the CCC index has moved from 7% up to about 10.5% as of today. So they’re moving up. In really panicky, scary environments, this index will reliably get up over 15%, 20%. I mean, during the financial crisis, it got up to crazy levels just because that was such an acutely damaging balance sheet sort of recession that we were undergoing at that time. But right now, I think that credit spreads are saying there is a rising risk of sensitivity at the balance sheet level for a lot of, especially the lower-rated entities in the economy. And that’s in part due to that dynamic that I discussed before, where the amount of domestic investment going on is slowing.
I think that I talk to a lot of venture capitalists all the time and private equity firms. And a lot of these guys are saying, we are freezing everything for six months because of the uncertainty. And that slowdown in the circulation of cash flow through the economy, it hurts these sorts of entities the most—the lowest-rated sorts of entities because they rely on short-term funding needs. They’re very sensitive to the amount of money that is flowing through the economy across time. And so risks are rising. I would never want to jump out of a window over this sort of stuff, but the risks are definitely rising. And I would say the longer this event lasts, the worse it has the potential to become because the uncertainty results in this economic slowdown where the cash flow and the velocity of money through the economy just slows down. And that has the potential to cause a lot of disruption.
Benz: You referenced Dan Rasmussen. We actually have a podcast with him coming right up so people can keep an eye out for that. We’re also going to link to your defined duration white paper in the show notes. I think it’s so helpful. Before we let you go, Cullen, I wanted to ask about the book that you’re working on. Can you talk about what it’s about and when we can expect to see it?
Roche: So it should be available later this year. And gosh, yeah, I just got my final notes back from my editor, which was a lot of fun because with everything blowing up in the world, the last thing I have time for right now is to read my own 300-page book a dozen times in the next few weeks, which is, for anyone who hasn’t written a book, that’s actually, for me at least, that’s the worst part is by the time you’ve gotten to about the 50th read-through of your own book, you’re like, Oh my God, I hate this person. So the book is called Your Perfect Portfolio, and it’s designed—what I did was I took 23 very popular portfolios and I’m going through in kind of a deep-dive analysis of each one. And this ranges from things like, I was fortunate enough to talk to Taylor Larimore about the three-fund portfolio.
I talked to William Bernstein about the Bernstein No-Brainer. And then I got into some more high-level risk-parity portfolios. And the book kind of builds throughout itself—starts with very boring portfolios and builds up to much more interesting dynamic more of what we might call active portfolios. But it’s sort of a fun, explorative way to assess certain portfolios. And my goal really is to help people find the portfolio that works for them. Because the way that I kind of view a lot of this is that a lot of people, especially people like me, we have a certain methodology, and we oftentimes are sort of selling that methodology to people.
But the reality is that investors need to find the portfolio that works for them. In a lot of ways, I wrote the book similar to finding your spouse—that you can’t just marry the person that everybody else wants you to marry. You have to find somebody that works for you. And that is going to be unique and different to each person. And I think your portfolio needs to be similar. It needs to be customized to you. It needs to fit your personal needs. And that’s a process that I’ve spent a lot of my career wrangling with. And I’ve divorced a lot of portfolios over the course of the last 25 years because of this. And my goal with this is to help people expedite that process and hopefully avoid a lot of the portfolio divorces that I went through in the search for my perfect portfolio.
Benz: It sounds super useful. I can’t wait to see it. Cullen, we always enjoy talking to you. Thank you so much for taking time out of your busy schedule to be with us today.
Roche: Thanks for having me. I hope it was helpful.
Lefkovitz: It’s great. Thanks so much, Cullen.
Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.
Lefkovitz: And at Dan Lefkowitz on LinkedIn.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.
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