There are folks who are investing doomers. The next recession is here. The war will sink worldwide markets. AI is going to kill employment. Trump will destroy our economy. Biden is destroying our economy. What they tend to see (in this seriously incomplete list of fears) is the immediate future and/or their perception of that future, or they are anchored to a negative past like 2022 or the recession of 2007 to early 2009.
There are investing boomers - no, not the people born between 1946 and 1964 - people who believe that there is a positive future regardless of the present. What they see and feel are the results from the past and the ongoing development of technologies, advances in global trading, global decreases in poverty, and increasing lifespans around the world for example.
Here is a fundamentally positive, boom believing speech by Katherine Boyle, of Andreesen Horowitz, about “American Dynamism” (and I really love the “ESG-adjacent nonsense” comment!).
In that narrow window before the world changed, I also put out a thesis, maybe it was a little shocking or controversial to some of the people I work with and to my friends in San Francisco. In that essay, I said that my firm, Andreessen Horowitz, one of the largest venture capital firms in the world, was unabashedly and unanimously supporting America. That we were betting on America. And that this wasn’t some marketing gimmick or some ESG-adjacent nonsense, this was a real strategy.
We’re in the business of value creation. Of taking bets on things that get very big, very fast. Not only were we betting on America, but America and her allies are best off when we’re building technology companies that support the national interest.
We believe that a strong America means a strong world, a safer world. A more civilized world, which is a term we should use more often. And that technology is the backbone of maintaining this order of civilization and always will be.
We called this movement "American Dynamism."
If you plan to be invested for longer than twenty years (industry jargon for this amount of time you plan to be invested is Time Horizon), the boom/bull/up market is forever, and it almost does not matter what investing strategy you choose (so long as you stay with it). The real questions in this scenario are:
Can I stay invested that long?
Should I be invested that long?
If I am investing that long, what is the right way to invest?
And what comes after forever? For most of us, the time will come when some or all of our investments do not have a twenty-plus year of time horizon.
The Facts
Here are rolling returns for the S&P 500 in 1, 5, 10, and 20 year periods. The first thing you will note is annually the S&P is positive far more often than negative. Looking at the 20 year data, there are no negative rolling periods, with the minimum compounded return being .5%. It is extremely difficult to forecast a negative year. When you have time horizon, it makes far more sense, probabilistically, to remain invested.
This also holds true for a more diversified portfolio of 60% stocks and 40% bonds. In this case, you would need to hold on to to your investments for at least 13 years to ensure positive returns. Your time horizon does not need to be at least 20 years in this case.
Source: https://www.lazyportfolioetf.com/allocation/stocks-bonds-60-40-rolling-returns/
The doomer view is that the S & P is not stable, which is true, and it’s becoming more unstable in terms of the duration of time a company stays in the S & P. Does this induce fear in some people? Of course it does.
And the current doomer view is that the bond market is a terrible place to be, and it for sure was during the ZIRP years. And it was worse during the recent rising rate period. The “safest” bonds had the worst returns.
This was the period when the 60/40 was declared dead (Note, see above, it ain’t dead and never was. Hibernating? Sure). In 2022, with the S & P down 18.3% and the total bond market down 3.1%, the ‘ole 60/40 “returned” a walloping, negative 16.24%. That’s not the kind of volatility one expects from a relatively conservative portfolio. Was this result a significant probability? No. However, this result is in the probability set, so it “should” have been an expected result. But that is not how our brains work. The narrative is that bonds are a portfolio shock absorber (and even in this case, bonds contributed less to the value reduction than stocks, but the narrative is not one where bonds have this kind of temporary drop in value). Your brain loves to anchor on this kind of thing. It is painful and therefore memorable to have endured.
The doomer - “I hate my generation, I offer no apology”- sees this as a loss.
The boomer sees it for what it is, if you have the time horizon to deal with it - a temporary reduction in value. This has been true for our entire history of market performance data. Could it be different this time? It could. Is it? Not so far. The 60/40, this year, has (again) done its Phoenix routine. The S & P, as of this second, is up 24.7%. The Bloomberg Unhedged Global Aggregate bond index is up 3.89%. This puts your “dead“ 60/40 at 16.38% for the year. So what happened to my $1M over these two years?
It dropped to $837,600. Now it is back to $974,799. If 2024 gives us the average 60/40 return, you could then be at $1,050, 150. This is why you never interrupt compounding (which is essential to the boomer mentality, and at least, historically, it has worked).
The Wrap-up
I am not a member of the Forecasters’ of Fame (I wrote about this here, and you can find a more in-depth look here). It has no permanent members, although occasionally someone wanders in, accidentally, and often to great fame for their one time accuracy luck. I am fundamentally a quant and live by the probabilities, and was that way before I read Thinking In Bets, which bigly confirmed my approach to investing. The probabilities favor the invested, the boomer mentality, in the same way the probabilities in Las Vegas favor the house, barring a highly skilled player with a system and really good math and memory skills (in my world, here’s to you, the successful traders, of which there are few and of which we respect for their capabilities - but woe to the “normie” who tries to replicate this). The advantage is not necessarily large, and it is not all predictable in the short term. In the long term, though, a small advantage, compounding, produces terrific results.
The winners are strong of constitution and of faith - “Little bitty-boy, with a heart of steel”. They stick with it. The boomers.
As to “should you be invested this long?”, that is a function of your lifespan, your spending plan, your desire and capacity to earn income (whether that be as an employee or owner) from your labor, your saving plan and capacity, and other factors. This, to me, is the primary purpose of financial planning: both to figure this multi-variate problem out with some reasonable estimate and to prove it out over time, consistently re-modeling while you go.
Regarding the right way to invest, well, there are many, many approaches that work. I tend to prefer lower-cost, diversified approaches with a mix of indexing and more active solutions, with active tax-loss harvesting and rebalancing. I like to do those two things on a schedule, mindlessly, but there are times (hello Q4 2018 and Q1 2020, of recent note) when it pays to be really active with these, too. I will note that indexing is not passive (take a look at the S&P lifespan above) - but it is passive in the sense that you select an index and then let that index work. Can you be successful concentrating solely in real estate, or the S & P, or small cap, or emerging markets? Of course you can. But you better know what you are doing and be tolerant of much volatility (and I would suggest a decent, like 3-5 year, income/cash reserve, too).
What’s right for you, the everyday people? That is also a function of your beliefs, behaviors, and financial planning.
Thanks for reading. All feedback is a gift. Let us know if there is a topic you’d like us to cover.
Sundry
Most moving song this week:
Books read this week: The Ipcress File and The Lock Up
Historic decision in Colorado - following more than a few historic things. Now we see what’s next.
This week’s YouTube (https://www.youtube.com/@mjnewfield) is about year-end planning, of the most important kind - are you maximizing the value of your time?