Negativity Is Not an Investment Strategy

The 60/40 portfolio is dead.

The 4% rule will never work anymore because bond yields are so low.

Tech stocks are going to see a spectacular crash. Just wait.

The U.S. stock market is running on borrowed time. Valuations can’t go up forever.

Foreign stock prices are depressed for a reason. No one wants to invest overseas.

The real estate market is being propped up by low interest rates. Just wait until they rise.

The only reason markets are up is because the government has thrown trillions of dollars at the economy. This can’t last.

The global debt bubble is going to lead to the biggest crash in history. You’ll see.

The private markets and IPO stuff is bananas. Look at the Snowflake IPO this week — 1999 all over again.

I understand why people are negative about, well, everything. 2020 hasn’t exactly been a walk in the park. There’s plenty to worry about these days.

You could argue that the investing landscape has never been harder than it is today considering the level of interest rates around the globe.

T.I.N.A. (there is no alternative) was originally rolled out as a way to explain why stocks have remained so resilient the past decade or so but it would probably make more sense right now as There Is No Answer.

As in, you either accept volatility in risk assets or accept no returns in high-quality bonds. I’ve spent months and months wracking my brain about this and there truly are no easy answers.

But you still have to invest.

You can’t bury your money in your backyard or keep it all in cash when there is no such thing as a risk-free rate of return.

Complaining about the Fed is not going to help fund your retirement. Making fun of Robinhood speculators does not in fact create alpha. Being mad at the stock market for not dropping further during a pandemic doesn’t help fund your child’s 529 plan.

Any position you take in regards to your portfolio involves risk. Investing in stocks is risky. Bonds are also risky. Crypto, private equity, hedge funds, real estate and every other financial asset involve risk-taking to make (or lose) money.

But guess what else involves risk — doing nothing!

In fact, doing nothing with your money is the biggest risk of all.

There are no guarantees when investing your money in risk assets. Maybe you’ll lose a boatload of money investing in risk assets. In fact, you almost certainly will at times. There is no way to completely hedge risk out of the equation when trying to grow your capital.

There is a way to guarantee awful outcomes with your savings — complain about the markets and don’t do anything with your money.

If you never take any risk, you will never have enough saved for retirement. Being pessimistic and sitting on the sidelines at all times guarantees you will lose money to inflation over the long-term.

Burton Malkiel shared the following in the latest edition of his classic A Random Walk Down Wall Street:

An investor with $10,000 at the start of 1969 who invested in a Standard & Poor’s 500-Stock Index Fund would have had a portfolio worth $1,092,489 by April 2018, assuming that all dividends were reinvested. A second investor who instead purchased shares in the average actively managed fund would have seen his investment grow to $817,741.

The implication here is the superiority of index funds over actively managed mutual funds. But do you know what would have done far worse than investing in active funds? Doing nothing with your money.

The returns for the actively managed universe of funds weren’t as good as index funds but they were still pretty darn good over close to 5 decades.

Even investing your money in below-average funds would have produced ridiculous growth of your capital over the long-term. But you had to actually stay invested to attain those below-average gains.

The active vs. passive debate is far less important than the optimistic vs. pessimistic divide. I’m not saying you have to be a perma-bull who completely ignores the fact that markets go down as well as up sometimes.

Perma-bulls fare better over the long haul than perma-bears but you also have to be realistic about risk.

However, the seduction of negativity can lead you to sit on your hands at all times and that’s the worst strategy of all.

Complaining can be cathartic at times but it’s not an investment strategy.

You still have to invest in something if you wish to grow your capital.

Further Reading:
The Art of Doing Nothing

 
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