Perez is an unusual Democrat: a Reed College economics graduate who co-owned an auto-repair and machine shop with her husband before entering Congress. Republican John Braun is also formidable: Washington Senate minority leader, president of a family-owned emergency-vehicle manufacturer, retired Navy captain, and a University of Washington electrical-engineering graduate with an MBA and master’s degree in manufacturing engineering from the University of Michigan.

The immediate question is who wins. But WA-03 is interesting for another reason. After Republicans twice nominated the more polarizing Kent, this year voters have two credible candidates who appear reasonably close to the district’s political center.

Washington uses a top-two primary, with all candidates on the same ballot. Braun finished first with 39.7%, Perez received 36.4%, and progressive Democrat Brent Hennrich took 16.7%. Democratic candidates collectively received 54.8% of the vote, compared with 42.8% for Republicans. That looks encouraging for Perez—but Hennrich has said he will not support her in November. Perez needs many voters on her left without losing the crossover appeal that has kept her in office.

This week showed how difficult that balancing act can be. Perez and Jared Golden angered Democratic leaders by helping Republicans pass a procedural rule. Two days later, Perez again broke with most Democrats, supporting legislation restricting certain federal funding for universities participating in boycotts of Israel. Only 33 Democrats supported the bill; 167 opposed it, including Hakeem Jeffries.

For me, the underlying issue is fundamental. An AJC/Hillel survey found that 42% of current or recent Jewish college students said they had experienced antisemitism on campus. I do not believe American universities receiving federal support should institutionally boycott Israel—a country built to a remarkable degree by immigrants and refugees. I discuss that history in Israel as Refuge: Ethiopia and Melat Kiros—Selective Focus.

Perez is therefore a useful canary in the coal mine. Jeffries is already facing unease on his left, with a growing group of Democratic nominees declining to commit to supporting him for Speaker. Yet he may also need independent-minded Democrats such as Perez to win the majority in the first place. If Democrats capture the House narrowly without enough members like her from competitive districts, the caucus could tilt further left—and Jeffries’s own position could become more vulnerable. If Perez wins, meanwhile, he may have to govern with members whose political survival depends partly on bucking the party leadership. Either way, the coalition that could make Jeffries Speaker may also make the House extraordinarily difficult for him to manage.

WA-03 matters because it could help decide control of the House, could impact the vote for Speaker, and because in this cycle voters have a choice between two strong, relatively moderate candidates.

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That history matters today. A recent Wall Street Journal article, “Wealth Management Has a $3 Trillion Problem: Investors Are Keeping Too Much Cash,” describes financial advisers trying to persuade clients to move money out of money-market funds and into bonds and other investments, while many investors remain reluctant.

My recent papers, Can a Treasury Ladder Beat a Bond Fund? and Is the 30-Year Yield Really That Attractive?, approach the issue from two different directions.

The first compares investor-built Treasury ladders with bond funds and finds that ladders can outperform passive bond-fund strategies.

The second asks whether today’s relatively high 30-year Treasury yield is sufficiently attractive to justify the substantial duration risk.

Together, they suggest a natural next question: What happened to investors who bought long-duration bond funds when yields were exceptionally low, particularly during the COVID period?

The literature suggests that warning signs of large potential losses from the lower interest rates during the pandemic were visible. Morningstar observed in 2021 that the average core bond fund yielded only 1.21 percent while carrying a duration of 5.9 years—almost three times the duration of the average short-term fund for only 26 basis points of additional yield. A Federal Reserve study found mutual funds “reaching for duration,” including through Treasury futures, in part to keep their portfolios aligned with benchmark indexes.

A manager can competently follow a benchmark and still produce an outcome which looks deeply flawed from the investor’s perspective. If fund mandates, benchmark construction, product design, and conventional asset-allocation advice collectively encourage investors to maintain long-duration exposure almost regardless of valuation, the process can become mechanically blind to price and risk.

Suppose an investor placed $10,000 on December 31, 2020, in each fund and reinvested all distributions. By early September 2026:

Intermediate and broad bond funds have largely recovered on a total-return basis. Reinvesting interest distributions—particularly at the much higher yields available after 2022—substantially reduced the losses. A $10,000 investment would now be worth approximately $9,805 in Vanguard Intermediate-Term Treasury (VGIT), $8,983 in iShares 7–10 Year Treasury (IEF), and $9,726 in Vanguard Total Bond Market (BND).

Long-duration funds have not recovered, even after giving them the same benefit of reinvested distributions. The same $10,000 would be worth only about $6,250 in iShares 20+ Year Treasury (TLT), $4,807 in Vanguard Extended Duration Treasury (EDV), and $4,326 in PIMCO 25+ Year Zero Coupon Treasury (ZROZ).

The pattern is remarkably clean: the longer the duration, the deeper and more persistent the damage. This is not simply a story about one bad year in 2022.

Individual long bonds also suffered enormous mark-to-market losses. The 10-year and 30-year Treasury yields rose from 0.93 and 1.65 percent at year-end 2020 to roughly 4.76 and 5.23 percent in early September 2026. A $10,000 investment in comparable individual securities would consequently have principal market values of roughly $8,460 for the 10-year and $5,070 for the 30-year, before counting coupon payments already received.

Buying an individual 30-year Treasury at an exceptionally low yield does not eliminate the problem. Thirty years is a very long time, and the investor remains exposed to substantial price risk if interest rates rise.

The COVID experience raises a broader question about the investment process. If the prescribed investment strategy of a particular fund is driving investors toward a cliff, why keep following it? Fund sponsors, index designers, advisers, and active managers all made choices which kept investors exposed to very long duration at exceptionally low yields. Federal Reserve evidence that some funds even increased duration to remain close to their benchmarks makes the issue especially troubling.

There is also a market-wide constraint. Large institutions can reduce their holdings of 30-year Treasuries, but they cannot all do so simultaneously without pushing prices down and yields up until other buyers emerge. If the Federal Reserve becomes that buyer, it can absorb duration from the market, but only by expanding its balance sheet and creating additional bank reserves. That transfers some of the duration risk to the Federal Reserve and changes the monetary consequences; it does not make the underlying risk disappear.

So, the mandate or investment strategy governing long term funds is still a choice, not a law of nature. Long-duration funds exist because sponsors choose to offer them, benchmarks are designed to include certain securities and maturities regardless of market conditions.

The process does not seem to allow consideration – At low yields is duration risk sensible for investors?

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We tested these questions using 20 years of historical interest-rate data, from January 2006 through December 2025. Each strategy received $1,000 every month, for total contributions of $240,000.

The basic Treasury ladder divided new money among six maturities: 3 months, 6 months, 1 year, 2 years, 5 years, and 10 years. As a passive-fund alternative, we used SHY, the iShares 1–3 Year Treasury Bond ETF, including reinvested distributions.

We then tested whether the ladder could be improved by selectively omitting the 10-year rung. The modified bond ladder involved:

· Use all six rungs whenever the 10-year Treasury yield is at least 4.0%.

· Use all six rungs if the 10-year bond yield falls below 4.0 percent but remains more than 70 basis points over the 5-year bond yield.

· Otherwise use a five-rung ladder with the 10-year step omitted.

What happened?

After 20 years and $240,000 of contributions:

• 70-basis-point adaptive Treasury ladder: approximately $302,854

• Always-six-rung Treasury ladder: approximately $296,900

• SHY Treasury ETF: approximately $284,900

The adaptive ladder finished roughly $6,000 ahead of the mechanical ladder and $18,000 ahead of the ETF.

The ETF’s last-place finish is the most important result. A low-cost Treasury bond fund did not replicate the results of periodically purchasing and holding individual Treasury securities.

The result held for a more restrictive decision rule on the purchase of 10-year bonds in a low-rate environment. The more restrictive rule – purchase all six rungs when the 10-year-5-year spread was over 90 basis points resulted in 10 fewer purchases of the 10-year bond and almost the same exact wealth balance after 20 years.

The broadest finding is that an investor-constructed Treasury ladder can outperform a passive Treasury bond fund. A second finding is that actively managed bond purchase rules can potentially outperform the purchase of the same ladder regardless of the interest rate environment.

A related paper, Is the 30-Year Treasury Yield Really That Attractive?, examines whether today’s long-term Treasury yields look unusually attractive only because recent comparisons begin during the exceptionally low-rate post-2007 period. The next step is to extend the simulations here to additional portfolios, including portfolios with 30-year Treasuries and other fixed-income assets, and to compare individual-security strategies with bond ETFs that accumulated longer-duration bonds during the unusually low interest-rate environment surrounding COVID.

Appendix: Data and Methodology

Period and contributions. The test covers January 2006 through December 2025. Each strategy receives $1,000 every month, producing $240,000 of total contributions.

Interest-rate observations. Treasury decisions are based on the last available business-day Treasury yield for each month, rather than the monthly-average yield.

Individual Treasury purchases. Each purchase is treated as a separate Treasury position. Securities already owned are held to maturity and are not sold because interest rates change or because the allocation rule subsequently changes.

Reinvestment. New monthly contributions, coupon payments, and principal from maturing securities are invested according to the rule prevailing at the exact time the maturity reaches maturity.

Bond ladder composition: The six-rung ladder involves equal purchases of all six securities. The five-rung ladder involves equal purchases of the five shorter securities – with the 10-year maturity omitted.

Treasury data. The ladder uses historical Treasury market yields at the relevant maturities to construct synthetic par Treasury purchases. This allows a consistent 20-year simulation, but it is not a CUSIP-by-CUSIP reconstruction of every Treasury auction or secondary-market transaction.

ETF comparison. SHY is evaluated using historical total returns, including distributions, so the ETF result incorporates both price movements and reinvested income.

These assumptions are intended to put the strategies on as comparable a footing as practical. The calculations should be viewed as a historical simulation rather than a claim that an investor could have reproduced every reported dollar exactly in real-world trading.

Author’s Note

This paper extends a series of articles on fixed-income portfolio design, inflation protection, and the choice between individual securities and bond funds. Related articles include:

• Mistakes made by many fixed-income investors

• How to protect workers from inflation

• Series I Bonds vs. Bond Funds: 27 Years of Head-to-Head Results

• How best to expand investment opportunities inside retirement accounts and other portfolios?

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I have spent most of my life supporting the Democratic Party—the party I associated with Hubert Humphrey, John F. Kennedy, Jimmy Carter and Bill Clinton. But strident partisan appeals increasingly have the opposite of their intended effect on me. Both parties too often ask voters to put party over country or party over principle. In this case, Nessel is effectively asking Jewish voters to put party over their own security and over what I regard as an important human-rights cause.

Although Nessel was speaking in the immediate context of Michigan’s Senate race, the dilemma she describes is much broader. Similar tensions are appearing in other 2026 Senate and House contests, where Jewish voters are being asked to reconcile traditional partisan loyalties with concerns about Israel, antisemitism and Jewish security.

Her appeal is especially unpersuasive because it bundles together several very different claims: that the story of Queen Esther supports collective Jewish self-sacrifice; that voting Democratic is tantamount to protecting the planet; that Jews should subordinate concerns about their own safety even as threats against them have become more tangible; and that defending Israel is somehow a narrower interest than defending humanity. I disagree with all four propositions.

The story of Esther is straightforward. Haman seeks the destruction of the Jews of Persia. Esther can remain relatively safe in the palace or risk her own life by approaching the king. She chooses the latter: “If I perish, I perish.” She risks herself to save her people.

Nessel uses Esther to support a very different proposition. She says Jews may need to sacrifice “the comfort, safety and security and even the very future of our own people” for the opportunity to save humanity. Esther does not sacrifice the future of the Jewish people. Preventing their destruction is precisely why she takes the risk.

There is another awkward aspect to the analogy. Nessel declined to attend the Michigan Democratic convention because she feared being harassed, chased, yelled at or booed—all legitimate concerns. But Haley Stevens, who attended an earlier convention and confronted a hostile crowd, provides the closer analogy to Esther in the biblical story. Stevens took the stage despite loud boos and heckling; Esther, likewise, personally accepted risk on behalf of her people.

Voting Democratic, despite Nessel’s protestations, is not synonymous with saving the planet. Democratic environmental policy is neither efficient nor sustainable.

Democrats have relied too heavily on subsidies and spending rather than economically efficient policies that price environmental externalities. The priorities can also seem badly distorted. The federal government subsidized purchases of electric vehicles, including Teslas, while enhanced health-insurance premium tax credits were allowed to expire and families now face sharply higher health-care costs.

I do not particularly like Republican environmental policy either. As I argued in Trump and Biden on Wind and LNG, Trump was wrong to obstruct economically viable wind power, just as Biden was wrong to impede LNG.

There are reasonable arguments about how best to address climate change. But “vote Democratic or sacrifice the planet” is not one of them.

Nessel’s appeal is especially difficult to accept because Jewish security in America is not an abstract concern. In March 2026, an attacker drove a truck into the preschool entrance at Temple Israel in West Bloomfield, Michigan, before exchanging gunfire with security. In May 2025, two Israeli Embassy staff members were murdered outside the Capital Jewish Museum in Washington. The following month, a man threw Molotov cocktails at participants in a Boulder, Colorado, gathering calling attention to Israeli hostages in Gaza.

These are only some of the recent incidents that make Jewish concerns about safety concrete rather than theoretical. Nessel herself also brought charges arising from pro-Palestinian demonstrations at the University of Michigan and later dismissed them after months of proceedings, while saying the court had failed to rule on probable cause and that the cases had developed a “circus-like atmosphere.”

We live amid an almost compulsive use of public forums to denounce Israel, including settings with little or no connection to the Middle East. Rights of expression are being applied in an unusually one-sided manner. Nessel never asked Palestinian activists to subordinate their cause to some asserted greater good. We would be rightly uncomfortable applying Nessel’s reasoning to other minorities, such as Black Americans during the civil rights era.

There is a deeper disagreement underlying Nessel’s argument. I regard the protection of Israel—and the protection of vulnerable minorities elsewhere in the Middle East and beyond—as one of the paramount human-rights issues of our time.

Israel is a nation of refugees and immigrants. It absorbed Holocaust survivors who had nowhere secure to return to and successive waves of Jews from Iraq, Yemen, Morocco, Algeria, Tunisia, Libya, Egypt, Iran, Turkey and Syria, as well as Jews escaping the Soviet Union and Ethiopian Jews fleeing persecution and extraordinary hardship. The circumstances differed from country to country, but the larger historical point is unmistakable: Israel became a place to which Jews could go when remaining where they were had become dangerous, untenable or impossible. Israeli government statistics document immigration on a massive scale from North Africa, the Middle East, the former Soviet Union and Ethiopia.

I discuss one particularly striking example in this essay on Jewish migration from Ethiopia. Thousands of Ethiopian Jews undertook dangerous journeys because Israel offered a refuge that, for many, was not realistically available elsewhere. But Ethiopia is only one chapter in a much larger story. Israel’s existence means that Jews facing persecution no longer have to depend entirely on whether some other country is willing to admit them.

Nor should that principle stop with Jews. My principal criticism of current policy is that too little is being done to help Iranians seeking freedom from repression and to protect other threatened populations: Bahá’ís, Christians, Jews, Sunnis, women and political dissidents in Iran; Druze, Christians, Alawites, Kurds and other vulnerable communities in Syria; Yazidis in Iraq and Syria; Hazaras in Afghanistan; and other religious and ethnic minorities whose safety cannot be taken for granted.

Protecting societies in which persecuted people can live safely is part of the human-rights project. Israel’s continued existence as a refuge for Jews belongs within that project, not outside it.

