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An Ocean of Contradictions

I listened to a long-form podcast about Japan and how its empire came to be so aggressive, militaristic, and tragic during the 1930s and 40s.  There is no simple way to distill Japanese culture and explain it.  Their culture is nuanced, deeply historic, reverent, and steeped in honor.  It is also full of contradictions.  It got me thinking about contradictions in our culture – specifically as it relates to investing and financial planning.

How Important is History?

We look at charts and graphs a lot in finance.  How did the Dow Jones perform from 1990 to 2010 for example.  Or what does the yield curve look like today compared to 10 years ago?   History is full of analogues, yet it rarely repeats itself as a photocopy. We look at history all the time to make sense of today and predict tomorrow.  It’s a contradiction because (1) we know where we have been, that’s history; (2) we know where we are right now, it’s the present; and (3) we know nothing for certain about what is going to happen, because it’s in the future.  My argument is open to some debate, but probably not much.   Yet we constantly look in the rearview mirror to see where we are going through the front windshield. It’s a strange and easy contradiction to lean into.

In the stock and bond markets, contradiction is endemic to the ecosystem.  Analysts constantly review past fundamentals and technical charts to see how they might be able to predict future outcomes.  Would we be wise to let go of the past?  Probably not, but don’t take past performance as prescriptive truth either.  Perhaps Mark Twain said it best: “History does not repeat itself, but it often rhymes…”

Timing the Market

Boy oh boy, this one is rife with contradictions.  Buy low.   Sell high.  Win.  Repeat again.   Sounds cool, but it’s not entirely how it works.  First, not everything goes up. Second, how can one possibly time the market so precisely?  They cannot…at least not repeatably.  That is not to say that time itself does not matter because it most certainly does.  Often, the time piece that matters most is how long one stays in the market while holding assets before they ultimately sell them.  As a nod to our contradictions theme, we need to be clear: holding an underperforming asset is not going to get better with time.  Although sometimes it does…Ugh.  Contradictions are enough to make you go crazy!

It's logical to say we want to avoid buying at the top of the market and selling at the bottom, right?   Wait a second, here comes another contradiction.  A recent analysis from JPMorgan illustrates that investing at new market highs for the S&P 500 compared to investing on any other day does NOT yield worse results for the investor!  Did not see this one coming, honestly.  It gets better.  There is evidence that shows investing at new market highs yields stronger returns over longer time horizons!

Source: JPMorgan, March 2024 - ** “Invest on any day” represents average of forward returns for the entire time period whereas “Invest at new high” represents average of rolling forward returns calculated from each new S&P 00 high for the subsequent 3-months, 6-months, 1-year, 2-year, and 3-year intervals.

JPMorgan research aside, if you are recently retired and the market goes into a protracted downturn, you may have another issue called sequence of return risk. Time is a tricky space and its contradictions can be immobilizing to investors dismay.

How To Manage It All?

Good advice may be: just keep buying!  Of course, buying smart is better than buying blind.  That said the stock and bond markets are supremely forgiving to long-term investors.  Still, for most people, there comes a time when buying is no longer possible, for example in retirement.  At some point prior to retiring, a strategy known as financial planning may just be the best advice for managing the myriad contradictions of investing.  Done well, embracing a financial planning process provides a north star for YOUR GOALS.  If you don’t have a plan, you may find yourself in a death spin of contradictions coming from all different sources like financial news, social media, your brother-in-law who loves to trade stocks, geopolitics, and history itself! Trust us, financial planning is one of the best and most durable choices you can make to help navigate an ocean of contradictions.


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