IN BEHAVIORAL FINANCE, there’s an important concept that doesn’t get a lot of attention: It’s called temporal discounting. The idea is that we view our current and future selves, to some degree, as different people—and there’s a tendency to discount the needs of the “other” person. It’s an interesting idea because, even for the most diligent planners and savers, there’s an inherent tension between the financial needs of today and those of tomorrow. Take the “latte factor,” which argues that a young person could accumulate nearly $1 million in savings simply by forgoing a daily coffee and muffin. Personally, I’m not sure that’s the road to financial success. Still, the latte factor illustrates the importance of not discounting our future selves. Along those same lines, as we look ahead to 2023, here are some other financial steps you might take to help your future self. Sidestep taxes. Earlier this year, I told the story of an investor who had an odd experience with a mutual fund. She first bought shares in the fund about 30 years ago. Her initial investment was $19,000. When she sold her shares last year, they were worth $287,000. That seemed like a great result. But surprisingly, she actually had a loss on this investment for tax purposes. How could that be possible? The problem was that the mutual fund in question was actively managed and generated sizable capital gains distributions each year, which she reinvested and thereby raised her cost basis for tax purposes. Result: When she sold, her shares were worth less than all the money she'd put into the fund, including those reinvested distributions. While her original $19,000 might have had a gain, all of the subsequently purchased shares turned the whole thing into a tax loss. Worse yet, for decades, she had been paying taxes each year on the fund’s distributions, heaping on unneeded extra income during her peak earning years. Want to avoid a similar result? If you hold any actively managed funds in your taxable account, check the fund’s track record for making capital gains distributions. You can find this information on research sites like Morningstar. For instance, look up American Funds’ popular Growth Fund of America, and you’ll see that last year it distributed gains of $6.01 per share when the share price of the fund was $71.12. That translates to a capital gain equal to 8.5% of the fund’s value, delivering a sizable tax bill to the fund’s taxable shareholders. To quantify this, suppose an investor's capital gains tax rate, including federal and state, is 25%. That fund distribution would have cost an investor 2% of the fund’s value in taxes (25% x 8.5%). That's on top of the cost of the fund itself, which isn't insignificant. If you hold a fund like this, and you have a sizable unrealized gain on your investment, you may be hesitant to sell. To be sure, exiting the fund would involve a one-time tax hit. But you might be doing your future self a favor if that allows you to sidestep future capital gains distributions. Plan for a rainy day. In my experience, there are two financial tasks that are most susceptible to procrastination: putting together an estate plan and buying life insurance. These may not benefit your future self, but they could be crucial to your family’s financial future. Moreover, when folks do get these two tasks taken care of, they usually aren’t in a hurry to revisit them. But it’s important to make sure your estate plan and insurance coverage keep up with your needs—especially if you have children. Fortunately, term life insurance can be very inexpensive, making it relatively easy to add more coverage. Got a whole life policy? One possibility: Cut back on the whole life, with its relatively high premiums, and redirect those dollars into a much larger term policy to cover the years until your children are out of school. [xyz-ihs snippet="Holiday-Donate"] Disability coverage is much more expensive. That reflects the reality that a disability during our working years is much more likely than dying. The good news: Your employer may already provide some coverage under a group policy. Nonetheless, it’s worth running the numbers to see if your family would be able to cope over the long term with that employer-provided benefit plus your accumulated savings. Revisit your 401(k) contributions. For most people, most of the time, it makes sense to defer income into a 401(k). Say you have a handsome household income of $400,000. If you make a 401(k) contribution, your tax savings on that contribution would be 32% at the federal level. If your income in retirement is much lower—as most people's is—then you’ll come out ahead when you withdraw those dollars from your 401(k) at a much lower tax rate. But as you advance in your career and your tax-deferred savings grow, it’s worth confirming that this is still the case. If you’re self-employed or in a profession where you have access to multiple tax-deferred retirement plans, it’s possible to end up with very large tax-deferred balances. The result: At age 72, when required minimum distributions begin, your income might leave you once again in a high tax bracket. Indeed, if your tax-deferred balances are north of about $5 million, it might be worth doing some more detailed projections. Your future self may thank you. Consider an annuity. Annuities have a bad reputation. Some of that’s well deserved, owing to their opacity and high fees. But not all annuities are created equal, and there’s evidence that they can deliver unexpected benefits. Research has found that those