I’ve had tons of great interactions with David. He’s a good guy.
But I gotta admit—my face contorted when I read his tweet last week.
I don’t want to bash David, because
- First, Twitter does not permit nuance—one tweet limited to only 280 characters. David’s ideas are more detailed than 280 characters allows.
- And second, the Twitter algorithm wouldn’t reward nuance even if it was there. Nuance doesn’t sell. Confidence sells. Impossible sells. So, I understand what David said and why he said it.
Nevertheless, I want to use David’s tweet as a springboard for three important ideas.
Idea #1 – It’s Possible to Lose
Bear markets—where the stock market value drops by 20% or more from its previous high—have occurred 12 times since 1929.
|Years of Bear Markets||Percent Drawdown from Previous High|
|1929 – late 30s (Great Depression)||-86%|
|1956 – 57||-22%|
|1961 – 62 (Flash Crash of ’62)||-28%|
|1968 – 70||-36%|
|1973 – 78 (Bretton Woods + Oil Crisis)||-48%|
|1980 – 82||-27%|
|1987 – 88 (Black Monday)||-34%|
|2001 – 05 (Dot Com Bubble)||-49%|
|2008 – 09 (Financial Crisis)||-56%|
The market ebbs and flows, oscillating between “unsustainable optimism and unjustified pessimism,” as Ben Graham opined. If we believe the assumption that stock prices are current unsustainably optimistic, then it’s believable that a serious bear market could happen in the next few years.
But lesser corrections—typically defined as at least a 10% drawdown—occur even more frequently. Since 1950, there have been 37 corrections of 10% or more. That’s more frequent than one every two years.
Losing is impossible? Far from it. History has seen plenty of losing periods. Losing will happen. That’s part of investing. If you want to invest, be prepared to lose.
Idea #2 – More Time = Less Losing
But in David’s defense, sufficient time in the market makes losing almost impossible. At least that’s what historical market returns show us.
The following chart asks: “If you held a broad stock index fund for X years—starting on any date in stock market history—would you make a profit?” And then it repeats that question for every time period available. e.g. all 1-month periods, all 1-year periods, all 5-year periods, etc.
If you’re only investing for a month or a year…you might lose money! 38% of all 1-month periods and 28% of 1-year periods have been losers.
For five years or ten years? The odds are more in your favor.
And for 20 years or 30 years…yes – it would have been almost impossible to lose money.
David’s idea becomes more true if we add nuance. That nuance is time.
It’s impossible to lose…given enough time!
Idea #3 – Smart People Need–And Deserve–Nuance
When I compared Dave Ramsey to Darth Maul, I pointed out how Dave lacks faith in his listeners’ intelligence. Dave stays simple and speaks in absolutes. Nuance requires intelligence to understand. So Dave avoids it.
The Best Interest is not Dave Ramsey.
You guys are intelligent. You understand nuance. And it’s important that you choose to read nuanced points of view.
Why? Because the real world is nuanced. Hiding nuance is equivalent to hiding the truth. In the long run, hiding the truth harms us. Our results suffer.
Ray Dalio promotes “radical transparency” as a means to never hide the truth. And Dalio believes his Bridgewater Associates’ amazing investing success can be attributed to their policies of radical transparency.
I’m a huge proponent of smart, safe, long-term, dollar-cost-averaged investing. Here’s exactly how I invest. And since we’re sitting amid one of the best stock market periods ever, it’d be easy for me to toot my own horn.
“Invest like me. Look at my success.”
But I’m also a huge proponent of telling you that my investments will probably go down someday. That’s the nuanced truth. Markets ebb and flow and I expect my portfolio will do the same. I’m planning on it!
Yes, I do think my portfolio will continue to go up (given enough time). I certainly want it to go up. But I’m planning—and have accepted—eventual periods of decline.
You’re smart enough to understand that.
Impossible is Nothing
Investing is a risk. You might lose your money. But with risk comes reward—you ought to be paid for your risk-taking. That’s Investing 101.
“Impossible to lose” implies there is no risk. I don’t want that! You shouldn’t want it either. No risk means no reward.
Instead, arm yourself with the knowledge of how investing works. That’s what The Best Interest is all about. Run a fire drill on your investments. Plan for the day when you’ll lose money—and remind yourself today that you won’t feel good about it!
But also plan for the fact that—most likely—your long-term investing plans will work out favorably. That’s exciting! Woohoo!
Special thanks to David for being a good sport and agreeing to let me write about him. You can check out David’s financial and fitness journey at @moneyfitjourney on Twitter and his blog at Money Fitness Journey.