Nessel frames the choice as one between Jewish self-interest and the needs of humanity. She is asking me and other Jews to put party over an important human right—the continued security of Jews and the existence of a refuge available to them when other countries will not provide one—and to treat one party’s environmental agenda as synonymous with protecting the planet. Partisan appeals don’t resonate with me, and this one would never have been made by the Democratic Party that I grew up in and supported my entire life.

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That view is potentially justifiable, but far from a slam dunk: nominal 30-year yields above 5 percent have not been available for many years, while long-term TIPS offer a real yield close to 3 percent.

J.P. Morgan has similarly argued that the reset to higher bond yields has created more attractive opportunities in fixed income.

Those arguments invite investors to look at a chart like this:

But before buying the 30-year because its yield is “the highest since 2007,” look at what happens when we change the starting date.

The 5¼ percent yield looks very different when viewed against the full modern history of the 30-year Treasury.

Starting the chart in 2007 makes today’s yield look extraordinary. Starting in 1977 shows that it followed an extraordinary period of low interest rates.

From 2007 through 2025, the median annual 30-year Treasury yield was about 3.3 percent.

From 1977 through 2007, the median annual 30-year Treasury yield was about 7.7 percent.

Some 30-year Treasuries may now be worth buying. But these charts suggest proceeding with considerable caution—and certainly not overweighting a 30-year position simply because yields are at their highest level since 2007.

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• Health care: lower premiums through subsidized reinsurance, improve portability, and make public and private coverage work together more efficiently.

• Student debt: provide greater help early in repayment while simplifying and improving the long-term repayment system.

• Capital gains: make realization less punitive while making permanent avoidance harder.

• Retirement: broaden access, portability, and effective saving incentives, particularly for ordinary workers.

These proposals illustrate how a future governing coalition could pursue structural economic reform rather than another temporary collection of tax cuts, subsidies, and expiring provisions.

Preamble: The Constitution does not expressly require the Speaker of the House to be a member of the House. That creates an intriguing constitutional thought experiment: what would I do if a closely divided House, unable to organize around a Democrat or a Republican, somehow decided that a former Treasury economist writing policy papers from Denver was the answer?

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It is not quite as impossible as it sounds. In a narrowly divided House, a bloc of perhaps 10, 20, or 40 members unwilling to support either party’s leadership could become decisive. A centrist coalition might conceivably find it easier to agree on an outside Speaker than one inside the chamber.

This is a governing thought experiment, not a candidacy announcement. My wife nevertheless thinks she has devised the more effective campaign slogan: rather than my asking people to buy $1 million worth of my books so I can run for Speaker, she proposes that unless they buy $1 million worth of books, I will run.

But the policy exercise is serious.

The memorandum below asks what a new Speaker could realistically enact through budget reconciliation—the principal route for major fiscal legislation that cannot command 60 votes in the Senate. It begins with four areas in which I have already developed substantial proposals: health care, student debt, capital gains, and retirement policy. Additional work should eventually address the recurring federal fiscal cliffs, Social Security reform, and energy and environmental policy.

This memorandum and 95 percent of the material on this site are free. One recent exception behind the paywall is this assessment of the 2026 race for control of the House of Representatives.

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Readers who want more detail on these proposals and who want to support my policy work can purchase the detailed papers on Kindle, but there is no pressure to do so; there is already plenty to read and think about here on www.economicmemos.com.

Memorandum from the Speaker of the House

From: Speaker David Bernstein

To: Appropriate House Committee Chairs

Subject: Development of a Comprehensive Tax Reconciliation Bill

As the newly elected Speaker of the House, I am directing the relevant committee chairs to begin work immediately on a single tax reconciliation bill built around the health care, student debt, capital gains, and retirement reforms developed in the policy papers summarized below, together with related legislative extensions of those ideas.

The objective is not simply to assemble another collection of tax cuts, spending increases, temporary subsidies, and expiring provisions. It is to construct a durable package of structural reforms that improves economic incentives, strengthens household financial security, uses federal resources more efficiently, simplifies unnecessarily complicated programs, and places federal policy on a more sustainable fiscal path.

These four titles should be treated as the first stage of a broader governing agenda. Separate policy work should proceed on the recurring federal fiscal cliffs, Social Security reform, and energy and environmental policy.

The provisions below are legislative starting points, with committee staff expected to preserve their policy objectives while refining the details through scoring, analysis, and negotiation.

I. Health Care

My paper, A Third-Party Tax Reconciliation Approach to Health Care, starts from the premise that health care reform need not require either dismantling the existing system or simply pouring more federal money into it. The better approach is to change the structure of the individual market, employer assistance, public coverage, and health savings so that the pieces work together more efficiently.

The central objectives are to reduce the cost of catastrophic claims through federal reinsurance, make individually owned insurance genuinely portable, use Medicaid and CHIP where public coverage is more economical, redesign tax subsidies around that structure, and give households better tools for meeting out-of-pocket expenses.

1. Federal catastrophic health reinsurance. Establish a permanent federal program assuming a specified share of exceptionally high individual medical claims, thereby reducing underlying premiums and federal premium-tax-credit expenditures.

2. Portable individual health insurance. Allow workers to retain individually owned qualified coverage as they move among employers rather than requiring insurance to remain tied to a particular job.

3. Tax-free employer contributions to individual coverage. Give employer contributions toward qualified individual or Marketplace coverage tax treatment comparable to contributions for conventional employer-sponsored insurance.

4. Revised large-employer health contribution requirement. Require large employers to make a minimum contribution toward employees’ qualified health coverage while permitting workers to own and select their policies.

5. Expanded CHIP coverage. Expand CHIP as a pediatric coverage option and consider using it as a reinsurance backstop for high-cost pediatric claims, with income-related premiums or buy-ins for higher-income families.

6. Medicaid expansion to 200 percent of the federal poverty level. Establish a nationally available Medicaid option through 200 percent of FPL with an adequate permanent federal match where public coverage is more economical than heavily subsidized private insurance.

7. Redesign the Premium Tax Credit. Coordinate Marketplace subsidies with Medicaid, CHIP, and federal reinsurance, concentrating assistance where it remains necessary and reducing sharp subsidy cliffs.

8. Individual-market health-insurance deduction. Provide an above-the-line deduction for qualified premiums paid by people who do not receive equivalent tax-free employer assistance, particularly self-employed and gig workers.

9. End FSA “use-it-or-lose-it.” Permit unused Flexible Spending Account balances to remain available for future health expenses or transfer into an eligible retirement account rather than being forfeited.

10. Modernize HSA and FSA rules. Expand the ability to use health-savings vehicles with portable individual-market insurance and eliminate artificial distinctions based on where coverage is obtained.

11. Health-savings assistance for lower- and middle-income households. Develop a refundable credit or direct federal contribution to help households accumulate funds for deductibles, copayments, and other medical expenses.

II. Student Debt

A Third-Party Tax Reconciliation Approach to Student Debt rejects the choice between indiscriminate loan forgiveness and a repayment system that can leave borrowers trapped for decades in complicated programs.

The objective should be to provide the greatest assistance when borrowers are young and financially constrained, preserve conventional repayment for borrowers able to repay their debts, repair structural defects in income-driven repayment, and create a much simpler way to resolve balances that remain after many years.

12. Introductory zero-interest period. Provide a temporary zero-percent interest period during the first years of federal student-loan repayment so early payments reduce principal when borrowers are generally most financially constrained.

13. Repeal the student-loan-interest deduction. Replace or phase out the existing deduction and use the savings to help finance more effective front-loaded interest relief.

14. Make conventional repayment the presumptive starting point. Encourage borrowers able to make conventional amortizing payments to reduce principal early while preserving immediate access to income-driven repayment for borrowers facing genuine financial difficulty.

15. Private-refinancing incentive. After a sustained period of successful repayment, provide a modest one-time principal reduction for borrowers refinancing qualified federal loans into private credit, thereby reducing long-term federal exposure.

16. Eliminate the RAP marriage penalty. Redesign Repayment Assistance Plan rules so marriage does not arbitrarily increase obligations for similarly situated borrowers.

17. Use marginal RAP payment brackets. Apply higher repayment percentages only to income falling within the relevant bracket rather than applying the higher percentage to all applicable income once a threshold is crossed.

18. Index RAP parameters. Automatically index income thresholds, protected amounts, dependent allowances, and related parameters so inflation does not quietly increase real repayment burdens.

19. Stabilize federal student-loan interest rates. Replace unnecessary annual interest-rate volatility with a predictable federal rate that appropriately balancing borrower costs and taxpayer protection.

20. Twenty-year Treasury resolution account. Transfer qualifying balances remaining after twenty years into a simplified zero- or very-low-interest Treasury repayment account rather than leaving older borrowers indefinitely inside complicated Education Department programs.

21. Improve student-loan treatment in Chapter 13. Develop rules ensuring that federal student debt receives an appropriate share of available bankruptcy-plan payments while maintaining necessary protection for financially distressed borrowers.

III. Capital Gains and Inherited Wealth

Tax Reconciliation and Capital Gains Taxes begins with a simple principle: lower rates should be paired with a broader, more coherent tax base.

Current law can discourage economically sensible sales by imposing substantial tax costs on realization, particularly for long-held real estate and other appreciated assets. The proposal therefore seeks to reduce tax-induced lock-in—including housing lock-in—through lower positive capital-gains rates and more consistent treatment of real property, while broadening the base by limiting open-ended deferral, reforming basis rules at death, and rationalizing the taxation of inherited wealth.

22. Reduce positive long-term capital-gains rates. Retain the zero-percent bracket while using 12.5 percent and 17.5 percent as starting points for replacing the existing 15-percent and 20-percent rates.

23. Increase and index the Net Investment Income Tax. Increase the Net Investment Income Tax to 6.0 percent but index the applicable income threshold for inflation.

24. Apply a unified capital-gains structure to real property. Subject taxable real-estate gains to the revised rate structure while reducing the principal-residence protections and tax-induced housing lock-in.

25. Phase out Section 1031 exchanges. End new open-ended like-kind-exchange deferrals while providing an orderly transition for existing investments.

26. Replace full step-up in basis with a partial adjustment. Preserve only part of unrealized appreciation at death rather than eliminating the entire accrued gain, while postponing taxation until the heir sells the asset.

27. Preserve basis on lifetime gifts. Ensure that changes to transfer taxes cannot be used to eliminate embedded capital gains through lifetime transfers.

28. Simplify inherited traditional retirement accounts. Require most nonspouse beneficiaries to distribute the account’s value at the time of inheritance in equal installments over 10 years, with each distribution taxed under the normal rules for traditional retirement accounts. Investment gains may remain in the account during the 10-year period; at the end of the period, any remaining balance would transfer in kind to a taxable account, with normal income tax due on the transfer but no penalty or forced sale.

29. Five-year transition for inherited Roth accounts. Permit inherited Roth assets to remain tax-free for a limited period before automatically converting remaining assets into ordinary taxable investments without requiring a forced sale.

30. Mega-Roth excise tax. Impose a modest tax at death on Roth balances above a very high, indexed threshold, leaving ordinary retirement savers entirely unaffected. Unlike earlier proposals prompted by Peter Thiel’s multibillion-dollar Roth IRA, this approach would not force lifetime distributions or cap successful investment growth; it would simply recapture part of the tax benefit when an extraordinary retirement account becomes inherited wealth.

31. Replace estate, gift, and generation-skipping taxes with the new inherited-basis system. Coordinate repeal of the existing transfer-tax regime with strong basis reporting, carryover-basis rules for gifts, valuation requirements, and anti-abuse protections.

32. Prepare a companion capital-gains contribution for Social Security. Develop separately a capped contribution on a limited amount of capital gains accompanied by an actuarially appropriate Social Security benefit credit. Because direct Social Security changes cannot be enacted through reconciliation, prepare this provision as companion legislation.

IV. Retirement and Household Saving

Tax Reconciliation and Retirement Policy seeks to move retirement policy away from a system whose largest tax incentives frequently flow to households already able to save substantial amounts.

The goal should instead be universal access, portability, stronger protection of retirement assets, better treatment of spouses and caregivers, more effective incentives for lower-income workers, and simpler movement of savings from job to job.

33. Universal Auto-IRA. Establish a nationwide portable IRA default for workers without employer-sponsored plans, using automatic payroll enrollment with an employee opt-out.

34. IRA–401(k) parity. Increase IRA contribution capacity and permit employers, particularly small employers, to make matching contributions directly into employees’ individually owned IRAs.

35. Automatic rollover of stranded retirement accounts. Move small or dormant 401(k) balances automatically into low-cost portable IRAs after job changes unless workers affirmatively select another destination.

36. Automatic spousal and caregiver retirement saving. Modernize spousal IRA rules and create simple payroll or tax-return mechanisms allowing retirement contributions to flow automatically to a non-working spouse or caregiver.

37. Protect core retirement savings while permitting emergency access. Replace excessive reliance on early-withdrawal penalties with rules that protect a core portion of retirement assets from pre-retirement depletion while allowing reasonable access to a separate emergency-savings component in cases of genuine financial need.

38. Direct savings incentives toward lower-income workers. Rely more heavily on refundable matches or direct federal contributions whose value does not disappear when a worker owes little or no federal income tax.

39. Add a retirement-saving incentive for workers with tax-exempt tips and overtime. Allow workers who contribute qualifying tip or overtime income to a retirement account to receive a modest additional tax benefit—for example, a higher ceiling on the amount of tip or overtime income eligible for tax-free treatment. This would reward retirement saving without giving workers both tax-free income and a federal matching contribution on the same dollars. The Current no tax on tips can discourage retirement savings because a low or zero marginal tax rate reduces the incentive to contribute to a retirement account.

40. Safer and lower-cost default retirement investments. Strengthen standards governing automatically selected retirement investments, including safeguards concerning fees, illiquidity, private credit, and inflation risk. Specifically, allow the purchase of Series I bonds inside retirement accounts.

V. Instructions to Committee Staff

These 40 provisions reflect my best judgment about the direction of reform. I do not assume that every mechanism proposed here is the best possible one. Staff should recommend better approaches where they can achieve the same objectives more effectively, simply, or economically.

Committee staff should develop appropriate legislative language and alternatives; obtain conventional budget estimates and, where useful, dynamic analysis; identify Byrd Rule problems; recommend transition and grandfather rules; evaluate distributional effects; and look for opportunities to simplify administration or reduce federal costs.

The committees should also examine how the proposals interact across household saving, federal finances, and future Social Security reform. Stronger personal balance sheets can reduce financial vulnerability and dependence on public programs, while better retirement saving and household liquidity may make otherwise difficult Social Security reforms more politically and economically feasible. The bill should therefore be evaluated not only provision by provision, but also for how its combined effects strengthen both household finances and the federal budget.

Finally, the bill should acknowledge fiscal trade-offs openly. Tax reductions do not automatically pay for themselves, and new spending does not automatically generate offsetting savings. The objective is an integrated economic reform bill that improves incentives and household economic security while remaining attentive to long-term fiscal sustainability.

The Four Policy Papers

Health Care — A Third-Party Tax Reconciliation Approach to Health Care
Read the health-care paper

Student Debt — A Third-Party Tax Reconciliation Approach to Student Debt
Read the student-debt paper

Capital Gains — Tax Reconciliation and Capital Gains Taxes
Read the capital-gains paper

Retirement — Tax Reconciliation and Retirement Policy
Read the retirement-policy paper

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This paper develops a race-by-race forecast of control of the U.S. House after the 2026 election. Using AI-assisted judgmental probabilities for 68 potential seat changes, each contest is modeled as a Bernoulli event and aggregated into a national baseline forecast. The baseline produces an expected Democratic gain of approximately five seats and an expected House of about 220 Democrats, 214 Republicans, and one Independent, with Democrats having roughly a 77 percent probability of reaching 218 seats under an assumption that race results are independent.