with more guaranteed income sources in retirement are both happier and live longer. In addition to the opacity and high fees, there’s another reason people tend to avoid annuities: The risk that they won’t live long enough to recoup their original investment. In simple terms, people worry about buying an annuity on Monday and dying on Tuesday. That’s an understandable concern, but keep in mind the story of Irene Triplett, who died just a few years ago at age 90. She had been receiving a veteran’s pension benefit from her father. That may not sound remarkable, except that her father was a veteran of the Civil War. The lesson: If you end up living a very long life, your future self might thank you for providing guaranteed lifetime income. Pay down your mortgage. An age-old debate in personal finance is whether it makes sense to make extra payments toward a mortgage. If you have a low rate, the math suggests you’d be better off not paying down your mortgage any faster than required, and instead investing those dollars where you might earn a higher return. Today, in fact, the math is easy: Suppose you’re paying 3% on your mortgage—a rate that was available as recently as last year. Instead of making extra payments toward that loan, you could invest those dollars in the stock market where, history suggests, you’d likely earn far more than 3%. Want to guarantee you’ll come out ahead? Instead of purchasing stocks, you could buy a 30-year Treasury bond today and earn 3.5% with negligible risk, ensuring you’d do better than if you used the same dollars to pay off your mortgage early. That’s what the math says. Still, your future self might thank you for doing the opposite. Why might that be the case? The reality is that none of us knows what the future will bring. Suppose you choose to retire early or perhaps, later in life, money is tight for other reasons. Being mortgage-free would provide a welcome dose of flexibility. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

NO QUESTION, MANAGING an investment portfolio is tricky. On the one hand, you want stock market exposure to help drive your portfolio’s performance. But on the other, it’s agonizing when the market drops 30% or 50%—or more—as it’s done on several occasions. How can investors strike the right balance? Like most things in personal finance, there isn’t one right answer. In general, investors can choose one of five approaches when building a portfolio. 1. All stocks. This first option is, in many ways, the simplest. But it isn’t easy. Since the 1920s, the U.S. stock market has returned about 10% a year, on average. But it’s hardly been a straight line. That’s why I say this approach is simple but not easy and why, as a result, many see an all-stock portfolio as altogether too risky. There are, however, three situations in which the volatility of a 100% stock portfolio might be tolerable and thus this approach might make sense. First, if you’re in your working years and regularly adding to your savings, you might go with 100% stocks in your retirement accounts. I would certainly recommend, almost universally, 100% stocks for Roth and health savings accounts, which benefit from tax-free growth. Another situation in which I’d recommend an all-stock portfolio: if you have young children and you’re investing their 529 accounts for college. I generally recommend lightening up on stocks in 529s only when children reach middle school. Finally, there are folks who enter retirement with enough income from outside sources that they can afford to take any amount of risk with their portfolios. If some combination of a pension, Social Security and passive income allows you to meet your monthly expenses, you could invest your portfolio for maximum growth, even if that also means maximum risk. 2. Tactical. Some years ago, I recall speaking with an executive at a large Wall Street bank. He regularly attended the bank’s investment committee meetings. But his reaction surprised me: “I leave these meetings not knowing any more than when I went in.” The problem was that the bank’s investment recommendations, like much of the advice that comes out of Wall Street, was tactical—that is, short-term in nature based on economic forecasts. This is an approach to investing that’s notoriously difficult. Consider just the most recent example: In 2020, when the pandemic emerged, investment prognosticators were correct in predicting a market downturn. The market did indeed drop—by more than 30%. The problem, though, is that it didn’t stay down for long. Stocks rebounded quickly, resulting in a positive return overall for 2020. In fact, 2020 turned out to be an above-average year, with the S&P gaining 18.4%, including dividends. The following year, the S&P gained another 29%. There may be someone out there who had perfect timing—selling before the market dropped and then buying back in after stocks fell—but it would have been extraordinarily difficult. No one can see around corners. Research by Morningstar confirms how difficult this is. Among professional money managers, those who pursue tactical strategies have fared particularly poorly. These types of funds, in Morningstar’s words, have “incinerated” investment returns. As a group, they’d have delivered returns that were twice the funds’ actual returns if their managers hadn’t traded at all over the past 10 years—if they’d simply gone on vacation. 