George Bailey had grand aspirations. He planned to leave the crummy town of Bedford Falls and explore the world. When his father asked him if he’d ever consider returning someday to run the family Building and Loan, George responded: “I couldn’t face being cooped up the rest of my life in a shabby little office”.
When his father died unexpectedly George was forced to take over the Building and Loan, which put a hold on his grand plans. His brother, Harry, had agreed to come back and run the Building and Loan after college, but that too did not work out as planned once Harry got married and moved away. George’s plans were once again ruined.
If there was a bright spot in this, by staying in Bedford Falls George was able to marry an amazing woman, but unfortunately the honeymoon was abruptly canceled when there was a run on the Bailey Building and Loan, and he had to use his personal savings to help meet withdrawal requests.
One Christmas Eve George was gloating with pride from his brother Harry earning the Congressional Medal of Honor, until his Uncle Billy misplaced $8,000 of customer deposits and he quickly had to start worrying about bankruptcy and prison time. He thought he could drink away his sorrows at a local tavern, until he was punched in the face by another patron.
George Bailey’s life had been a complete letdown.
George determined he couldn’t take anymore, but as he was about to end his own life, he chose to save another instead (which happened to be his guardian angel, Clarence).
Clarence was able to give George a wonderful gift, which was a view of the world as if George had never been born at all.
Recently I was talking with a newer client and they were understandably concerned that shortly after they opened their account it had declined quickly. While chatting about the importance of staying the course the client said:
“It’s not like I want to sell now, I just wish I had never invested at all. I should have put all my money in treasury bills where I can’t lose”
It’s A Wonderful Life is my favorite movie, so George Baileys famous line “I wish I had never been born at all” immediately rang in my head.
Many of us intuitively know that 3, 6, 12, or even 24 months is not enough time to judge an investment strategy, but when we make a decision to invest in something that immediately loses value, we question our decision based on that short-term outcome. If the value would have increased immediately, the decision would not be in question. Judging decisions based solely on the result is not a rational form of evaluation, but it is the way most of the world works. (P.S. my wife often gets called “Monday Morning Quarterback” by me for judging some of my decisions based on the outcomes, #hindsightbias).
When times are bad in markets it is difficult for us to remember all the good that has come from investing.
So what would it have possibly looked like over the long haul if someone never invested at all? Would they end up better off?
History shows us below that the investing has been better than not investing for growing real wealth throughout history. In every decade listed below, the real return of a 60/40 below has significantly outpaced that of One-Month US Treasury Bills.
For those who say “at least I wouldn’t lose in treasuries” let’s view the inflation-adjusted returns for them from 1973-1979 and 2010-2017. Real wealth is what counts, a return of 6.90% when inflation is 8.80% means you’re still coming out behind in real terms.
|One Month Treasury Bills||4.70%||0.67%|
|60/40 Balanced Portfolio*||10.80%||5.83%|
1973 – 1979
|One Month Treasury Bills||6.90%|
|60/40 Balanced Portfolio*||10.10%|
|1980 – 1989|
|One Month Treasury Bills||8.90%|
|60/40 Balanced Portfolio*||17.17%|
|1990 – 1999|
|One Month Treasury Bills||4.90%|
|60/40 Balanced Portfolio*||11.10%|
|2000 – 2009|
|One Month Treasury Bills||2.80%|
|60/40 Balanced Portfolio*||6.80%|
|2010 – 2017|
|One Month Treasury Bills||0.20%|
|60/40 Balanced Portfolio*||7.90%|
Avoiding markets is the easy route. It allows people to avoid experiencing gut-wrenching declines. But if the emotions can remain neutral, investing in markets is no harder than investing in treasury bills.
George Bailey wanted to take the easy route as well and end his struggles, but the fact that he was able to see the world as if he had never existed helped him gain a new perspective on life. When we see markets drop, it’s good to get a reminder that the historical data is on our side, and long-term wealth may be potentially worse off by never investing at all.
*The 60/40 Balanced Portfolio is based off the Dimensional Balanced Strategy Index Normal.