The analysis then examines two factors that could produce substantial departures from the baseline: (1) a larger-than-expected blue wave associated with President Trump’s low approval rating, and (2) Democratic weakness in rural and exurban districts that proves greater than the baseline already incorporates. Regression analysis shows that the baseline itself assigns Democrats substantially lower probabilities of success in the most rural districts; the question is whether actual Democratic performance will be weaker still.

The paper’s principal contribution is therefore not simply its prediction of the final House composition. It provides the race-by-race probabilities underlying that prediction, statistically examines one potential source of systematic forecast error, and identifies four sets of contests that should provide early evidence that the baseline is failing—and in which direction. A complete appendix reports the probability assigned to every race included in the model.

Executive Summary

We model 68 possible seat changes: 60 races identified as key contests and 8 additional redistricting-driven or effective seat changes. Each race is treated as a Bernoulli event—a seat either flips or it does not—with the probability assigned in our race-by-race forecast. Expected flips can be summed without assuming independence. For the variance calculation and the probabilities of House outcomes, however, we make the simplifying assumption that race outcomes are independent.

· Expected R→D flips: 17.62

· Expected D→R flips: 13.23

· Expected Democratic net gain from direct R→D and D→R flips: 4.39 seats. Including Independent-related seat changes, the expected Democratic gain is 5.04 seats.

· After adjusting for possible seats held by Independents, expected total seat changes are 31.70, with a variance of 12.48 and a standard deviation of 3.53 seats.

· The expected new House is approximately 220 Democrats, 214 Republicans, and 1 Independent.

What follows is the part of the forecast that I think is most useful. The national number alone does not tell us where the model could be wrong. Regression analysis shows that the baseline already assigns Democrats substantially weaker prospects in the most rural districts. The paid analysis asks whether that adjustment is large enough, examines the statistical evidence behind it, identifies four election-night tests that could signal either a substantially larger Democratic wave or greater-than-expected Democratic weakness, and provides the complete race-by-race probability ledger underlying the national result.

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That led me to a different question. If Powell’s guideposts provide a useful discipline before undertaking a drastic change in foreign policy, could a similar set of guideposts help us evaluate drastic changes in domestic economic policy?

Admittedly, naming the result the Bernstein Doctrine takes considerable chutzpah: Colin Powell was a four-star general and Chairman of the Joint Chiefs of Staff; I am an economist with a keyboard.

But here we go.

The Powell Doctrine is often presented as eight questions that policymakers should force themselves to answer before undertaking something as consequential and difficult to reverse as war:

The Eight Guideposts of the Powell Doctrine:

1. Is a vital national security interest threatened?

2. Do we have a clear and attainable objective?

3. Have the risks and costs been fully and frankly analyzed?

4. Have all reasonable nonmilitary alternatives been exhausted?

5. Is there a plausible exit strategy that avoids an open-ended commitment?

6. Have the likely consequences of military action been fully considered?

7. Does the action have the support of the American people?

8. Is there broad international support?

Powell explicitly warned against treating these questions as an inflexible checklist. Every crisis is different, and policymakers inevitably must exercise judgment. Powell’s questions were designed to be guideposts -- a disciplined way of forcing decision-makers to confront objectives, costs, alternatives, unintended consequences, public support, and the path out before taking an enormously consequential step.

The goal of the Bernstein Doctrine is to create a similar framework for major domestic economic reforms. Bernstein proposes five guideposts designed to determine whether a major proposed upheaval of an existing domestic economic program or system is justified, feasible, sustainable, and economically efficient.

The Five Guideposts of the Bernstein Doctrine for Domestic Economic Reform:

1. Are the problems serious enough to justify major reform?

2. Can the reform avoid substantial harm to major groups?

3. Is there a feasible transition to the new system?

4. Is the reform economically and politically sustainable?

5. Is there a more efficient way to achieve the objective?

The remainder of the essay applies these guideposts to health-care reform. Health care provides a useful test because there is broad agreement that the existing system has serious problems, but much less agreement about how radically it should be changed. I consider two very different approaches: Medicare for All, which would fundamentally restructure the existing system, and a more incremental package of reforms designed to improve it.

Do the five guideposts of the Bernstein Doctrine provide adequate justification for the adoption of Medicare for All as described here?

Guidepost 1: Is Reform Justified?

Answer Yes. The current U.S. health-care system has serious problems involving coverage, portability, affordability, and access that justify substantial reform.

Guidepost 2: Is Major Harm Avoided?

Answer No. Medicare for All would create substantial economic losses for important groups, including some providers, insurers, employees, and households satisfied with existing coverage.

Guidepost 3: Is the Transition Path Feasible?

Answer No. Replacing the existing employer-sponsored, private, Medicare, Medicaid, and CHIP systems within a short transition period would create substantial risks of economic and health-care disruption.

Guidepost 4: Is the Program Sustainable in the Long Term?

Answer Maybe, but probably no. A universal federal system could be financially sustainable, but its dependence on future congressional funding, provider-payment decisions, and changing political control creates significant long-run risks.

Guidepost 5: Is the Program Economically Efficient?

Answer No. Many of Medicare for All’s objectives can likely be achieved through less costly and less disruptive reforms that preserve useful parts of the existing system.

The transition problem also reinforces the sustainability problem. The United States is not starting with a blank sheet of paper. It has a massive private health-insurance industry, an employer-sponsored coverage system, and provider networks built around existing payment arrangements. Medicare for All would largely dismantle that structure and replace it with a system whose financing and provider payments would depend heavily on future federal budget decisions. Whatever the merits of the proposed destination, the path from here to there is unusually difficult—and the resulting system could remain vulnerable to recurring political and fiscal conflict.

Do the five guideposts of the Bernstein Doctrine provide adequate justification for the adoption of Bernstein’s durable path forward on health care involving subsidized reinsurance, portable health coverage with employer subsidies, modernized savings accounts and a more efficient expanded role for Medicaid?

Guidepost 1: Is Reform Justified?

Answer Yes. The current U.S. health-care system has serious problems involving affordability, portability, coverage gaps, and inefficient public subsidies that justify substantial reform.

Guidepost 2: Is Major Harm Avoided?

Answer Yes. The reforms build on existing insurance arrangements rather than eliminating them, allowing substantial improvements while avoiding large losses for providers, insurers, employers, or households with coverage they wish to retain.

Guidepost 3: Is the Transition Path Feasible?

Answer Yes. Subsidized reinsurance, portable employer-supported coverage, modernized savings accounts, and expanded use of Medicaid can be introduced incrementally without dismantling the existing health-care financing system.

Guidepost 4: Is the Program Sustainable in the Long-term?

Answer Yes. The reforms retain a mixed public-private system, limit fiscal exposure, and can be adjusted over time as economic, budgetary, and political conditions change.

Guidepost 5: Is the Program Economically Efficient?

Answer Yes. The package seeks many of the principal objectives of more sweeping health-care reforms—broader coverage, greater portability, improved affordability, and greater security—at substantially lower economic and transition costs.

The durable-path approach begins from the premise that successful reform should work with the institutions that already exist whenever doing so is economically sensible. Private insurers, employers, Medicaid, and individual coverage would continue to play important roles while federal policy addresses catastrophic costs, portability, savings, and coverage gaps. That makes the transition substantially easier and improves long-run sustainability because the reform does not require the federal government to replace and continuously finance nearly the entire existing health-insurance system.

Conclusion

The Bernstein Doctrine provides a framework for determining whether a major domestic policy reform is justified and whether the proposed change is feasible, sustainable, and economically efficient. A successful reform need not be Pareto improving—that is, it may make some people worse off. Modest losses to one group may be acceptable when the overall gains are substantial, but large losses imposed on identifiable groups are much more difficult to justify.

Economic efficiency deserves particular emphasis. Governments face many competing problems and necessarily limited fiscal resources. A reform that achieves nearly the same objective at substantially lower economic and fiscal cost should generally be preferred because the resources saved remain available for other priorities.

Applied to health care, the doctrine points in two different directions. Medicare for All addresses genuine problems but fails important tests of transition, sustainability, and economic efficiency. A more durable path—one that preserves useful parts of the existing system while reforming those that do not work—offers a more viable, sustainable, and economically efficient route to substantially better health-care outcomes.

Author’s Note

In A Durable Path Forward on American Health Care, I propose four reforms: subsidized catastrophic reinsurance, portable employee-owned coverage with employer support, modernized health savings arrangements, and a more efficient expanded role for Medicaid. The goal is to achieve broader coverage, greater portability, improved affordability, and greater security without the disruption and transition risks of Medicare for All.

Readers interested in the full proposal can find A Durable Path Forward on American Health Care here.

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I have written extensively—and critically—about the student-loan changes enacted in 2025, including RAP’s payment structure, marriage penalties, lack of inflation indexing, and the increased financing burden placed on some professional students.

BUT two wrongs do not make a right.

The Student Loan Interest Elimination Act of 2026 (H.R. 8045/S. 4169), introduced in the House by Representative Joe Courtney (D-CT) and in the Senate by Senator Peter Welch (D-VT), would make federal student loans permanently interest-free.

The bill would apply zero interest to existing and future federal Direct Loans, allow certain older loans to be refinanced at zero percent, preserve access to RAP, and increase and eventually index federal borrowing limits.

It would also create an Education Affordability Trust Fund, into which federal student-loan repayments would flow. The fund would invest those resources and use the earnings to help finance student lending and potentially other higher-education programs.

Student borrowers are not a homogeneous group. Some genuinely struggle to make their payments; others have ample ability to repay. A universal zero-percent rate gives the same subsidy to both. With enormous federal borrowing and many competing public needs, why subsidize borrowers who do not need the assistance?

More importantly, zero interest changes behavior. It encourages borrowers to borrow more, borrow even when they could use their own resources, and repay as slowly as permitted. Under RAP, borrowers may also have incentives to reduce AGI, lower required payments, and keep debt outstanding for decades, potentially ending in discharge. These actions are rational responses to the incentives the legislation creates.

The Trust Fund raises a broader problem. Money is fungible and federal resources are scarce. Yet the bill would earmark all student-loan repayments for higher education and contemplates a fund that could eventually exceed $500 billion. Those resources would therefore receive special protection rather than compete with health care, climate change, hunger, deficit reduction, and other public priorities.

That choice is especially difficult to justify when the underlying program provides unlimited zero-interest lending over the life of the loan, weakening borrowers’ incentives to borrow cautiously or repay quickly. Good public policy should address genuine problems at the lowest reasonable cost. This proposal instead combines an enormous earmark with a student-loan policy that largely removes incentives to economize.

I have proposed a different approach in my Kindle paper, A Third-Party Tax Reconciliation Approach to Student Debt: Front-Loaded Relief, Faster Principal Reduction, Fairer RAP Rules, and a Durable Endpoint for Long-Term Debt. The basic principle is to provide the most help when borrowers are most likely to need it—at the beginning of their careers.My proposal provides a temporary period of zero interest, so early payments go entirely toward reducing principal, while preserving the incentive to borrow less and repay faster because a smaller balance always means lower future payments.

The proposal also rewards successful repayment. Borrowers who make payments on time for several years and refinance into the private market would receive a reduction in their remaining federal balance. RAP would remain available as a safety net for borrowers who genuinely need income-based repayment, but the system would not encourage borrowers to enter RAP unnecessarily or remain in federal debt for decades.

Finally, I would not simply discharge unpaid balances after 20 or 30 years. After 20 years, qualifying long-term debt would instead become interest-free and be administered through the IRS rather than the Department of Education. The objective is straightforward: help borrowers when help is most valuable, reward repayment, preserve incentives to borrow carefully, and provide a humane endpoint for borrowers who still have debt after many years.

Congress already has a less extreme alternative. The bipartisan Lawler-Luna-Moskowitz bill would reduce federal student-loan interest to 2 percent rather than zero. I prefer that approach to permanent zero-interest lending because it provides substantial relief while preserving some incentive to borrow less and repay faster.

I would go further toward targeted relief. My proposal provides zero interest when borrowers are starting their careers, rewards successful repayment, preserves principal repayment rather than forgiveness, and provides limited long-term protection after 20 years. My proposal has not received a budget score from the Congressional Budget Office, but I believe this approach creates strong incentives for quick repayment and will prove less costly to taxpayers. The principle is simple: help borrowers when they need it most while limiting costs to taxpayers.

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The initial portfolio is: IVV - 81 allocation units, VGT - 7 allocation units, VPU - 7 allocation units, and GLD - 7 allocation units

We are comparing two rules:

Rule 1 - Buy and hold. The portfolio is initialized at the January 2005 month-end observation and no subsequent reallocations are made. Each position is allowed to rise or fall with market performance for the entire test period.

Rule 2 - Full dynamic reallocation rule. The portfolio begins with the same initial allocation. No reallocations are made during 2005. Beginning with the January 2006 month-end observation, reallocations occur only when one of the events below is triggered. There is no routine annual rebalancing and no scheduled restoration of target portfolio weights.

VGT event. The VGT target begins at 10% of the portfolio. Each January, the target may increase according to the rise in the Information Technology weight of the S&P 500 since the starting date: VGT target = 10% + 12.5% × the increase in the S&P 500 Information Technology weight. The target cannot decline and is capped at 13%. If VGT reaches a month-end adjusted-price level at least 50% above a qualifying prior high established at least 12 months earlier and VGT is also above its current target weight, 25% of VGT’s dollar amount above the target is sold and invested in VPU.

GLD event. If GLD reaches a month-end adjusted-price level at least 30% above a qualifying prior high established at least 12 months earlier, 25% of the entire GLD position is sold and invested in IVV.

IVV outperformance event. Each month, the trailing three-month total return on IVV is compared with the trailing three-month total return on VPU. If IVV outperforms VPU by 20 percentage points or more and the differential freshly crosses that threshold, 10% of the current IVV position is sold and invested in VPU.

VPU outperformance event. If VPU outperforms IVV by 10 percentage points or more—equivalent to an IVV-minus-VPU differential of -10 percentage points or less—and the differential freshly crosses that threshold, 8% of the current VPU position is sold and invested in IVV.

After any event triggers a transaction, that same event cannot trigger another transaction for at least 12 months. If more than one event is triggered in the same month, each transaction amount is calculated from the portfolio immediately before that month’s trades and the transactions are then executed together.

Experiment design. The test uses 241 month-end observations from January 2005 through January 2025, producing 240 monthly return observations. Both portfolios begin with the identical 81 IVV / 7 VGT / 7 VPU / 7 GLD normalized allocation. The no-reallocation portfolio is held unchanged throughout. The full dynamic rule begins making eligible adjustments in January 2006.

Monthly adjusted prices are used for IVV, VGT, VPU, and GLD so that distributions are incorporated in returns. CAGR is calculated from terminal wealth. Annualized volatility is the sample standard deviation of monthly portfolio returns multiplied by the square root of 12. The Sharpe ratio uses monthly excess returns based on the FRED TB3MS three-month Treasury-bill series divided by 12 and is annualized by the square root of 12.

The test does not include taxes, bid-ask spreads, commissions, or other transaction costs. The thresholds are treated as a research specification rather than as optimized trading recommendations.

2. Results

Performance

• CAGR. The no-reallocation portfolio produced a CAGR of 10.875%, compared with 11.207% for the full dynamic rule. The dynamic rule therefore increased CAGR by 0.332 percentage point, or about 3.1% relative to the no-reallocation result.

