Two Truths & A Paradox

Truth #1-Past performance is no guarantee of future results.
Truth #2-The definition of insanity is doing the same thing over & over, and expecting a different result.

Are these two truths a paradox, or is one (or both) simply untrue? The answer is largely in the semantics, as is often the case. Although past performance does not guarantee future results, doing the same thing repeatedly rarely generates different results (most other things equal).

Once I was discussing personal finance with a friend who questioned the benefits of setting money aside for the future with "what if you die early?" To which I sharply responded, "what if you don't?!" As I have discussed before, "what if" can be a precarious game that portends mistakes.

The drivers of personal finance are uncertainty and probabilities. Over time, stocks generally return better performance than bonds or cash equivalents. Likewise, human generally live 80 years. Neither generality ensures that stocks will outperform bonds and cash in any given year any more than it can ensure survival through the year. Regardless, if stocks outperform bonds and cash seven of every 10 years with higher average annual performance for each period, then expecting stocks to outperform bonds and cash over the long run is highly reasonable (the opposite of insanity).

Even when expectations change, it is generally best to stay the course, at least until the changes become more certain. Several years ago, I was talking to a friend about an obligatory market recession because the bull run had been going for so long. She referred me to a source, citing that the man had been projecting this downturn for the past five years, to which I quipped "So, he has been wrong for the past five years." She quickly defended him, before realizing what I had said was in fact true. That bull market has continued fairly strongly through today as the Dow Jones has 30,000 on the horizon.

Until domestic stocks prove to be unreliable performers, they are the best foundation of a growth portfolio for the next 10 year or more. Perhaps decades from now, international stocks will have proven to outperform domestic stocks significantly more often than not, in which case they may become a better foundation for growth portfolios. But projecting that shift today and shorting domestic stocks as a result has not been a reasonable strategy.