Post hoc, ergo propter hoc

After this, therefore because of this.

History is what drives a lot of the decisions we make in our lives, arguably every decision we make.

Historical statistics drives almost every investor’s decisions.

History gives people reasons to make decisions, and satiates the rational part of our brain.

History has given rise to the popular notion that over the long-run, US equities are a good investment because they have gone up over the long-run in the past.

There are definite causalities to which one can attribute the consistent increase in the value of US equities. However, you have to be sure that those causes are always present in US markets, otherwise your fundamental assumptions will be wrong, and you’ll get burned.

In 2021, we witnessed a dangerous decoupling between the attitude of the US investor and the systems that validate the attitudes. We got burned in 2022.

We have to continue to be vigilant in ensuring our investment thesis is correct. The idea that you can drop all your savings in a US market index and watch it grow at 12% annually over the next 30 years is bogus, and carries more risk with it than many investors realize. The US has no guarantee to continue to be a global economic superpower to the extent that it has been the past decades, and even if it does, that doesn’t guarantee those 12% annualized returns from the US equities market.

A quick note about those 12% annualized returns. They aren’t 12% annualized returns.

First, we have to adjust for inflation. That brings it down to ~7–8% annualized returns.

Then, assuming the 20% federal and 8% state tax rate on realized long term gains, the annualized returns go to a very small real rate of return.

So unless you have a true conviction that the US market will continue to thrive over the next decades, it is not a wise financial decision to keep your money in broad US market indices.

The myth that you can make money by just putting money into a box is absolutely ludicrous.

You might be able to keep up with inflation, but you won’t grow your wealth by buying an index.

This isn’t to say that the US market won’t go up over the long-run. It may even achieve returns greater than that of historical returns. But it is imperative that you have a reason to be investing in the US market. If you are, it is imperative that you have conviction in the US macroeconomic outlook over your investment horizon.

If you don’t have that conviction, you may be better off finding conviction in an individual company, a sector of the market, or an alternative investment class.

Happy New Year.