• Annualized volatility. Annualized volatility was 13.545% with no reallocation and 14.010% under the full dynamic rule. The dynamic rule therefore increased volatility by 0.465 percentage point, or about 3.4%.

• Sharpe ratio. The Sharpe ratio increased from 0.7155 with no reallocation to 0.7178 under the full dynamic rule, an increase of 0.0022, or about 0.31%.

• Ending value of a $10,000 investment. A $10,000 equivalent investment grew to $78,829 with no reallocation and $83,686 under the full dynamic rule. The dynamic rule therefore produced about $4,857 more terminal wealth, an increase of about 6.2%.

The full dynamic rule produces the higher compound return and slightly higher Sharpe ratio, but it also produces higher volatility and a somewhat deeper maximum drawdown. Under the working success criterion used in this research - higher CAGR, higher Sharpe, and no increase in volatility - the full rule therefore does not qualify as an unambiguous improvement over no reallocation.

Ending Portfolio

• No-reallocation portfolio. The portfolio ends with 75.42% in IVV ($606.39), 14.43% in VGT ($116.00), 4.83% in VPU ($38.80), and 5.33% in GLD ($42.87), for a total normalized value of $804.06.

• Full dynamic-rule portfolio. The portfolio ends with 82.14% in IVV ($701.11), 13.08% in VGT ($111.65), 2.67% in VPU ($22.75), and 2.12% in GLD ($18.09), for a total normalized value of $853.60.

Allocation Activity

The corrected full rule generates 12 allocation transactions in 12 distinct months over the 20-year test: 3 GLD-to-IVV transactions under the gold rule, 1 VGT-to-VPU transaction under the technology rule, 8 VPU-to-IVV transactions under the three-month differential rule, 0 IVV-to-VPU transactions because the +20 percentage-point threshold is never reached.

The asymmetry of the three-month differential rule remains important to the final portfolio. The -10 percentage-point VPU-outperformance threshold produces eleven fresh crossings in the raw monthly data, but three occur during a 12-month same-event lockout and therefore do not generate transactions. The +20 percentage-point IVV-outperformance threshold is never reached. As a result, the rule progressively transfers capital from VPU into IVV, and the full-rule portfolio ends with 82.1% in IVV and only 2.7% in VPU.

Interpretation

The experiment shows that the event-driven rule can raise terminal wealth without frequent trading, but the gain is accompanied by greater equity concentration and somewhat higher risk. This specific full rule ends with about $4,857 more per $10,000 after 20 years and higher annualized volatility of 0.46 percentage rates. My search with the assistance of CHAT GPT for the holy grail, a portfolio and allocation strategy that beats the market by a lot with less risk has not succeeded, but I will persist.

Author’s Note: I publish a wide range of personal-finance, investing, economic, and policy material on my multi-topic blog, Economic and Political Insights. One example is The Sequence of Returns Puzzle: Why Timing Hurts Workers and Retirees in Opposite Ways, which uses simulations and retirement examples to demonstrate that the impact of the path of returns on terminal retirement wealth can often be more important than average returns.

Please browse the site—there is much more there for readers interested in investing, personal finance, economics, and public policy.

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To examine the question, I compared the three groups using two related measures: how far their stocks currently trade below their 52-week highs and the size of their 52-week high-to-low trading ranges.

Answer: Yes, at least in this small group of companies.

The clearest result concerns distance from the 52-week high. The smaller drone-focused companies are, on average, 62.3% below their highs. The larger drone-focused companies are 46.3% below, while the diversified companies are only 16.6% below their highs.

The same progression appears in 52-week trading ranges. The smaller drone-focused stocks have traded over ranges equal to about 75.7% of their 52-week highs, compared with 65.9% for the larger drone-focused companies and 55.7% for the diversified companies.

The two measures are related and should not be treated as independent evidence. A narrower high-to-low range mechanically limits how far a stock can fall below its high, and both results may reflect the same underlying factors. Larger and more diversified businesses may have more established revenue streams, stronger financial resources, or simply be regarded by investors as less speculative.

The more modest conclusion is therefore the better one: among these companies, greater scale and diversification are associated with stocks that are closer to their 52-week highs and that have traded within narrower 52-week ranges.

The particularly interesting comparison is within the drone-focused companies themselves. Even after removing the large, diversified technology companies, the four larger drone-focused companies are about 16 percentage points closer to their 52-week highs than the four smaller drone-focused companies.

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Much of the discussion about AI and investing focuses on whether artificial intelligence can identify the next winning stock. A more practical use may be much less ambitious: helping investors execute portfolio decisions they already have reason to make.

Investors sell securities for many reasons. They may want to reduce their exposure to stocks because their portfolio has become more aggressive than intended or because they believe the market is unusually expensive. They may want to replace an investment they regard as relatively weak with one they believe has better prospects. Or there may be no judgment about the investment at all: an investor may simply need cash for a down payment on a house, tuition, a major purchase, or a larger precautionary reserve.

In each case, the investor has a reason to sell. That investment or financial objective should come first. Tax considerations should help determine how to execute the decision, not determine whether the decision should be made.

Trading in a taxable brokerage account can nevertheless create substantially different tax consequences depending on what is sold. Net short-term gains are generally taxed at ordinary-income rates, while qualifying net long-term gains may receive preferential rates. Capital losses offset capital gains, and only after losses exceed gains can up to $3,000 of the remaining net capital loss generally be deducted against ordinary income, with additional losses carried forward.

The tax value of a loss can therefore depend not merely on its size but also on what it offsets. A short-term loss used against a short-term gain can be particularly valuable because net short-term gains are taxed at ordinary-income rates; the immediate tax value may be lower if that loss instead offsets a preferentially taxed long-term gain.

Losses also require another check. Under the federal wash-sale rule, a loss can be disallowed when substantially identical securities are acquired during the period beginning 30 days before and ending 30 days after the loss sale.

The tax value of a loss should never be confused with the investment value of selling the security. The tax benefit from realizing a loss is limited, while the opportunity cost of abandoning an investment that subsequently recovers can be much larger. A loss should therefore generally be harvested when selling is already consistent with the investor’s objectives, or when the investor can maintain the desired economic exposure with an acceptable alternative.

Once the objective has been established, however, taxes and execution can matter considerably. An investor may have several securities that could be sold, multiple tax lots, some positions with gains and others with losses, and both short- and long-term holdings.

This leads to the practical question examined here:

Regardless of why an investor wants or needs to trade, can artificial intelligence help identify a more economically and tax-efficient way to carry out those transactions?

The answer appears to be yes—but only if AI is given the right information and the investor keeps the priorities straight.

What Information Does AI Need?

The first requirement is the investor’s year-to-date tax position. AI should know realized short-term gains and losses and realized long-term gains and losses from all taxable brokerage accounts reported on the same tax return, including both spouses’ accounts when filing jointly, along with any capital-loss carryforwards from previous years.

The second important input is the portfolio at the tax-lot level. For securities that might be sold, AI should know the number of shares with short- and long-term gains or losses, the amount of each unrealized gain or loss, and the relevant purchase dates.

The capital-gain and capital-loss calculations discussed here concern primarily taxable brokerage accounts, rather than investments held inside tax-advantaged retirement accounts.

If losses are being considered, AI also needs enough recent transaction information to identify possible wash sales. That can require looking beyond the brokerage account in which the security will be sold to other relevant household accounts, including a spouse’s accounts. AI cannot identify transactions it has never been shown.

Wash-sale analysis is another task AI can help automate. Instead of manually checking transaction histories across several accounts, the investor can provide those records and ask AI to flag purchases that fall inside the wash-sale window.

For ETFs, investors can often preserve broadly similar market exposure by buying a close substitute—a “twin” fund—but the tax rule turns on whether the replacement is substantially identical, so similarity alone does not automatically make the trade safe from the wash-sale rule.

Finally, AI needs to know what the investor is trying to accomplish—whether that means reducing stock exposure, replacing weaker investments with stronger ones, or simply raising cash. With that objective defined, AI can compare alternative sales and identify the combination that best preserves the desired portfolio while avoiding unnecessary taxes.

For an investor who simply needs to raise cash, the central question might be:

Which combination raises the required cash, moves the remaining portfolio closest to my desired allocation, and produces an acceptable tax result?

A Hypothetical Investor Example

Consider an investor who had accumulated roughly 50 positions, including several very small holdings in companies he did not know particularly well. His goal was to simplify the portfolio toward perhaps 20 positions and gradually shift away from small individual-company bets toward ETFs and a smaller number of large companies whose businesses and fundamentals he understood better.

Several positions he wanted to eliminate were trading at losses. The investment objective was already clear: simplify the portfolio and reduce exposure to companies about which the investor had relatively little conviction. But he did not want to sell the losing positions indiscriminately. If possible, he wanted to exit them at reasonably favorable prices while taking the tax consequences into account.

This is where AI became useful. Instead of evaluating a single trade, it could help screen roughly 50 holdings simultaneously for portfolio desirability, tax status, and current market performance. Among the positions targeted for elimination, AI could identify securities that remained below their purchase prices but were nevertheless having relatively good trading days, potentially providing better opportunities to exit.

Four unwanted positions were sold as part of the portfolio simplification. The proceeds were then redeployed into Berkshire Hathaway, Visa, and Apple, larger companies the investor was more comfortable owning. Approximately half of the new purchases were executed at market prices and the remainder through limit orders.

AI therefore contributed to more than the tax calculation. It helped sort the existing holdings for possible sales, identify losing positions that were performing relatively well that day, and use current market information to identify reasonable entry prices for the securities being added.

The tax loss considerations did not create the investment strategy. The investor had already decided to simplify the portfolio, reduce holdings in companies he knew less well, and concentrate more heavily on ETFs and larger companies he understood better. Tax information and current market prices helped determine how to execute that strategy more efficiently.

This illustrates the broader role for AI: it can combine an investor’s desired portfolio changes, tax position, and current market conditions to help answer not simply what should be sold, but which of the contemplated transactions make the most sense to execute now and how should the proceeds be redeployed?

This discussion is for educational purposes and is not individualized tax or investment advice. Tax circumstances vary, and complicated transactions or uncertain wash-sale situations may warrant review by a tax professional.

Author’s Note: I write Economic and Political Insights, a multi-topic blog covering investing and personal finance, economic policy, health care and retirement policy, and politics and elections. Readers interested in the investment research may also want to see When Similar Funds Produce Different Results, which examines how supposedly similar growth ETFs can produce materially different portfolio results; The 10% International Diversification Trap, which tests whether a small international allocation actually reduced portfolio risk; and Can Investors Find the Few Stocks That Create Most Market Wealth?, which examines the case for individual-stock selection against Hendrik Bessembinder’s evidence on the extraordinary concentration of long-run stock-market wealth creation.

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The six portfolios compared are 100% IWB, 80% IWB / 20% IWF, 80% IWB / 20% VUG, 80% IWB / 20% RPG, 80% IWB / 10% IWF / 10% VUG, and 80% IWB / 6.67% IWF / 6.67% VUG / 6.67% RPG.

Using recent 2026 holdings data, the three growth funds considered for the portfolio sleeve—IWF, VUG, and RPG—differ in the following ways.

· IWF — iShares Russell 1000 Growth ETF. The fund holds about 367 stocks. Its four largest positions are NVIDIA, Apple, Alphabet Class A, and Broadcom, which together account for about 34.7% of the fund. Information technology represents about 54% of the portfolio.

· VUG — Vanguard Growth ETF. The fund holds about 154 stocks. Its four largest positions are NVIDIA, Apple, Microsoft, and Alphabet Class A, which together account for about 40.4% of the fund. Technology represents about 70% of the portfolio. Thus, VUG is considerably more concentrated in both its largest companies and technology than IWF.

· RPG — Invesco S&P 500 Pure Growth ETF. The fund holds only about 69 stocks, but its holdings look very different from those of IWF and VUG. Its four largest positions are Sandisk, Micron Technology, Comfort Systems USA, and CrowdStrike, which together account for only about 15.0% of the fund. Technology represents about 41% of the portfolio. RPG therefore has far fewer holdings but is much less dominated by the mega-cap growth companies that lead IWF and VUG because its index weights stocks according to growth characteristics rather than simply allowing the largest growth companies to dominate the portfolio.

The experiment asks which of these six core/sleeve combinations performed best. The results also provide limited evidence on whether an investor benefits from holding more than one growth fund in the sleeve.

Analysis:

The sample runs from April 2006 through December 2025, the longest common live-history period available for all four ETFs. The analysis contains 237 monthly return observations.

Monthly total returns are calculated from month-end adjusted prices, incorporating distributions. Each portfolio begins with its stated allocation in April 2006. There is no subsequent rebalancing.

The risk-free rate used in the Sharpe-ratio calculations is based on monthly TB3MS Treasury-bill observations from the Federal Reserve Bank of St. Louis.

The Sharpe ratio measures return relative to risk:

Annualized Sharpe Ratio = [(Average Monthly Portfolio Return − Average Monthly Risk-Free Return) ÷ Monthly Portfolio Volatility] × √12

A higher Sharpe ratio indicates that an investor received more return for each unit of risk taken, which makes it useful for comparing portfolios whose returns and volatility differ.

The principal measures emphasized here are compound annual growth rate and the Sharpe ratio. CAGR measures the annualized rate at which wealth compounded over the period. The Sharpe ratio evaluates return relative to the volatility incurred in earning that return.

The no-rebalancing assumption also provides an intuitive test. Holdings that outperform are allowed to become larger portions of the portfolio rather than being periodically reduced back to their starting weights.

Results

The six portfolios can be summarized using two principal measures:

• Return. IWB alone produced a 10.69 percent CAGR. The highest return came from 80 percent IWB/20 percent IWF at 11.23 percent, followed almost indistinguishably by 80 percent IWB/20 percent VUG and 80 percent IWB/10 percent IWF/10 percent VUG, both at 11.22 percent. Adding RPG to IWF and VUG lowered the three-fund combination to 11.06 percent. The RPG-only growth tilt produced 10.71 percent, barely above IWB.

• Return adjusted for risk. The Sharpe ratio tells essentially the same story. The 20 percent IWF portfolio ranked first at 0.6617, followed by the IWF/VUG combination at 0.6600 and VUG at 0.6583. The three-growth-fund combination fell to 0.6482. IWB was 0.6350, while the RPG portfolio ranked last at 0.6228. Thus, RPG not only produced substantially less additional return than IWF or VUG; after adjusting return for volatility, it performed worse than IWB itself.

Although an annual-return difference of roughly one-half percentage point may appear modest, compounding makes it meaningful over nearly twenty years. An initial $100,000 invested in IWB grew to approximately $743,000, while the 80 percent IWB/20 percent IWF portfolio grew to approximately $818,000—a difference of about $75,000.

Adding either IWF or VUG increased both return and risk-adjusted return. One reason the difference relative to IWB was not larger is that IWB itself already contained substantial exposure to many of the same large technology and growth companies. Although the initial 20 percent IWF allocation grew to about 27 percent without rebalancing, the resulting increase in the portfolio’s underlying technology exposure was therefore more modest than the change in the fund weights alone might suggest.

Adding RPG to the growth sleeve reduced both return and risk-adjusted return relative to using IWF or VUG. This does not establish that investors should always diversify across growth funds, but it does show the risk of relying on a single fund simply because it carries the desired style label. An investor who does not understand the differences among competing index methodologies may therefore have reason to diversify across broadly similar approaches rather than assume in advance that one particular methodology will prove superior.

