They say the four most dangerous words in investing are “this time is different.”
The idea, of course, is that the sun will continue to rise and set, the seasons will change, the markets will rise and fall and we’ll continue to visit the grocery. Life isn’t clockwork, but even in the midst of major disruptive events like the Great Depression or the rise of Hitler and the onset of the Second World War, we continue on.
Indeed, during the most extreme decade of economic dislocation in the last 100 years, from 1938 – 1948, inflation-adjusted annualized returns for a 50% stock/50% bond portfolio were roughly -2%. If you think about what was happening in the world from 1938 – 1948, life was pretty grim. But many of us might be surprised the markets didn’t literally fall off a cliff during that time.
Of course, past performance is no guarantee of future results and we live in interesting times. Should we look at this time as different? We are certainly in unprecedented territory as far as central bank activity is concerned. We have more debt and greater wealth and income inequality than at almost any time in our history. Partisanship is at its highest level in decades. And the stability of our global environment is at risk.
On the other hand, technology is helping us move away from fossil fuels. We are learning new ways to address human health concerns. We are becoming more widely interconnected and inclusive in ways previously unimagined. And we are increasingly aware of our collective impact on the environment.
But at this point in history, we rely on the global capital markets to help make sure there is food on the table, clothes in the closet, and a roof over our heads. In short, the capital markets need to work. Make no mistake, we should work to recreate a local foundation for our economic activities to help make us more resilient or, in the parlance of the electrical or technology grid, to create redundance. And parallel, market-based efforts like crowdfunding, cooperative financing, direct public offerings and other grassroots endeavors are changing our economic relationships in ways that have yet to be fully explored and developed.
Nevertheless, if you’re feeling some trepidation around our apparent or perceived trajectory, no matter who wins the Presidential election or otherwise, then you should ask yourself, what harm can really come from selling everything and waiting out the “storm”? Practically speaking, there may be transaction costs, capital gains issues, the cost of inflation on cash holdings, and the ever-present bugaboo, market timing – once you’re out, at what point do you feel comfortable enough to get back into the market?
Behavioral finance tells us that people tend to panic and sell near the bottom of markets and buy back in near the top. This is exactly the reverse of “buy low, sell high” and predictably, lowers investor return relative to investment return considerably.
Every person’s situation is different. Each of us has different capacities and tolerance for risk. So, you should ask yourself, what would I do if the market took a 20% dive? How will a ten-year period of mixed returns (both good years and bad ones combined) averaging out to 2% or so before inflation impact my plans? How might holding cash or buying real estate or some other asset not only protect me, but provide for my future needs as well? Always, one needs to look at time horizon and diversify accordingly.
We believe we all have a hand in creating our own realities. We can allow ourselves to be sucked into the vortex of negativity. We can obsess on the latest abominations and insults and tragedies OR we can do something about them. We can support meaningful change through our daily actions. We can treat one another with respect and dignity. And we can choose to have our money work toward positive ends, not only personally, but locally and globally as well.
Is this time different? We probably won’t know until many of us are long gone. But in the end, who decides our fate? WE DECIDE.
Please don’t hesitate to reach out with any questions or concerns you may have.
With a host of unprecedented challenges facing us as a society and as an electorate, the question remains, what is different about this period in our history and what, if anything, should we do differently?