Today I want to look at the bane of existence for everyone doing real financial planning, as well as the life blood of CNBC, stock newsletters, and other snake oil shenanigans. The person who believes, “this time is different.”
Imagine looking at two people from about 10 feet away. Pick two people who look quite different from each other (6 feet tall versus 5-6, 200 lbs or 145 lbs, you get it). Now, instead, look at them from 300 feet away (you stand on one goal line of a football field, they stand on the opposite goal line). Disparities between the two now become much less noticeable.Repeat the experiment from the observation deck of the Empire State Building. Look down at Fifth Avenue and tell me which of the pedestrians is above 6 feet tall, and which are below.
Much of what passes for investment planning revolves around observing things, and then trying to discern meaning from them. In other words, guessing what’s going to happen next. The truth is that no one knows what’s going to happen next, yet everyone knows what’s going to happen next. No, I did not just contradict myself. If you are wondering what’s going to happen in the next 5 minutes, then your guess is as good as anyone’s. Mine included. What is going to happen in the next 5 years is pretty much in the same category, although an entire industry profits greatly from your refusing to believe it.
The reality is that we just don’t know what’s going to happen next. We have decades of history, but the story that always resonates is the one that ends with “this time is different.” If you are measuring 30 year periods, then no, it almost certainly is not different. For the next 30 years, stocks will outperform bonds, cash, real estate, and quite possibly any other productive asset you can name. It will do this while experiencing greater volatility than most of those asset classes as well. Does this mean you should put all your money in stocks? Of course not. You don’t live in 30 year increments, you live every single day (that is, if you are doing it correctly). You will need cash to pay your bills, eat, travel, go to the doc, etc. You will need some place to live. You will need money in case of an emergency. You may want to give some of your extra money away.
Some things are more pressing that require you to give up the greater return of stocks, because the risk is just not worth it. That is called an “opportunity cost,” and life is full of them. Finding this balance, minimizing opportunity costs, and capturing the growth that is certain to occur over the next three decades is something I think we do well.
We believe in the promise of the future, and we think the world will be an exciting place to live. Yes, the future will be different, just not in any way anyone will be able to predict.
People who shouldn’t hire me, part 1: the market beater
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