The broader lesson is that investors either need to understand in considerable detail what their funds own and how their indexes are constructed, or they need to diversify across methodologies rather than assume that funds with the same label are interchangeable. Two overlapping funds may still reduce index-selection risk, while another fund in the same category may represent a substantially different investment strategy.

Appendix: Verification of Portfolio Calculations

Sample period: April 2006–December 2025

The portfolio results reported in this paper were independently reconstructed in Python and in an Excel-compatible spreadsheet workbook. The purpose of this appendix is to document that verification rather than repeat the substantive findings discussed in the paper.

The analysis uses 237 monthly observations based on month-end adjusted prices for IWB, IWF, VUG, and RPG, incorporating distributions. Each portfolio was established at its stated initial allocation in April 2006 and was not subsequently rebalanced. The risk-free rate used in calculating Sharpe ratios is based on the monthly TB3MS Treasury-bill series.

For verification, the monthly portfolio paths were rebuilt independently from the underlying fund data. CAGR, volatility, Sharpe ratios, and the other portfolio statistics were then calculated separately in Python and with spreadsheet formulas. The two implementations agreed essentially to machine precision, with a largest absolute difference across the principal statistics of approximately 1.6 × 10⁻¹⁵.

Figure A1. Independently verified portfolio results, April 2006–December 2025.

The verification therefore confirms that the return and risk comparisons reported in the paper are reproducible under the stated no-rebalancing methodology.

Author’s Note: Readers interested in related work on portfolio construction may also want to see Can Investors Find the Few Stocks That Create Most Market Wealth?, which examines the evidence for diversification when a small number of stocks generate most market wealth, and Broad Market vs. Sector ETFs: Risk & Return Revisited (2007–2024), another portfolio experiment comparing broad-market and sector-fund strategies.

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• Democratic socialist gains are driven mainly by domestic economic concerns, not Israel.

• Heavy spending in Democratic primaries is often an inefficient response.

• AIPAC should emphasize education and selective candidate support.

• Deep-blue districts need a viable center-left alternative in general elections.

• A small third-party bloc could matter greatly in a closely divided Congress.

The Democratic socialist and allied progressive left has scored a series of striking victories in 2026. Most of the Democratic Socialist victories in Democratic primaries occurred in deep-blue districts where the winner of the primary is currently guaranteed to win in the general election.

These races include: CO-1—Melat Kiros, beat longtime incumbent; PA-3—Chris Rabb, won Philadelphia seat; NY-7—Claire Valdez, socialist-backed victory; NY-10—Brad Lander, defeated Dan Goldman; NY-13—Darializa Avila Chevalier, defeated incumbent; NJ-11—Analilia Mejia, won Sherrill seat; NJ-12—Adam Hamawy, Gaza surgeon wins; MI-13—Donavan McKinney, defeated incumbent; and CA-14—Aisha Wahab, faces Melissa Hernandez in both August special and November general elections.

The progressive left has also produced candidates in less overwhelmingly Democratic states and districts including: Abdul El-Sayed MI, Troy Jackson ME, Manny Rutinel CO-8, William Lawrence MI-7, and Sam Forstag MT-1. These races test whether the progressive left can win beyond deep-blue electorates.

I have some comments on the reasons for the debacle and some suggestions on how groups like AIPAC and DMFI should proceed both in the current and future election cycles.

First, there must be a recognition that the world does not revolve around Israel. The rise of the progressive left probably has much more to do with intense frustration over health insurance, economic opportunity, and income and wealth inequality. Democratic socialists have responded with proposals such as Medicare for All and aggressive redistribution that are often impractical but highly appealing to the relatively small share of voters who participate in Democratic primaries—often roughly 20 percent of the eventual general-election electorate.

Republican candidates with the party’s record on cutting SNAP benefits and premium subsidies for health care are not competitive in many districts, regardless of the Democrat’s position towards Israel. In deep-blue districts, however, winning that primary usually means winning the seat, allowing strongly anti-Israel socialists to enter Congress even when their broader views may not represent the district’s general-election electorate. I understand this outcome because many voters even if they disagree with the Democrat’s view on Israel differ from the Republican party on a wide variety of issues including immigration, health care, economic policy, the growing isolationism and most of all concerns about President Trump.

The long-term answer therefore cannot simply be spending more money in Democratic primaries. Deep-blue districts need a pragmatic progressive or center-left alternative in the general election, something neither the Republican nor Democratic party can provide. The long-term solution to the declining political support for Israel is the creation of a viable political party with a pragmatic approach to governing and a reasonable approach to Israel.

The short-term options for AIPAC and DMFI in the 2026 cycle are relatively narrow because the die has largely been set for the fall election. In some cases, AIPAC support has backfired, as in the NJ 11 primary, where their intervention led to the nomination of a more radical Democrat. In Michigan the expenditures for Stevens may have weakened El-Sayed but there were less expensive ways to accomplish this.

AIPAC needs to move away from support of individual candidates and towards a broader education effort about the conflict and the world. In the current cycle, AIPAC should explain why terrorism and the history of the intifadas have made an Israeli Palestinian settlement so difficult, distinguish legitimate criticism of Israeli governments from efforts to delegitimize Israel, and confront Iran’s role in supporting terrorism and destabilizing the region—including the brutal repression of the Iranian people themselves. These educational efforts do not always have to be tied to an individual race.

Some 2026 candidates in both parties do deserve AIPAC support both because of their support for Israel and the views of their opponent. These candidates include Melissa Hernandez (D), CA-14; Janelle Stelson (D), PA-10; Eileen Laubacher (D), CO-4; Paige Cognetti (D), PA-8; Elaine Luria (D), VA-2; Don Davis (D), NC-1; Marie Gluesenkamp Perez (D), WA-3; Emilia Sykes (D), OH-13; Bobby Pulido (D), TX-15; Tom Barrett (R), MI-7; Gabe Evans (R), CO-8; Aaron Flint (R), MT-1; and Brent Taylor (R), TN-9.

The most important long-term problem is preventing Democratic socialists in deep-blue districts from becoming permanently entrenched in Congress. These candidates are often nominated in primaries dominated by activists and involving only around 30 percent of the voters who will participate in the general election. Yet once they win the Democratic nomination, the political composition of these districts makes election in November almost automatic. These candidates cannot be beaten in the Democratic primary. The only way to beat the candidates is the construction of a pragmatic and progressive third-party which champions economically efficient and progressive solutions.

The potential universe of deep-blue districts where a pragmatic progressive alternative could compete is considerably larger than the handful in which democratic-socialist candidates were elected this term. A substantial bloc of Democrats in the current Congress supports policies associated with the party’s progressive wing, including Medicare for All, major elements of the Green New Deal, and increasingly critical positions toward Israel. The relevant question is not whether a pragmatic-progressive alternative could win every such race; it plainly would not. The question is whether it could win enough of them to matter.

Even if an independent or third-party candidate had only about a one-in-six chance of prevailing in a competitive three-way race, victories in even a handful of deep-blue districts could upend the existing political calculus. In a House in which control may depend on only a few seats, such candidates could become pivotal to determining the majority and could demonstrate that winning the Democratic primary no longer guarantees election in November.

The problem will be more acute in 2028 and spread to even more Senate and House seats. Schumer is likely to be challenged in New York and Bennet is likely to be challenged in Colorado, actions that will endanger two pro-Israel Democrats.

The most effective way to stop the increase of socialist anti-Israel candidates from entering Congress is not beating them in primaries where most voters are progressive but beating them in the general election by fielding a pragmatic fiscally conservative progressive. The rationale for an organization built around the idea of a Democratic Majority for Israel is becoming increasingly difficult to sustain. Pro-Israel Democrats deserve support, but there is no longer a dependable pro-Israel majority within the Democratic Party.

On July 15, 103 House Democrats voted for Thomas Massie’s amendment eliminating $3.3 billion in annual assistance to Israel, compared with 98 Democrats opposed, and 10 voting present. Democratic leadership itself divided, with Hakeem Jeffries opposing the amendment and Katherine Clark supporting it.

The decision of centrist Democrats to oppose Israel is couched in terms of opposing Netanyahu and the current government and support for a two-state solution. But these votes do not reflect the recent history where Palestinians turned their backs on Oslo, started violent Intifadas, and then initiated October 7.

The movement by Democrat centrists away from Israel is an attempt to placate the growing anti-Israel wing of the party. Melat Kiros has described October 7 as an “inevitable consequence” of apartheid and occupation while denying that this justified the attack. Darializa Avila Chevalier defended attending a pro-Palestinian demonstration on October 8, 2023, and supports a one-state solution. Abdul El-Sayed has called Israel’s conduct genocide and apartheid, favors ending U.S. military aid, and has repeatedly resisted directly affirming Israel’s right to exist specifically as a Jewish state.

Centrist Democrats seem increasingly unwilling to draw boundaries around such rhetoric. Buttigieg, Newsom, Whitmer, Slotkin and Stevens have now all endorsed El-Sayed after he won the nomination. There must be some point at which principle overrides party loyalty. As the old saying goes, lie down with dogs and you get fleas.

I cannot simply migrate to the Republican Party. I find much of its immigration policy gratuitously cruel, oppose its large reductions in Medicaid and food assistance, and disagree with combining those cuts with very large tax reductions. CBO estimates that the 2025 reconciliation law will reduce Medicaid spending by about $1.2 trillion and SNAP by $211 billion through 2035 while greatly expanding immigration enforcement.

I would however if I was a resident of Michigan vote for Mike Rogers and if I was a resident of Maine vote for Susan Collins.

On foreign policy, the growing isolationism of Thomas Massie, Rand Paul, Marjorie Taylor Greene and influential voices such as Tucker Carlson creates another reason for concern. Trump remains more supportive of Israel, but his foreign policy is unpredictable and his commitment to supporting the Iranian people has been inconsistent.

An AIPAC backed third party can win by uniting people in the center in both deep blue and deep red districts and in swing districts where voters do not want either Republican or Democratic party rule. This approach will give substantive results as early as 2028 when a relatively small number of successful third-party candidates could control the balance of power in the House of Representatives and maybe also the Senate.

Author’s Note: One place to start would be recruiting candidates with credible answers to the domestic problems that are driving voters toward the socialist left—for example, candidates willing to support the practical health-care reforms outlined in A Durable Path Forward on American Health Care. Amazon Kindle edition. This book is linked to other policy proposals on student debt, retirement income and taxes. I appreciate your support.

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• Policies allowing thinner coverage and expanding access to catastrophic and bronze plans on state exchanges;

• Policies affecting prescription-drug prices, Medicare drug subsidies, pharmaceutical tariffs and the future domestic supply of pharmaceuticals;

• Policies affecting Medicaid eligibility and financing and providing temporary support for rural hospitals; and

• Policies affecting provider compensation, insurance payments, prior authorization and price transparency.

This analysis reflects policies enacted, announced or issued through August 6, 2026.

Expanded Access to Catastrophic and Higher-Cost-Sharing Bronze Coverage

The 2025 reconciliation law makes bronze and catastrophic plans offered through the health-insurance exchanges eligible for health savings account contributions beginning January 1, 2026. This expands access to HSAs, although many lower-income households purchasing bronze coverage may have little money available to contribute after paying premiums and other living expenses.

A previous memo on this blog examined separate regulatory changes, which are now finalized and will take effect in 2027 and 2028. Beginning with the 2027 plan year, HHS will give insurers greater flexibility in setting cost sharing for bronze plans, permit additional non-network plan designs, allow catastrophic plans to have multiyear terms of up to ten years and discontinue federal requirements that insurers offer standardized plans or limit the number of nonstandard plans. Changes to the permissible cost-sharing requirements for catastrophic plans will begin in 2028. Together, these policies expand the availability of thinner coverage and give insurers more flexibility in plan design, while potentially exposing some households to greater out-of-pocket costs.

President Trump has asked Congress to enact a broader plan that would send some federal health-insurance assistance directly to eligible individuals, fund cost-sharing reductions, restrict certain pharmacy-benefit-manager and broker payments, and require insurers to disclose denial rates, administrative expenses and profits. It remains a legislative proposal rather than an operating replacement for the existing premium tax-credit system.

Prescription Drug Prices, Subsidies and Tariffs

The administration’s prescription-drug policies move in several different directions. It is trying to reduce selected drug prices through Medicare negotiations and voluntary agreements with manufacturers, while also ending a temporary Medicare premium subsidy and pursuing tariffs that could increase the cost of imported pharmaceuticals.

CMS has announced that the Medicare Part D Premium Stabilization Demonstration will end after 2026. In 2026, the demonstration reduced the base-premium calculation by $10 for participating stand-alone prescription-drug plans and limited their year-to-year premium increases. Ending the demonstration removes that additional premium support beginning in 2027 and could contribute to higher premiums for some plans. However, the effect will vary by plan, and final average Medicare Advantage and Part D premiums for 2027 will not be released until September 2026.

In April 2026, President Trump imposed tariffs on imported patented pharmaceuticals and associated pharmaceutical ingredients, but the policy does not apply one uniform rate to all pharmaceutical imports. The standard tariff is 100 percent, while a 20 percent rate applies to products from companies with approved plans to expand production in the United States. Imports from the European Union, Japan, South Korea, Switzerland and Liechtenstein generally face a 15 percent rate, and imports from the United Kingdom face a 10 percent rate. Companies entering both most-favored-nation pricing agreements and domestic-production agreements may receive temporary exemptions. Generic drugs, biosimilars and their associated ingredients are exempt for now, although the administration is required to reconsider their treatment within one year. The tariffs took effect on July 31, 2026, for companies identified in the proclamation and are scheduled to take effect on September 29, 2026, for other covered companies.

TrumpRx directs cash-paying consumers toward discounted prices offered by participating manufacturers and pharmacy services. The administration has also negotiated voluntary most-favored-nation arrangements with major drug companies, although these agreements apply only to selected products and purchasing arrangements rather than establishing a universal limit on American drug prices.

At the same time, the administration is continuing the Medicare drug-price negotiation program created under President Biden. Republicans opposed the initiative during the Biden administration, but President Trump has retained it, and CMS has selected additional Part B and Part D drugs for negotiation. Its continuation is consistent with other parts of the Trump health-care agenda that use aggressive federal intervention to reduce pharmaceutical and provider prices.

This approach also reflects Trump’s broader preference for negotiating company-specific deals rather than relying entirely on uniform legislation or regulation. The administration has exchanged pricing, tariff and regulatory concessions with individual corporations and, in strategic industries outside health care, has sometimes taken federal equity stakes. No comparable government purchase of stock in a health-care company has yet been announced.

The clearest health-care example is the administration’s November 2025 agreements with Eli Lilly and Novo Nordisk covering GLP-1 drugs. The companies agreed to offer reduced prices for Ozempic, Wegovy, Zepbound and related products through TrumpRx and participating public programs, while also making commitments to expand domestic manufacturing. Medicare access to GLP-1 drugs for weight management is not yet a universal permanent benefit.

Medicaid Regulations and Rural Hospitals

The administration’s Medicaid agenda began with the substantial eligibility and financing changes enacted in the 2025 reconciliation law, but it has since continued through a series of CMS regulations and administrative actions. These measures implement the law’s work requirements and financing restrictions while also imposing tighter federal controls on provider taxes, state-directed payments and Medicaid demonstration spending.

In June 2026, CMS issued an interim final rule implementing the new Medicaid work and community-engagement requirement. Beginning no later than January 2027, many nondisabled, nonpregnant adults ages 19 through 64 must document at least 80 hours a month of employment, education, training or community service. The regulation specifies how states must verify compliance, identify exemptions, notify beneficiaries and terminate coverage when the required information is not supplied.

