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Things I Think I Know

A friend who regularly reads this blog remarked to me recently that I should write a book titled I Don't Know But Nobody Else Does Either.  As tempting as that is, I think it means I've probably taken this whole "nobody knows anything" thing a little too far.

The truth is that the business of financial advice is built around certainty...if you've ever watched CNBC you know what I'm talking about. They usually bring some guy on in a $3,000 suit to tell you his views on the markets and why they're going to do up, down, or sideways. The track record of these "experts" is dubious at best but that doesn't stop them from churning out new predictions almost daily.

Well, I hate to break it to you but I don't know which way the markets are going over any short period of time (I also don't own a $3,000 suit). I do know, however, that there are a handful of certainties in planning and investing...I've outlined them below.

So here are some things I think I know:


Human behavior is the one investment variable that’s impossible to solve for. It’s also probably the one advantage you have that will never be arbitraged away.

Financial planning is hard.  Sticking to a plan is even harder.

Spreadsheets are rational…the world isn’t.  Everything makes sense in theory and nothing makes sense in reality.

Market forecasts are usually wildly inaccurate because saying that things will be ok and average out over time doesn’t garner headlines.  Although, things are usually ok and average out over time.

Stocks will probably outperform bonds over the long haul but there will be really long, painful periods of time when they don’t.  These periods of underperformance are the price of admission for owning an asset class with a higher expected return.

Owning index funds and earning a market return is an unbelievably great outcome.  You'll beat the large majority of the investing population doing it that way...but it sure is boring.
 
There is no such thing as a free lunch.  
Higher return = higher risk.
 
Real estate is more volatile than you think.  
You only get to see the actual price of it twice: when you buy it and when you sell it.

Proper diversification means always having to say you’re sorry.  Everything shouldn’t work in concert…some asset class, geography, or company will undoubtedly always be a drag on performance. And that’s OK.

This time isn’t different.  Ever.

Everything averages out over time.  Baseball players hit their average.  Markets do, too.

Luck plays a vital role in any investment strategy.  It’s hard to admit it but history has proven it too many times for it not to be true.

Return sequences matter.  Just ask someone who retired in 2007 versus someone who retired in 2017.

Nothing is clearer than identifying market excesses with the benefit of hindsight.  And nothing is more difficult than identifying them in real time.

If you spot a bubble, buy it.  Things tend to go up until no one thinks they can go up anymore…and then they really go up.

Money provides optionality.  It can act as either a call or a put option on happiness.

All wealth is relative.  If Jeff Bezos woke up tomorrow with $100 million, he would feel poor. If I woke up with $100 million, I would be rich.

Assuming you have some of both, time is infinitely more valuable than money.  Ask an old person.
 
Investing is easy.  Being human is hard.

With all of that said, I'm not willing to say I'm totally certain of any of it.