Posts tagged stocks

I just read about a Vanguard retirement planning calculator recommending someone put 100% of their money into the stock market. Well, 100% in any asset class is gambling, not investing.

The Vanguard questionnaire assumes many things about the future that history simply doesn’t support in terms of market risk. The past does not predict the future. Just because U.S. markets have had good runs in the past does not mean they will have those runs on your particular timetable.

The last part is important because the investment industry will often show a chart with 200 years of U.S. stock returns (or some similar very long time horizon). But these charts make a lot of assumptions:

1) That U.S. stock market history will repeat the exact same way (it won’t).

2) That any person or organization was able to capture those returns consistently (they didn’t).

No Campaign Plan Survives First Contact with the Enemy

“No campaign plan survives first contact with the enemy”

The above is a famous quote attributed to Helmuth von Moltke the Elder, a Field Marshal for the Prussian Army and military strategist. This quote has direct bearing on investing because people come up with all sorts of plans for what they think their favorite asset class will do. But when that plan enters the battle of the markets, things often go wrong.

Let’s pretend what 10% a year average stock growth over 200 years with starting investment of $1,000 would be:

$189,905,276,460.46

Looks pretty good, right? Well I don’t know of any individual that turned $1,000 into $189 Billion dollars, do you? Why not?

Ignoring the obvious that people don’t live 200 years, between Point A and Point Z on a timeline of 200 years of history you have a lot of things going on: Wars, depressions, inflations, high taxes, low taxes, government bloat, price controls, shortages, bankruptcies, trade wars, embargoes, market bubbles, market panics, etc. So while someone thinks they are going to take in their 10% a year in stock returns to easy riches, the reality is that the road is very bumpy and uncertain.

Stock Markets Don’t Care About Your Retirement Goals

In fact, I put the odds of an individual in 100% stocks capturing the historical average market returns over their lifetime at basically zero. That’s right, zero.

Why? Two reasons:

1) You’re human and your emotions are going to get in the way.

2) Stock markets don’t care about your retirement goals.

You may invest for something like 20-40 years in many cases and then retire. You may even need that money earlier for kids, emergencies, job loss, etc. So if that period is great for stocks and you make 10% compounded a year (before fortuitously cashing out before any market crash or prolonged decline of course) that’s great. But more realistically you’re not going to do that.

Chances are the stock volatility is going to rattle you so much eventually you’ll flee in terror. However even if you have nerves of steel, future market events are likely going to get in the way regardless. Crashes, prolonged declines, negative real returns after inflation, etc. These market events may get in the way right when you need your money. The market event that deals a serious blow to stocks is not going to wait around until it is a convenient time for you. No, it’s going to be a surprise as it always is.

Bad outcomes in the market can be absorbed with a diversified portfolio that is not 100% stocks. But if you’re 100% stocks? Well, you’re going to get a real shellacking eventually.

Bad outcomes in the market can be absorbed with a diversified portfolio that is not 100% stocks. But if you’re 100% stocks? Well, you’re going to get a real shellacking eventually.

Avoid Extremes in Investing

Be careful of anyone advocating 100% in any asset class, whether it is stock bugs saying 100% in stocks, gold bugs saying 100% gold, or bond bugs saying 100% in TIPS. These are all extremes and I always recommend you avoid extremes in investing. There is no asset class that is 100% safe, 100% risk free and 100% guaranteed to do what you expect it to do. It’s best to just acknowledge this weakness and develop a plan to deal with it. That plan should have you across multiple asset classes in a balanced way and those asset classes should not all be stocks.

I think putting 100% of your money in stocks is a terrible idea and will eventually lead to terrible outcomes. Vanguard should be ashamed for recommending this kind of allocation based on investor and market behavior. Me? I’m sticking with a widely diversified allocation like the Permanent Portfolio to take care of me no matter what is going on. Even if you’re not a Permanent Portfolio follower, please consider holding other assets besides just stocks.

Yeah, the new book we’re writing is going to talk about a lot of these issues. The industry constantly tries to sell people on owning way too much in stock exposure. Stocks are much riskier than people give them credit, even over the long run. Make sure whatever plan you develop for investing can survive first contact with the markets by being diversified.