CMS has also issued new regulations governing the provider taxes states use to finance their share of Medicaid. A January 2026 final rule closed arrangements under which states imposed disproportionately high taxes on Medicaid-related business and then used the revenue to obtain additional federal matching funds. A separate proposed rule issued in July would implement the reconciliation law’s new limits on provider taxes and gradually reduce the permissible tax thresholds in states that expanded Medicaid.

A May 2026 proposed rule would impose additional restrictions on state-directed payments made through Medicaid managed-care plans and on certain targeted payments in fee-for-service Medicaid. Among other changes, it would generally limit covered payments to Medicare rates in expansion states and 110 percent of Medicare rates in non-expansion states. If finalized, the rule could substantially reduce payments to hospitals, physicians and other providers beyond the reductions already required by the reconciliation law.

CMS is also tightening its oversight of Section 1115 Medicaid demonstrations. The agency has announced plans for stricter budget-neutrality standards intended to limit how much federal spending states can obtain through demonstration projects, although the detailed regulation has not yet been proposed.

At the same time, the reconciliation law created the $50 billion Rural Health Transformation Program, distributed over five years, to support rural health-care access, workforce development, technology and alternative delivery models. The program may help some rural hospitals and providers adjust to the broader Medicaid changes, but it is temporary and considerably smaller than the projected long-term reductions in Medicaid financing.

Provider Compensation, Insurance Payments and Prior Authorization

The administration’s policies affecting providers and insurers demonstrate that its health-care agenda is not simply deregulatory. In several areas, it involves greater federal intervention in provider compensation, surprise-billing arbitration, prior authorization and price disclosure.

The bipartisan No Surprises Act, enacted during Trump’s first term, has substantially reduced unexpected out-of-network billing, although its provider-payment arbitration system has developed significant operational problems. An HHS evaluation found that out-of-network bills declined by 15 percent for emergency services and 11 percent for nonemergency services at in-network facilities during the law’s first year. A separate study estimated that the law reduced annual out-of-pocket spending by about $567 among directly insured adults who gained new protections, although it found no measurable reduction in premiums.

The Trump administration’s May 2026 changes to the law’s arbitration system are meaningful but mostly procedural. The final rule reduced the administrative fee from $115 to $15 per party, expanded the batching of similar claims and limited batches to 50 claim items. These changes may make arbitration faster and less expensive, but they do not directly limit the amounts arbitrators can award.

The larger unresolved issue is the extraordinary growth in disputes under the arbitration system. CMS has reported millions of disputes since the federal portal opened, far more than originally anticipated. The administration is considering additional changes intended to reduce administrative burdens and address concerns about unusually high payment demands. Depending on their design, such changes could place greater weight on insurers’ median in-network prices, narrow the claims eligible for arbitration or otherwise limit exceptionally high awards. No new reimbursement standard has yet been adopted.

In its proposed 2027 hospital outpatient payment rule, CMS would pay for specified imaging services provided by off-campus hospital outpatient departments at the lower rates paid to physicians’ offices. The direct financial loss would therefore fall on hospitals and hospital-owned outpatient facilities, not on independent physician offices. Patients would generally benefit from lower cost sharing, while the policy would reduce the financial advantage hospitals obtain by purchasing physician practices and billing the same services at hospital rates.

In the same proposed 2027 hospital outpatient payment rule, CMS would substantially reduce Medicare payments for drugs purchased through the 340B program. Eligible hospitals and clinics buy these drugs at steep discounts but may receive the normal Medicare or private-insurance reimbursement, retaining the difference to support their operations. CMS proposes paying average sales price minus 33.4 percent, which it estimates would reduce Medicare drug payments by $4.55 billion and beneficiary cost sharing by $1.15 billion during the first year. Because the change must be budget-neutral, much of the federal savings would be redistributed through higher Medicare payments for other hospital outpatient services.

Criticism of 340B “abuse” generally concerns the rapid expansion of participating hospital sites and contract pharmacies, weak verification that every hospital and patient is eligible, the possibility of duplicate Medicaid discounts and the absence of a federal requirement that hospitals pass the drug discount directly to patients or document precisely how the retained revenue is used. GAO has repeatedly found weaknesses in federal oversight, although participating hospitals argue that the revenue finances uncompensated care and other safety-net services. The CMS proposal addresses the size of Medicare’s payment relative to hospitals’ acquisition costs, but it does not by itself resolve the broader debate over eligibility, contract pharmacies or the use of 340B revenue.

Prior-authorization policy is moving in two directions. A Biden-era rule retained by the Trump administration requires Medicare Advantage, Medicaid and CHIP plans to decide urgent requests within 72 hours and standard requests within seven days and to provide a specific reason for denials. The administration has also proposed extending electronic prior authorization, decision deadlines and denial disclosures to prescription drugs beginning in 2027.

At the same time, the WISeR demonstration introduces private prior-authorization contractors into selected parts of Original Medicare. The companies use artificial intelligence and other technology to review designated services and receive a share of the Medicare savings attributed to care they prevent. This creates a financial incentive to deny or redirect services, although CMS adjusts compensation for performance and can recover payments when a denied claim is successfully appealed.

WISeR includes a model-specific safeguard: a recommendation not to approve care cannot be made solely by an algorithm and must be reviewed by an appropriately licensed human clinician. Providers may resubmit a request without limit, but a non-affirmation does not immediately trigger the formal Medicare appeals process. To obtain a formal appeal, the provider must generally perform the service, submit the claim and receive an actual Medicare denial—potentially leaving the provider or patient exposed to financial risk while the dispute proceeds.

That safeguard does not amount to a general federal prohibition on AI-based insurance decisions. The Biden administration proposed broader guardrails for Medicare Advantage plans’ use of artificial intelligence, but CMS declined to finalize them in 2025. The Trump administration instead secured a voluntary commitment from major insurers to have medical professionals review clinical denials. WISeR therefore has an enforceable human-review condition within that demonstration, while the broader insurance market remains governed by existing coverage rules and a voluntary industry pledge rather than a comprehensive new AI regulation.

Finally, the administration is strengthening hospital price-transparency requirements already in effect. Hospitals must provide more useful information about negotiated prices and actual allowed amounts, use standardized machine-readable files and attest that their reported data are accurate. Separately, the administration has proposed broader disclosure requirements that would make insurer denial rates, administrative expenses, profits and prior-authorization outcomes more visible to consumers, employers and researchers. Those broader insurer-disclosure requirements have not all been finalized.

Conclusion:

The Trump health-care agenda begins with an ideological choice: restrain federal health spending even if that slows movement toward more universal coverage. Cost reduction is the constant theme running through all the administration’s health care proposals. The administration’s policies address Medicaid and insurance coverage, prescription-drug prices, hospital payments, billing disputes, prior authorization and other technical features of the health-care system.

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U.S. and international stocks were highly correlated during the past decade.

From July 2016 through June 2026, the quarterly returns of VOO and VXUS had a Pearson correlation of approximately 0.86. A correlation that high means the two funds generally rose and fell together. It therefore leaves relatively little room for a small international allocation to reduce portfolio volatility.

The limitation becomes even more apparent when international stocks make up only 10% of the portfolio. Even when VXUS behaves somewhat differently from VOO, its weight is too small to substantially alter the performance of a portfolio that remains 90% invested in U.S. large-cap stocks.

That leads to the central question:

Does adding a 10% international allocation create a more efficient portfolio by improving the relationship between return and risk?

Methodology:

The work here involves returns from portfolios formed from a combination of three funds -- VOO, the Vanguard S&P 500 ETF; VXUS, the Vanguard Total International Stock ETF; and BIV, the Vanguard Intermediate-Term Bond ETF.

The analysis covers July 1, 2016, through June 30, 2026. It uses Vanguard’s published quarterly market-price total returns, including reinvested distributions.

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1. Better Ratios Don’t Always Mean Higher Returns

A portfolio’s efficiency ratio can improve simply because risk fell faster than returns. You get a smoother ride, but you end up with less total wealth over time.

2. Emerging Markets Don’t Reliably Cut Risk

Emerging-market equities do not systematically lower portfolio risk. In practice, they often increase total volatility—the ratio improves only because the extra return outweighs the extra risk.

3. How You Measure Risk Can Change the Verdict

Standard metrics treat both big gains and big losses as “risk.” Because emerging markets suffer from sudden, sharp drawdowns, evaluating them strictly on downside risk reveals exposure that traditional metrics miss.

The academic literature finds that investing in emerging-market equities can improve a portfolio’s return–risk ratio because emerging-market returns do not move perfectly with developed-market returns. But a better ratio does not necessarily mean a higher return. It may result from higher return, lower risk or some combination of the two. This paper examines what produces the improvement under two definitions of risk: total volatility, measured by standard deviation, and downside volatility, measured by semivariance.

A better return–risk ratio can arise in three principal ways:

• Return rises while risk falls.

• Return and risk both rise, but return rises proportionately more.

• Return and risk both fall, but risk falls proportionately more.

The third outcome requires particular attention. The portfolio becomes statistically more efficient, but the investor accumulates less wealth. Diversification has successfully reduced risk, but only at the cost of accepting a lower return.

Standard Deviation and Semivariance

Standard deviation measures the dispersion of returns around their average. It treats a return far above the average as just as risky as an equally large return below the average. The Sharpe ratio generally divides the return above a risk-free benchmark by standard deviation.

Semivariance measures only returns below a specified target. The target can be zero, the risk-free rate, the portfolio’s average return or another required return. For example, zero-target semivariance considers only negative returns and gives greater weight to larger losses by squaring each shortfall. Its square root, semideviation, is expressed in the same units as standard deviation. A downside return–risk measure such as the Sortino ratio divides excess return by semideviation rather than by total volatility.

This distinction matters for emerging markets because their returns are often skewed, volatile and subject to unusually severe losses. A portfolio can therefore look attractive when all volatility is counted as risk but less attractive when only harmful volatility is considered.

Evidence Using Standard Deviation

Better Ratio, Lower Return

Min and Kim found that adding international regional indexes provided significant diversification benefits to Korean investors, but that the source and size of those benefits differed substantially across markets. Their results show that adding emerging-market Latin America lowered both the portfolio’s return and its standard deviation while raising the Sharpe ratio from 3.14 to 3.44. The authors concluded that the largest efficiency gains came from emerging-market Latin America and emerging-market Europe.

This is therefore an example of a better return–risk ratio achieved through risk reduction at the cost of a lower return. Note that these results reflect a South Korean won perspective against domestic South Korean benchmarks; exchange-rate dynamics and baseline volatility differ for U.S. dollar investors. Furthermore, the maximum efficiency gains relied on unconstrained optimization with large short positions rather than realistic long-only allocations.

The result should not be interpreted as a practical allocation recommendation. The optimized portfolio contained substantial short positions and an unusually large emerging-market allocation. It demonstrates the nature of the tradeoff, not the likely result of adding a modest emerging-market position to a conventional American portfolio.

Higher Economic Gains Without Consistent Risk Reduction

Bouslama and Ouda found that the economic gains from international diversification remained substantial for American investors and that emerging and frontier markets were major components of their unrestricted optimized portfolios. Their variance-optimized strategy produced greater terminal wealth, a higher Sharpe ratio and slightly lower standard deviation than the U.S.-only benchmark.

However, the authors’ broader conclusion was that unrestricted international diversification did not consistently reduce volatility or minimum loss across the different strategies they tested. Substantial emerging-market exposure primarily enhanced economic gains rather than reliably reducing risk. The authors found clear reductions in return variability and minimum loss only in their restricted portfolios.

The favorable mean-variance result should therefore be treated as strategy-specific. It demonstrates that higher return, lower standard deviation and a better Sharpe ratio can occur together, but it was not the general result across all the portfolio methods examined in the study.

The Min and Kim and Bouslama–Ouda results illustrate why an improved Sharpe ratio cannot be interpreted by itself. In one case, the ratio improved because risk fell more than return. In the other, a particular optimized strategy increased wealth while modestly reducing standard deviation.

Evidence Using Downside Risk

From an investor’s perspective, the relevant risk is generally not volatility itself but the possibility that returns will fall below an acceptable target. Returns above that target are beneficial and ordinarily should not be penalized as risk. Standard deviation remains widely used because it is simple to calculate and produces a tractable portfolio model; it is also a reasonable proxy for downside risk when returns are approximately symmetric.

Emerging-market returns, however, are frequently skewed and non-normal. Stevenson therefore evaluated emerging-market portfolios using lower partial moments, which count only returns below a specified target. He demonstrated that severe negative skewness and high kurtosis, or fat tails, cause standard mean-variance optimization to understate downside exposure, whereas lower partial moments reallocate capital to protect against extreme tail events. He found that this more direct measure of harmful volatility could materially alter portfolio allocations and produce significant performance improvements for risk-averse investors.

Better Downside-Risk Ratio, Lower Return

Bouslama and Ouda found a direct tradeoff between economic gains and downside-risk protection. Reducing emerging- and frontier-market exposure lowered return variability and minimum loss, but it also reduced terminal wealth. At the same time, the semi-variability ratio increased across their optimized strategies when they moved from unrestricted to restricted portfolios.

The authors concluded that unrestricted portfolios were more attractive to investors seeking economic gains, while restricted portfolios were more attractive to investors seeking lower volatility and smaller losses.

This is the central tradeoff examined here. Moderating emerging-market exposure improved downside-risk-adjusted performance, but only by sacrificing some return. Whether that is desirable depends on how highly the investor values protection against losses relative to long-run wealth accumulation.

The comparison is imperfect because the restricted portfolios imposed a 50 percent U.S. allocation and excluded some less-investable markets. It nevertheless provides a direct example of a higher downside return–risk ratio being achieved at the cost of lower accumulated wealth.

Higher Return and Better Ratios, but Higher Risk

Beach examined monthly rebalanced portfolios combining developed- and emerging-market equities. He concluded that “higher returns and higher risk are associated with portfolios that have higher allocations to emerging market equities.” Beach reinforced this using both semideviation and Downside CAPM, or D-CAPM, showing that while total downside risk rose with higher emerging-market exposure, the additional return expanded rapidly enough to improve downside-risk-adjusted ratios.

The Sharpe and reward-to-semideviation ratios nevertheless improved because the additional return more than compensated for the higher standard deviation and semideviation. This was therefore not a risk-reduction result.

What the Studies Establish

Taken together, the studies show that a better return–risk ratio can accompany either higher or lower returns and either higher or lower risk, whether risk is measured by standard deviation or by downside volatility.

The literature therefore does not support a general claim that emerging markets improve portfolio performance by reducing risk. Sometimes risk falls at the cost of return. Sometimes both return and risk rise, but return rises enough to improve the ratio. Under some portfolio methods, return rises while measured risk also falls.

The choice of risk measure can also change the assessment of the same portfolio. A portfolio may appear attractive under standard deviation because upside volatility is treated as risk and included in the denominator. The same portfolio may look less favorable when only returns below a specified target are considered.

Reading List

1. Byoungkyu Min and Tongsuk Kim. “An Examination of International Portfolio Diversification Benefits for Korean Investors.” Journal of Derivatives and Quantitative Studies, Volume 18, Issue 1, 2010. The study examines the diversification benefits of adding developed- and emerging-market regional indexes to Korean equity portfolios.

2. Ons Bouslama and Olfa Ouda. “International Portfolio Diversification Benefits: The Relevance of Emerging Markets.” International Journal of Economics and Finance, Volume 6, Issue 3, 2014. The study compares international portfolios constructed using variance, GARCH variance, conditional value at risk and lower partial moments.

