It has never been easier to make money in the stock market, real estate, or crypto.
And it has never been harder to be a diversified, long-term investor.
The 60-40 portfolio is dying.
Passive investing is quickly losing its lustre, too.
Consider this: ditching the world tracker in favour of five Big Tech stocks a decade ago would have generated annualized returns between 20% and 30%.
These are the kinds of returns that private equity and hedge funds would kill for (and often fail to deliver).
Here’s another fun fact: going all in on Tesla would generate ~75%. Per year.
And to top it all off, apparently someone bought $8k worth of a shitcoin Shiba Inu coin last August, which is now worth $5.7 billion.
This wallet bought roughly $8,000 of $SHIB last August.
It's now worth $5.7 billion.
From $8,000 to $5.7 billion in roughly 400 days.
We may actually be looking at the greatest individual trade of all time. pic.twitter.com/LtdgQ83bKP
— Morning Brew ☕️ (@MorningBrew) October 27, 2021
Nuts, isn’t it?
There’s a whole generation of investors who simply don’t know what a prolonged market downturn looks like.
Sure, they’ve seen a wobble or two – but then governments and central banks come riding to the rescue and everything quickly became hunky-dory again.
Well, guess what – it won’t always be this way.
Mathematical Certainties
Here’s the deal – there will either be a nasty market correction at some point, or investor returns will simply evaporate.
The one and only reason the market has delivered a 10% return over the past century is that it’s risky.
Not in the long term, but definitely in the short term. And thus, investors required a return of 10% to compensate them for that risk. Hence you had this happen:
The moment the stock market starts looking like a risk-free (or low-risk) way to make money, it will attract more inflows, inflating valuations – and reducing returns.
Some people may argue that the central banks are now essentially underwriting the market performance by acting as a buyer of last resort.
Perhaps – especially in situations where you have significant volatility and systemic risk.
But my sense is that they will be much less inclined to act if we have a slow, prolonged bear market.
One that feels like death by a thousand cuts, where your portfolio declines in value for months and years – notwithstanding all the contributions you are making.
One that differentiates between the true investors and the ones who jumped on a bandwagon when it looked like the only way is up.
In the meantime, what’s a sensible, long-term investor supposed to do in an environment like the one today?
Smoke and Mirrors
There are a couple of things worth reminding yourself.
First of all, it may seem like everyone around you is getting rich while you are getting left behind, which isn’t true.
Sure, some folks went long Tesla and Alphabet ten years ago. But the vast majority of people who hold those stocks hold them through a nicely diversified global tracker or an S&P 500 ETF.
You know, people like you and me. The very same people who are up 27% YTD:
The other thing you’ve got to acknowledge and accept is that over time, much dumber people will get much richer than you.
It’s pretty much a guarantee. In a normal distribution of returns, someone will always end up two standard deviations to the right of the mean. It’s also unlikely to be you – and that’s okay.
However, the most important thing you’ve got to remember is that yes, some folks will get rich on the way up. But many more will get rich on the way down.
Those early retirees you see today? Well, they are the ones who kept on buying when S&P went nowhere for a decade in the aughts.
And the people who made a killing in tech stocks (see above) are the ones who kept on buying after the dot-com crash.
They were the ones brave enough to pile into Netflix and Amazon ten, fifteen, or twenty years ago. They were also strong enough to hold on for all that time.
It’s nearly impossible to get there on willpower alone. Fortunately, the guaranteed way to get there is to set your contributions on autopilot, preventing your lizard brain from screwing with you in an emergency.
Most importantly, do whatever you can to avoid getting blown out. The biggest part of winning the investing game is staying in it to begin with.
Keep an ample emergency fund. Have flexibility when it comes to your spending.
Don’t let the numbers in your brokerage account mess with your brain, leading you to inflate your lifestyle. De-risk your employment by keeping your skills and network up to date.
It won’t happen tomorrow, next month, or even next year – but you will get rich.
All it takes is time.
Have a wonderful weekend all – and happy investing!
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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Great post BoF. I’m a long time reader, but haven’t commented before – big fan of the blog and this one is on point.
Recently I’ve wondered a lot “how long can all this go on for?”
One fund I’m in, a technology index, has gone up so much I think “why oh why didn’t I go 100% in on it?”. But maybe it’s intuitive to only regret what you missed rather than be thankful you didn’t lose (or is that just me?).
I do remember lean years in the markets so I know it’ll end at some point, and you’re quite right, some will handle it well but others, perhaps not so much.
