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.
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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