3. Simon Stevenson. “Emerging Markets, Downside Risk and the Asset Allocation Decision.” Emerging Markets Review, Volume 2, Issue 1, 2001, pages 50–66. The study directly compares conventional mean-variance optimization with portfolio construction based on lower partial moments.

4. Steven L. Beach. “Why Emerging Market Equities Belong in a Diversified Investment Portfolio.” The Journal of Investing, Volume 15, Issue 4, Winter 2006, pages 12–18. The study evaluates emerging-market allocations using standard deviation, semideviation, conventional beta and downside beta.

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One month after the October 7 massacre, Melat Kiros published an open letter attacking the position taken by more than 100 major law firms on antisemitism and Israel. Sidley Austin reportedly asked Kiros, then an associate at the firm, to remove the letter. She refused and was fired—an event that helped redirect her from corporate law into progressive politics and ultimately a run for Congress.

The letter deserves to be considered in three parts. First are its familiar anti-Israel arguments: claims that are, in my view, misleading or wrong but are widely made and can be debated. Second are its more inflammatory conclusions about October 7, Zionism and Israel’s continued existence—the portions that help explain why the letter had such serious professional consequences. Third is the larger question of utility. Even apart from whether its claims are correct, does Kiros’s rhetoric offer any plausible path toward peace, coexistence or a workable political settlement?

Much of the letter consists of standard anti-Israel fare. Kiros describes Israel as a colonial and occupying power, characterizes its treatment of Palestinians as apartheid and argues that its military response after October 7 constituted disproportionate force and collective punishment. Many people hold some or all these views, and each deserves serious discussion. But Kiros presents them as settled conclusions while offering, at best, an extraordinarily selective account of the conflict.

Israel is not simply a European colonial outpost populated by descendants of foreign settlers. A large share of Israeli Jews are descended from people who fled or were driven from communities elsewhere in the Middle East and North Africa. Around half of Israel’s Jewish population has roots in Arab or other Muslim countries, where ancient Jewish communities have now almost entirely disappeared. Their experience does not fit comfortably within a simple story of European colonizers displacing an indigenous population.

Nor does Kiros’s colonial account adequately acknowledge the role of Britain—the actual imperial power governing Palestine. At precisely the moment Jews were desperately attempting to escape Nazi persecution, Britain sharply restricted Jewish immigration. Jews fleeing for their lives were prevented from reaching Palestine, and many refugees and Holocaust survivors were forced to attempt entry clandestinely. That history does not erase Palestinian suffering, but it greatly complicates Kiros’s portrayal of Zionism as little more than an imperial project imposed upon the region.

The apartheid accusation is especially unpersuasive when applied indiscriminately to Israel within its pre-1967 boundaries. Get off an airplane in Israel and one immediately encounters a multilingual country: Hebrew, Arabic and English appear together on many airport, road and public signs. Arab citizens vote, form political parties, serve in the Knesset, work as physicians and university professors, and have served as judges, including on Israel’s Supreme Court.

Muslim religious life is not prohibited or driven underground. Israel contains hundreds of mosques, and Muslim citizens have access to a state-recognized system of Sharia courts that decides marriage, divorce, alimony, paternity and other personal-status matters. These are unusual features for a country supposedly organized around the systematic exclusion of its Arab population.

Cross-country comparisons are difficult, and substantial economic disparities remain between Arab and Jewish citizens within Israel. Even so, Arab citizens of Israel appear broadly on par economically with citizens of other Arab countries in the region and better off than those in several neighboring states. They possess citizenship, voting rights, political representation, religious institutions and access to an independent court system. Inequality and discrimination deserve criticism, but they are not synonymous with apartheid, and Israel bears little resemblance to South Africa’s former system of legally mandated racial separation and political exclusion. The comparative economic position of Arab Israelis is an interesting subject that merits fuller treatment in a separate comment.

Conditions in the West Bank present a more difficult case because Palestinians there live under varying combinations of Israeli military control and Palestinian Authority administration without Israeli citizenship. The Oslo process was intended to replace that arrangement gradually with Palestinian self-government and a negotiated settlement, but it failed. In my view, much of the responsibility lies with Palestinian and broader Arab leaders who repeatedly rejected an achievable partial settlement coupled to a promise of more to come.

The claim that Israel used excessive force after October 7 is also widely held and cannot simply be dismissed. The scale of Palestinian civilian suffering was immense. Yet Kiros gives little attention to the absence of any easy Israeli response after Hamas murdered civilians, seized hostages, embedded itself within Gaza and promised further attacks. Israel faced choices among terrible alternatives: leave Hamas in power, negotiate under the pressure of mass hostage-taking, or conduct a military campaign in one of the world’s most densely populated urban environments. One can criticize how Israel fought the war without pretending that it had an obvious, humane and risk-free solution available.

The portions of Kiros’s letter that most clearly set it apart—and likely explain the reaction of Sidley Austin’s partners—begin with her argument that violent Palestinian resistance is the predictable consequence of colonialism and occupation. Many people accuse Israel of occupation, apartheid or excessive force. Far fewer, especially one month after October 7, applied a theory of anticolonial violence so directly to the murder and kidnapping of Israeli civilians.

Kiros invokes an anticolonial passage associated with Jean-Paul Sartre, describes October 7 with the words “We saw this gaze,” and says the massacre “did not occur in a vacuum.” The invocation is especially peculiar because Sartre himself was, at least in a qualified sense, a Zionist: he welcomed Israel’s creation as a legitimate expression of Jewish national independence, even as he later advocated recognition of Palestinian national rights. Although Kiros calls the attack unjustifiable, her surrounding rhetoric portrays it as the foreseeable response of an oppressed population to its occupier. To many readers, this sounds less like historical context than a partial rationalization of terrorism.

She then places Hamas’s massacre and Israel’s military response side by side as unjustifiable acts. A law firm did not have to oppose criticism of Israel to view this as extraordinarily poor judgment. While victims were still being identified and hostages remained in Gaza, Kiros moved quickly from condemning the massacre to explaining why Israel had supposedly brought it upon itself.

There is nevertheless an uncomfortable truth beneath the rhetoric: this conflict has produced violence, trauma and hatred on both sides. Every day on my LinkedIn feed, I encounter another account of an October 7 atrocity or of an earlier attack on Jews in Palestine, often beginning with the 1929 Hebron massacre. Kiros presents Palestinian violence almost entirely as a response to Israeli oppression, but history is not that simple. For every violent act against Palestinians cited in her letter, I can point to a violent act committed against Jews.

Kiros briefly endorses a single state in which Jews and Palestinians possess equal rights, but she never explains how either people could reach that destination. How would Hamas, Palestinian Islamic Jihad and other armed groups be disarmed? Who would prevent Iran and its regional proxies from exploiting the new state or turning Palestinian territory into another front against Israel? Who would protect Jews and Palestinians from communal violence, terrorism or an attempted seizure of power? Why would Israelis—surrounded by hostile forces and newly traumatized by October 7—surrender the sovereignty, army and secure refuge that exist precisely because Jews historically could not depend on others to protect them? Kiros does not confront these questions because her letter reads less like an effort to solve the conflict than an opportunity to assign blame and vent anger.

The history of failed negotiations is more complicated than Kiros suggests, but Palestinian leaders have repeatedly declined to accept an attainable partial settlement and continue negotiating from there. Rabin accepted the Oslo process, under which Israel recognized the PLO and transferred substantial governing authority to the Palestinian Authority. Barak and the Clinton Parameters contemplated a sovereign Palestinian state in Gaza and most of the West Bank, supplemented by land swaps; Clinton later described Arafat’s failure to close the deal as a terrible mistake. In 2008, Olmert offered Abbas a state based broadly on the pre-1967 lines, territorial exchanges, a connection between Gaza and the West Bank, a division of Jerusalem and international administration of the holy sites. Abbas did not accept the proposal, and Olmert warned that another comparable offer might not appear for 50 years. After October 7, even that prediction may look optimistic.

Some form of Swiss-style federation or confederation may ultimately offer a better long-term answer than either permanent occupation or an artificial effort to divide every road, settlement and holy place. Such a system might combine autonomous Jewish and Palestinian cantons or states with shared federal institutions, local control over civil affairs and joint responsibility for infrastructure, economic policy and external security. But it would first require a viable Palestinian governing authority capable of enforcing the law, controlling armed groups, resisting Iranian interference, accepting Jewish national rights and honoring agreements. Equality cannot be created merely by declaring one state; it must rest on functioning institutions, credible security arrangements and at least a minimum level of mutual trust.

Kiros’s letter contributes nothing to that process. By presenting Palestinian violence principally as a response to Israeli oppression, questioning Israel’s legitimacy and offering no credible transition from conflict to coexistence, her screed pushes both peoples farther from compromise. Venting may attract political supporters, but it is not a peace plan.

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This analysis compares the S&P 500 with portfolios that began with 90 percent stocks and 10 percent gold. Using monthly returns from 2010 through 2025, it tests whether a tolerance-band strategy—rebalancing to 10 percent gold whenever gold moves below 7.5 percent or above 12.5 percent—improved downside protection. The strategy modestly reduced return but reduced downside risk by considerably more, producing the highest return relative to downside risk among the approaches examined.

Key Findings

• Annual return fell modestly.

• Semivariance fell about 20 percent.

• Downside-adjusted return improved.

My previous article, “Does Adding Gold Reduce Portfolio Risk?,” used 16 annual observations to compare the S&P 500 with 90/10 stock-and-gold portfolios that were either rebalanced annually or never rebalanced. It found that gold modestly reduced risk, but that most of the benefit depended on maintaining the intended allocation. The article utilized the semivariance and based the risk/return ratio on downside risk rather than the typical mean return and standard deviation of return measures because a risk measure based on downside price movements is more relevant than one dominated by positive returns.

This post extends the previous analysis by considering a more complex rebalancing procedure and by comparing risk/return ratios with monthly data over the January 2010 to 2025 period. Four strategies are considered.

• A portfolio invested entirely in the S&P 500.

• A portfolio maintained at 90 percent S&P 500 and 10 percent gold through annual rebalancing.

• A portfolio that began with the same 90/10 allocation but was never rebalanced.

• A portfolio using the 7.5-to-12.5-percent tolerance band and returning to 90 percent stocks and 10 percent gold whenever either boundary was breached.

The calculations use monthly total returns for SPY as a proxy for the S&P 500 and GLD as the gold investment, with distributions reinvested. Taxes, transaction costs and bid-ask spreads are excluded.

Adding gold created a tradeoff. Returns went down but risk went down by a greater amount. The reduction in risk was largest when reallocation was actively managed.

· The tolerance-band portfolio produced a compound annual return of approximately 13.74 percent, compared with 14.02 percent for the S&P 500. Gold therefore reduced return by about 0.28 percentage point annually, but it reduced downside risk sufficiently to improve return relative to downside risk.

· The S&P 500 had zero-target semivariance of 0.007655 and annualized downside deviation of 8.75 percent; the 90/10 portfolio without rebalancing, 0.006844 and 8.27 percent; the annually rebalanced 90/10 portfolio, 0.006139 and 7.84 percent; and the tolerance-band portfolio, 0.006117 and 7.82 percent.

A higher ratio indicates that the portfolio produced more average return for each unit of downside risk.

This is described as “Sortino-style” rather than a conventional Sortino ratio because the numerator does not subtract a risk-free return or another minimum acceptable return. Zero is used only as the threshold for identifying downside months: returns below zero contribute to downside deviation, while returns at or above zero do not.

The results were:

• S&P 500: 1.624.

• 90/10 portfolio without rebalancing: 1.663.

• 90/10 portfolio with annual rebalancing: 1.751.

• 90/10 portfolio with tolerance-band rebalancing: 1.764.

The tolerance-band strategy produced the highest downside-adjusted return, although its advantage over annual rebalancing was small. Its ratio improved not because gold raised raw return, but because downside risk declined proportionately more than return.

The more important result is that both disciplined rebalancing approaches performed substantially better on a downside-adjusted basis than either the S&P 500 alone or the portfolio that was allowed to drift.

The tolerance-band strategy also moderated the most severe monthly loss.

• S&P 500: −12.26 percent.

• 90/10 portfolio without rebalancing: −11.71 percent.

• 90/10 portfolio with annual rebalancing: −10.91 percent.

• 90/10 portfolio with tolerance-band rebalancing: −10.86 percent.

Gold did not prevent losses, but it reduced their magnitude. Because semivariance squares negative returns, reducing a particularly large loss has a significant effect on measured downside risk.

Annual rebalancing restores the portfolio to its target allocation on a fixed schedule, whether or not the allocation has changed materially. The tolerance-band rule instead requires a transaction only when gold moves at least 2.5 percentage points away from its 10 percent target.

The rule triggered eight rebalances during the 16-year period, compared with 16 scheduled annual rebalances. It maintained the intended diversification with fewer transactions while producing slightly lower downside risk and a slightly higher return relative to downside risk.

Some Notes:

This is a historical case study rather than proof that every investor should hold 10 percent gold or use these exact boundaries.

The period from 2010 through 2025 was unusually favorable to U.S. equities. Results could differ during an extended period of weak stock returns, high inflation or unusually strong gold performance.

The downside target used to calculate semivariance is a judgment selected by the analyst. This analysis uses a target of zero, so only months with negative returns are treated as downside observations. An analyst could instead choose a target of 3 percent, negative 3 percent, the inflation rate, the Treasury-bill return or the minimum return needed to finance retirement spending. Changing the target would change both the number of months classified as downside periods and the resulting semivariance.

Taxes, which are relevant for brokerage but not retirement accounts and trading costs are excluded.

A 10 percent gold allocation modestly reduced return but reduced downside risk by considerably more. The 7.5-to-12.5-percent tolerance band preserved that protection with only eight rebalances and produced the highest return relative to downside risk among the strategies examined.

Appendix: How to Reproduce the Calculations

The analysis can be reproduced in Excel, Google Sheets or a similar spreadsheet. Use 192 monthly observations from January 2010 through December 2025. Assume that the first observation is in row 2 and the last is in row 193.

1. Enter the Data

Create these columns:

• Column A: Month.
• Column B: SPY monthly total return.
• Column C: GLD monthly total return.

Enter returns as decimals: 4 percent as 0.04 and a 4 percent loss as −0.04. Returns should include reinvested distributions.

For the S&P 500-only portfolio, create Column D and enter:

=B2

Copy the formula through row 193.

2. Construct the Tolerance-Band Portfolio

Create these columns:

• E: Beginning SPY value.
• F: Beginning gold value.
• G: Ending SPY value before rebalancing.
• H: Ending gold value before rebalancing.
• I: Ending total portfolio value.
• J: Monthly portfolio return.
• K: Gold weight before rebalancing.
• L: Rebalancing indicator.
• M: Beginning SPY value for the next month.
• N: Beginning gold value for the next month.

Assume an initial $10,000 portfolio. Enter 9000 in E2 and 1000 in F2.

For the first month, enter:

G2: =E2*(1+B2)
H2: =F2*(1+C2)
I2: =G2+H2
J2: =I2/(E2+F2)-1
K2: =H2/I2

Column K measures gold’s end-of-month portfolio weight before any transaction. In L2, enter:

=IF(OR(K2<0.075,K2>0.125),1,0)

A value of 1 means that gold moved outside the 7.5-to-12.5-percent band. A value of 0 means no rebalancing is required. A weight exactly equal to either boundary does not trigger a transaction.

For the following month’s beginning values, enter:

M2: =IF(L2=1,0.9*I2,G2)
N2: =IF(L2=1,0.1*I2,H2)

When the boundary is breached, these formulas restore the portfolio to 90 percent SPY and 10 percent gold. Otherwise, the ending values carry forward unchanged.

