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Stocks - This Time It's Different (again)

Lately I've been hearing, a lot, that this stock market decline is different. So different, apparently, that many investors are actually changing their investment strategy based on this belief. Let's examine the argument.

It really is different this time
Never before in our modern history have we had major European governments on the verge of default. Nor has the US ever experienced a downgrade of the sacred US Treasury, as was recently done by Standard and Poors. Indeed, the whole belief in paper currency seems to be in question, which is likely why investors have flocked to gold.

My colleague, Larry Swedroe, recently wrote a great piece entitled This Time it Really is Different. He noted that the biggest crisis is the public lack of belief that elected officials will take the necessary steps to prevent the political crisis from becoming an economic one.

And this time there is nowhere to hide. With short-term Treasury bills literally yielding zero, and Treasury Inflation Protected Securities giving negative real yields, investors have few options.

So I completely agree that this time it is different in that the problems we are facing have never been seen to this degree in modern history.

Of course it's different this time
The fact that it's different this time is perhaps the most meaningless reason to change your investments that I can think of. Let's look at the recent times people said this time it's different:

  • 2000 - Cash flow no longer matters - it's a different dot com economy.
  • 2002 - We are at war with those that want to destroy our way of life using technology against us. It's a different world now.
  • 2007 - We can accelerate and leverage money all we want because real estate can never go down. We have different products today.
  • 2008/2009 - The whole financial system is on the brink of collapsing and we need to prepare for the great depression ahead. It's different now - modern portfolio theory is dead.
Each of these points in times had their own problems that were different than we ever experienced in the past. They each had unique circumstances that had never been seen before, at least to this degree.

And the problems we face today are the exact same in that they are also different than the problems we faced in the past.

Two predictions for the future
Predicting the future is tough but there are two things I'm willing to predict:

  1. Capitalism will survive the current issues facing us today, just like it did in the past.
  2. The time will come again when we face a declining market and, when that happens, people will be saying "this time it's different."
My advice
Behavioral finance research shows that humans aren't very efficient in learning from the past. We repeat the same mistakes over and over again. I certainly have my own list of mistakes I repeatedly make, yet am happy to say that I also learn from them.

Now that super computers make thousands of trades a second, we must all get used to the market always being different and accept that volatility is here to stay. Don't fall for the "this time it's different" argument to make major structural changes in your portfolio.

Consistency is a critical key to successful investing. If one can't resist the impulse to make changes based on fear, greed, the always different economy, or the stock market de jour, then lower returns are virtually guaranteed.

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