But the key is, you stick to your strategy. If you change your strategy, you don’t really have one!
I look forward to reading more from you 🙂
Thanks for the kind words Mr S.
As you say, we always benchmark ourselves to a better outcome, not a worse one. No one laments not going all-in on energy stocks a few years ago or doing a 100% allocation to Greece back in 2007.
Good to adapt but changing your strategy every day is not a strategy. Hope is also not a strategy I like, though some seem to be relying on it quite a bit these days!
Great, thought-provoking post!
Yeah, I feel like those who get rich in this environment will continue making the same decisions so they can ‘get more rich.’ But those strategies inherently carry “total ruin” risk which means a lot of folks who got rich recently will go very poor, very quickly.
A strategy that gets rich slowly will still get a person rich, albeit slower. The compensation for patience is that those strategies will generally keep the wealth around because they’re more diversified and low risk.
You get wealthy through concentrated bets.
You stay wealthy through diversified ones…
It’s true we got to hold on for dear life to stir that boat through the storm. That builds character, discipline and determination. Discipline is always more important then motivation. I have read in books motivation can run out.
Personally I am determined to make it to the other side. The journey is long and need that emergency fund.
On my journey to the outside a financial advisor has suggested I should insurance my brain 5% of my earning. He said that was my biggest asset and was my earning power and to insurance my savings if anything was to happen heaven forbids.
I am curious has anyone claimed on insurance on there financial journey either through health problems or accidents.
First time I hear of brain insurance!
That being said, I carry both disability and life insurance. Disability insurance to the tune of 70% of my earnings. Life insurance at 8x my annual salary.
Same for my wife. Thankfully no experience collecting on any insurance policies so far but am sure that if you go with a reputable carrier, you’ve got nothing to worry about (other than those sleazy insurance salesmen!)
Great post BoF.
50 year old and started investing in the late 90s. So seen some major events along the way.
Lesson to younger self?
“Monthly investment into index trackers (global or S&P 500).”
That’s it, do nothing else.
But that’s the hard part!
Note: I didn’t do it until the years ago… Sigh.
“Until years ago” sounds perfect! What are you sighing for?? It would have been a shame if it was “last month” but years ago is absolutely amazing
Sorry, it should say three years ago!
The most important lesson is the toughest one to learn.
As you can see, I am pretty worried about the new generation of investors. A lot of wealth will be destroyed before they learn the same lesson you (and I) did way back when!
Hi BOF, a good read as always.
It does seem unfair and annoying when we see dumb people calling themselves “investors” because they made 50x returns on GME, shiba, dogecoin and we are here just sticking to a well-researched strategy of index trackers. FOMO is doing its damage!!
Have you ever thought of buying a whole business yourself and just hire managers to manage its operation? Like Warren Buffett did during his early days.
For example you can buy a restaurant or a hotel and just hire some experienced managers to get it running. Have you thought about that at all?
Thanks Aaron.
To be honest, it’s not exactly my cup of tea. Being an absentee owner rarely leads to spectacular economic outcomes. You’ve got to be very hands-on and right now, I’m looking for ways to simplify my life, not make it even busier!
I suppose it’s similar to what I am doing with my properties where I have property managers looking after them. That being said, I still keep pretty close tabs on things and it takes some time and effort.
Oh, yes, since you already have a stressful banking job, it makes sense you don’t want anything to do with owning a business.
But what if you decided to quit banking tomorrow and pursued something less stressful?
9%-10% returns from the stock market may seem too low and you wanted a bit higher return to replace that cushy banking salary, what would you do? Going all in on real estate, leveraging to 75% LTV on all properties to achieve a net IRR of 18%? Or would you give another thought to the idea of purchasing a business, hiring a manager and “lightly” managing it?
It’s an intriguing question and one I haven’t really thought through to be honest
I guess it depends on the business. Would need to be something sufficiently attractive vs. those 10-15% real estate returns.
Food for thought I guess!
Every time I see a bitcoin or crypto youtube video, it physically hurts me and I shy away from watching that video. There will definitely always be someone dumber than me making outrageous amounts of money more than me.
I am staying the course and haven’t changed directions at all. It does get me wondering and I can’t help it…
I’ve come a long way on crypto over the past 2 years. Having done a ton of research, I think we should at least pay attention to it:
https://bankeronfire.com/crypto
That being said, my overall allocation is still way south of 1% of my net worth (albeit set to grow materially)
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