In row 3, set E3 equal to M2 and F3 equal to N2. Repeat the same formulas for Columns G through N and copy them through row 193. Count the rebalances with:

=SUM(L2:L193)

The rule produced eight rebalances during 2010–2025.

3. Construct the Other 90/10 Portfolios

For annual rebalancing, copy the tolerance-band columns and replace the indicator with:

=IF(MONTH(A2)=12,1,0)

This restores the portfolio to 90/10 at the end of each December.

For the unrebalanced portfolio, copy the columns again but always carry each asset’s ending value directly into the next month. The portfolio starts at 90/10, but its weights are never restored.

4. Calculate Semivariance and Downside Deviation

For each portfolio, create a column of squared downside returns. For the S&P 500, enter:

=MIN(D2,0)^2

For the tolerance-band portfolio, use:

=MIN(J2,0)^2

Use the corresponding return column for the other portfolios. Positive monthly returns receive a zero; negative monthly returns are squared. Zero is the analyst-selected target, not a required feature of semivariance. For another monthly target, T, use =MIN(Return-T,0)^2; a 3 percent annual target must first be converted to its monthly equivalent.

Annualized zero-target semivariance is:

=12*AVERAGE(DownsideRange)

The results were 0.007655 for the S&P 500, 0.006844 for the unrebalanced portfolio, 0.006139 for annual rebalancing and 0.006117 for tolerance-band rebalancing.

Downside deviation is:

=SQRT(AnnualizedSemivariance)

The corresponding results were 8.75 percent, 8.27 percent, 7.84 percent and 7.82 percent.

To calculate the percentage reduction in semivariance relative to the S&P 500, use:

=1-(PortfolioSemivariance/SP500Semivariance)

For the tolerance-band portfolio, the reduction was approximately 20.1 percent.

5. Calculate Returns and the Downside-Adjusted Ratio

Ending portfolio value is:

=10000*PRODUCT(1+MonthlyReturnRange)

Compound annual return is:

=(EndingValue/10000)^(1/16)-1

The S&P 500 returned approximately 14.02 percent annually, compared with 13.74 percent for the tolerance-band portfolio.

For the Sortino-style ratio, first calculate annualized arithmetic average return:

=12*AVERAGE(MonthlyReturnRange)

Then divide by downside deviation:

=AnnualizedAverageReturn/DownsideDeviation

The ratios were 1.624 for the S&P 500, 1.663 for the unrebalanced portfolio, 1.751 for annual rebalancing and 1.764 for tolerance-band rebalancing. The measure is described as Sortino-style because no risk-free or minimum acceptable return is subtracted from the numerator.

6. Calculate the Worst Month and Check the Work

The worst monthly return is:

=MIN(MonthlyReturnRange)

The results were −12.26 percent, −11.71 percent, −10.91 percent and −10.86 percent, respectively.

Finally, confirm that all portfolios use identical dates, rebalancing affects the following month’s allocation, rebalancing does not itself create a return, semivariance is annualized before taking its square root, and compound return is not confused with the arithmetic average used in the ratio.

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This analysis compares a portfolio invested entirely in the S&P 500 with two portfolios that began with 90 percent in the S&P 500 and 10 percent in gold. It examines both whether gold improved risk-adjusted performance and whether semivariance—which measures only downside outcomes—better captures gold’s potential diversification benefit.

Key Findings

• Gold slightly reduced returns but also reduced risk.

• Semivariance showed a larger reduction in downside risk than standard deviation showed in overall volatility.

• Annual rebalancing was essential to preserving the diversification benefit.

Investors often add gold to a stock portfolio on the theory that it will provide protection when equities perform poorly. Conventional portfolio analysis tests that theory using variance or standard deviation, which treat unexpectedly large gains and unexpectedly large losses as equivalent forms of volatility.

Semivariance provides a different test. It measures only returns below a specified target and therefore focuses on outcomes investors regard as harmful.

To illustrate the difference, I compared three portfolios over the 16 complete calendar years from 2010 through 2025:

• A portfolio invested entirely in the S&P 500.

• A portfolio invested 90 percent in the S&P 500 and 10 percent in gold, rebalanced annually.

• A portfolio that began with the same 90/10 allocation but was never rebalanced.

The calculations use the total returns of SPY as a proxy for the S&P 500 and GLD as the gold investment, with distributions reinvested. Each portfolio began with $10,000 on January 1, 2010.

Variance Versus Semivariance

Standard deviation measures how widely returns vary around their average. It treats a return far above the average as just as risky as a comparably large return below the average.

That may be mathematically convenient, but it does not necessarily correspond to how investors think about risk. Investors generally welcome unusually large gains and dislike unusually large losses.

Semivariance measures only returns below a chosen threshold. In this example, the threshold is zero, meaning that only negative calendar-year returns count as downside risk. Downside deviation is the square root of semivariance and expresses that risk in more familiar percentage-return terms.

Semivariance does not replace standard deviation. It answers a different question. Standard deviation asks how variable returns were in either direction. Zero-target semivariance asks how often, and by how much, returns fell below zero.

The Results

• Return: The S&P 500 produced the highest compound annual return from 2010 through 2025: 14.02 percent, compared with 13.66 percent for the annually rebalanced 90/10 portfolio and 13.62 percent for the portfolio that was never rebalanced. A $10,000 investment grew to approximately $81,563 in the S&P 500, $77,605 in the rebalanced portfolio, and $77,100 in the unrebalanced portfolio.

• Risk: Annual rebalancing produced the clearest reduction in both conventional and downside risk. Standard deviation declined from 13.89 percent for the S&P 500 to 12.94 percent for the rebalanced portfolio and 13.18 percent for the unrebalanced portfolio. Zero-target semivariance fell by approximately 18 percent with annual rebalancing but only 6 percent without it. Downside deviation declined from 4.69 percent for the S&P 500 to 4.25 percent with annual rebalancing and 4.54 percent without rebalancing. In the worst year, the S&P 500 lost 18.18 percent, compared with losses of 16.44 percent for the rebalanced portfolio and 17.62 percent for the unrebalanced portfolio.

• Return relative to risk: Arithmetic average annual return divided by standard deviation was 1.07 for the S&P 500, 1.11 for the annually rebalanced portfolio, and 1.09 for the unrebalanced portfolio. Using average annual return divided by zero-target downside deviation—a Sortino-style measure—the ratios were 3.17, 3.39, and 3.17, respectively. Gold therefore improved risk-adjusted performance when the 10 percent allocation was maintained but produced almost no improvement in downside-adjusted performance when the portfolio was allowed to drift.

Why Rebalancing Mattered

The unrebalanced portfolio did not remain a 90/10 portfolio. Stocks substantially outperformed gold during much of the period, causing gold to become a progressively smaller share of the portfolio.

By the beginning of 2025, gold represented only about 3.5 percent of the unrebalanced portfolio. Gold’s strong performance during 2025 raised its share to approximately 4.8 percent by year-end, but that remained far below the original 10 percent allocation.

The portfolio therefore had much less gold available to cushion stock-market losses than an investor might assume from its original allocation. An investor who chooses a 10 percent gold allocation for diversification cannot establish the allocation once and expect its protective role to remain unchanged.

Rebalancing periodically sells some of the asset that has performed better and purchases more of the asset that has performed worse. That can feel uncomfortable, but it is precisely what preserves the intended allocation and its diversification benefits.

What Semivariance Adds

The standard-deviation results suggest that adding gold modestly reduced volatility. The semivariance results tell a somewhat stronger story: maintaining the gold allocation reduced downside risk by considerably more than it reduced overall volatility.

Standard deviation fell by about 7 percent when the portfolio was rebalanced annually. Zero-target semivariance fell by approximately 18 percent.

This distinction matters because reducing downside losses is one of the principal reasons investors hold gold. Treating unusually large positive returns as a form of risk can obscure the value of an asset whose intended purpose is protection against adverse outcomes.

The number of negative years did not change. All three portfolios lost money in 2018 and 2022. Gold did not prevent those losses, but annual rebalancing reduced their severity.

Because semivariance squares each shortfall below zero, reducing a large loss can materially reduce measured downside risk even when the number of losing years remains unchanged. Semivariance therefore captures both the occurrence and magnitude of negative returns, not merely their frequency.

Important Qualifications

This is an illustration rather than a definitive finding about gold. Sixteen annual observations provide a relatively small sample, and only two years had negative S&P 500 returns. The semivariance estimates therefore depend heavily on what happened in 2018 and 2022.

A more rigorous analysis would use monthly returns, producing roughly 192 observations over the same period. It could also compare different downside targets, such as the Treasury-bill return, inflation, or the minimum return needed to finance retirement spending.

The period also strongly favored U.S. equities. The S&P 500 produced exceptional returns, causing any allocation to gold to reduce total wealth. A different starting date could produce different results.

Finally, semivariance is not the only measure of downside risk. Expected shortfall, maximum drawdown, and recovery time provide additional information about severe losses and the experience of remaining below a previous portfolio peak.

Conclusion

Adding 10 percent gold modestly reduced returns but also reduced portfolio risk. The improvement was more apparent when risk was measured by semivariance rather than standard deviation because gold’s principal benefit was reducing negative outcomes rather than eliminating fluctuations in both directions.

That benefit largely disappeared when the portfolio was not rebalanced. The broader lesson is therefore not simply that every investor should own 10 percent gold. It is that diversification must be maintained rather than merely initiated—and that conventional volatility may not fully measure the value of an asset whose purpose is to moderate losses.

Appendix: How to Reproduce the Calculations

The calculations can be reproduced in a spreadsheet with one row for each calendar year from 2010 through 2025.

Step 1: Enter the Annual Returns

Create the following columns:

• Column A: Year

• Column B: S&P 500 total return

• Column C: Gold total return

• Column D: Annually rebalanced portfolio return

Enter the years 2010 through 2025 in cells A2 through A17.

Enter returns as decimals. A 10 percent return is entered as 0.10, while an 18 percent loss is entered as -0.18.

For example, the 2022 entries are:

• S&P 500: −18.18 percent, entered as -0.1818

• Gold: −0.77 percent, entered as -0.0077

Step 2: Calculate the Annually Rebalanced Portfolio

For each year, multiply the S&P 500 return by 90 percent and the gold return by 10 percent.

If the S&P 500 return is in cell B2 and the gold return is in C2, enter the following formula in D2:

=0.9*B2+0.1*C2

Copy the formula down through D17.

This calculation assumes that the portfolio is restored to 90 percent stocks and 10 percent gold at the beginning of every year.

Step 3: Calculate the Portfolio Without Rebalancing

Create six additional columns:

• Column E: Beginning S&P 500 value

• Column F: Beginning gold value

• Column G: Ending S&P 500 value

• Column H: Ending gold value

• Column I: Beginning total portfolio value

• Column J: Unrebalanced portfolio return

Enter the initial investments:

• In E2, enter 9000.

• In F2, enter 1000.

Calculate the ending values for 2010:

• In G2, enter =E2*(1+B2).

• In H2, enter =F2*(1+C2).

Calculate the beginning total portfolio value:

• In I2, enter =E2+F2.

Calculate the portfolio’s return for the year:

• In J2, enter =(G2+H2)/I2-1.

The ending values for one year become the beginning values for the next year:

• In E3, enter =G2.

• In F3, enter =H2.

Then calculate the next year’s ending values:

• In G3, enter =E3*(1+B3).

• In H3, enter =F3*(1+C3).

• In I3, enter =E3+F3.

• In J3, enter =(G3+H3)/I3-1.

Copy the formulas down through 2025.

Do not restore this portfolio to its original 90/10 allocation. Its weights change automatically as the two investments produce different returns.

Step 4: Calculate Ending Values and Compound Annual Returns

For the S&P 500 portfolio, the ending value is:

=10000*PRODUCT(1+B2:B17)

For the annually rebalanced portfolio, the ending value is:

=10000*PRODUCT(1+D2:D17)

For the unrebalanced portfolio, the ending value is:

=G17+H17

The compound annual growth rate, or CAGR, is:

=(Ending value/10000)^(1/16)-1

The resulting compound annual returns were:

• S&P 500: 14.02 percent

• Annually rebalanced portfolio: 13.66 percent

• Unrebalanced portfolio: 13.62 percent

The corresponding ending values were approximately:

• S&P 500: $81,563

• Annually rebalanced portfolio: $77,605

• Unrebalanced portfolio: $77,100

Step 5: Calculate Standard Deviation

Standard deviation measures the variability of all annual returns, whether positive or negative.

For the S&P 500, use:

=STDEV.S(B2:B17)

For the annually rebalanced portfolio, use:

=STDEV.S(D2:D17)

For the unrebalanced portfolio, use:

=STDEV.S(J2:J17)

The results were:

• S&P 500: 13.89 percent

• Annually rebalanced portfolio: 12.94 percent

• Unrebalanced portfolio: 13.18 percent

The lower figures for the diversified portfolios indicate that adding gold reduced overall volatility.

Step 6: Calculate Zero-Target Semivariance

Semivariance measures only returns below a selected target. The target in this analysis is zero, so positive years contribute nothing to downside risk.

Create three more columns:

• Column K: S&P 500 squared downside return

• Column L: Rebalanced portfolio squared downside return

• Column M: Unrebalanced portfolio squared downside return

For the S&P 500, enter in K2:

=MIN(B2,0)^2

For the rebalanced portfolio, enter in L2:

=MIN(D2,0)^2

For the unrebalanced portfolio, enter in M2:

=MIN(J2,0)^2

Copy all three formulas down through row 17.

Calculate the average of each column:

• S&P 500 semivariance: =AVERAGE(K2:K17)

• Rebalanced portfolio semivariance: =AVERAGE(L2:L17)

• Unrebalanced portfolio semivariance: =AVERAGE(M2:M17)

Positive years remain in the calculation as zeros.

The resulting semivariances were:

• S&P 500: 0.002196

• Annually rebalanced portfolio: 0.001805

• Unrebalanced portfolio: 0.002066

The rebalanced portfolio’s semivariance was approximately 18 percent below that of the S&P 500.

Step 7: Convert Semivariance to Downside Deviation

Because semivariance is expressed in squared-return units, its square root is easier to interpret.

Use:

=SQRT(semivariance)

The resulting downside deviations were:

• S&P 500: 4.69 percent

• Annually rebalanced portfolio: 4.25 percent

• Unrebalanced portfolio: 4.54 percent

Downside deviation expresses below-target risk in percentage-return terms, just as standard deviation expresses overall volatility in percentage-return terms.

Step 8: Compare Return With Risk

First calculate the arithmetic average annual return for each portfolio:

• S&P 500: =AVERAGE(B2:B17)

• Annually rebalanced portfolio: =AVERAGE(D2:D17)

• Unrebalanced portfolio: =AVERAGE(J2:J17)

The conventional return-to-volatility measure is:

Arithmetic average annual return ÷ standard deviation

The resulting ratios were:

• S&P 500: 1.07

• Annually rebalanced portfolio: 1.11

• Unrebalanced portfolio: 1.09

This measure is the inverse of the coefficient of variation when average return is positive. It also resembles a Sharpe ratio with a zero risk-free rate, although no risk-free return was subtracted in this analysis.

The downside measure is:

Arithmetic average annual return ÷ downside deviation

The resulting zero-target Sortino-style ratios were:

• S&P 500: 3.17

• Annually rebalanced portfolio: 3.39

• Unrebalanced portfolio: 3.17

The calculations show that adding gold modestly improved return relative to overall volatility. Its benefit was more apparent when risk was defined as downside loss—but only when rebalancing maintained the intended gold allocation.

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