Josh Brown was kind enough to do a brief Q&A with me about my general macro thoughts and the new book. Here’s a snippet:
JB: You cite “Stocks for the Long Run” as a myth we need to get over as investors – and yet there is not a single twenty year period going back to 1926, an eight decade span, in which stocks have shown a negative return. In addition, stocks have returned something on the order of 5% per year during this period even after adjusting for inflation and taxes – bonds have shown something closer to 1% when adjusted for the same factors during this time. So, why not “stocks for the long run”? What am I missing?
CR: I am a hopeless optimist at heart as I think most Americans are, but I also know that we have to look at the bigger picture here and keep things in perspective. I say, be optimistic in the long-run, but not naively optimistic. While it’s true that stocks are generally a good long-term bet it’s also true that markets are comprised of irrational participants operating in a complex dynamical system. And that means this system is actually much more fragile than many presume. And that’s why we see prolonged periods of poor equity market performance such as Japan over the last 20 years, Greece, China, etc. The US economy and markets are a powerhouse, but I don’t think it’s prudent to assume that that powerhouse is impervious to sustained periods of poor performance as we’ve seen in many other global equity markets in recent decades.
More importantly, our financial lives are not clean linear 20 or 100 year periods. Our financial lives are made up of a series of specific events that require stability and predictability. We go to college in our teens, we get married in our 20s, we have kids, we buy the new car, we buy the house, we plan for the kids’ tuition, we plan for retirement, we break a hip, etc. Our lives don’t start and stop. Life is ALWAYS happening. And our financial lives should reflect that. I think too many people view their financial lives as having a start and stop date, apply some “long-term” approach to it and then when 2008 disrupts their financial life they have an emotional breakdown, become susceptible to our inherent biases and make matters even worse. Treating your portfolio as a place to create stability and predictability as opposed to constantly trying to “beat the market” and maximize returns is an approach that applies to our lives in a much more practical and rational way. While it’s important to remain optimistic in general, I think it’s a mistake to position ourselves in such an optimistic way that it can actually create near-term instability.
Read the whole interview here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.