3. Asset allocation. Tactical traders’ results illustrate why, in my opinion, investors shouldn’t make predictions. Instead, I recommend the portfolio management prescription offered by investor and author Howard Marks: “You can't predict. You can prepare.” While market forecasting makes for entertaining cocktail party conversation, it’s too unreliable. Instead, what investors should do is to prepare, so their portfolios could withstand a market downturn at any time. That’s critical because bear markets don’t tend to give much notice. How can you prepare your portfolio? The key is to choose an asset allocation that won’t require you to sell any of your stock market holdings even if the market dropped 50% or more and stayed down for a multi-year period. For example, if you’re retired and require $100,000 per year from your portfolio, you might hold $500,000 to $700,000 in a mix of cash and bonds, allowing you to ride out a downturn at any time. Your chosen asset allocation need not be static forever. As your spending needs shift, you might add or subtract from this stockpile of safer assets. Importantly, though, you wouldn’t need to shift your portfolio in response to market events or market forecasts. 4. Judiciously opportunistic. Howard Marks often reiterates his mantra that “you can’t predict,” but he does allow for some exceptions. In his most recent memo, Marks noted that he has, in fact, made a few predictions over the years. How many? In 50 years, he says, he recalls five. Marks explains his reasoning: “Once in a while—once or twice a decade, perhaps—markets go so high or so low that the argument for action is compelling and the probability of being right is high.” Only then is Marks willing to bet on a forecast. In late 2008, for example, when the Lehman Brothers collapse sparked a drop in both stock and bond prices, Marks started buying. Similarly, in March 2020, when the pandemic caused the market to drop more than 30% in the space of six weeks, Marks again loaded up on depressed shares, betting (correctly) that the downturn would be temporary. Marks, I think, makes an important point. In general, it’s better to avoid predictions. But as with most things in personal finance, it’s also important to avoid being too dogmatic. Sometimes, it’s okay to take a step or two out on a limb. In 2020, for example, when the Fed began printing money at an extraordinary pace, there was a clear risk that inflation might pick up, and that this would force the Fed to raise interest rates. To guard against this, many investors shortened the durations of their bond portfolios. With rates near zero, this was a relatively safe bet. 5. “No” risk. Some investors are so wary of the stock market that they choose to hold all their savings in bonds. On the surface, this seems like a way to play it safe. Indeed, in modern portfolio theory, the U.S. Treasury bond is referred to as the “risk-free asset.” But I refer to this strategy as “no” risk because it’s actually quite risky. The danger, of course, is inflation, which degrades the purchasing power of bonds. Even inflation-linked bonds aren’t a perfect inflation hedge. Last year, when inflation approached 9% at one point, Treasury Inflation-Protected Securities (TIPS), on average, lost money. For this reason, even though it may appear safe, I’d steer clear of an all-bond portfolio. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

IS THE STOCK MARKET too high? It's a question I’ve heard a lot recently. Each time, I’ve offered this recommendation: It’s impossible to predict where the market will go next, so your best defense is to have an appropriate asset allocation. But how exactly can you determine an ideal allocation? The textbook method originated in the 1950s, with the work of a PhD student named Harry Markowitz. Up until that point, investors had mostly picked stocks and bonds in a vacuum, without giving much thought to how each individual investment might interact as part of a larger portfolio. In other words, the concept of diversification was not well understood and received little attention. Even Benjamin Graham, who came before Markowitz and who’s considered the father of investment analysis, never talked about diversification in his work. For Graham, the question was always, “Is this specific investment a good choice?” It was never, “What combination of investments should I choose?” Then came Markowitz, who made the observation that the second question was at least as important as the first. This is how Markowitz described it in an early article: “A portfolio with sixty different railway securities, for example, would not be as well diversified as the same size portfolio with some railroad, some public utility, mining, various sorts of manufacturing, etc. The reason is that it is generally more likely for firms within the same industry to do poorly at the same time than for firms in dissimilar industries.” In other words, if you’re trying to build a diversified portfolio, you need to do more than simply buy a collection of assets. Instead, you need to buy a collection of assets that you expect to behave differently from one another—in statistics talk, to exhibit low correlations with one another. While this might seem obvious today, it wasn’t obvious in 1952 when Markowitz published his first paper. His work was so new, in fact, that it came to be known—and is still known—as Modern Portfolio Theory (MPT). The mathematical details are dense, but the promise of MPT was appealing. You may have heard the term “efficient frontier.” This was Markowitz’s invention, and it lies at the heart of his framework. In simple terms, the efficient frontier offers investors a menu of “efficient”—or optimal—portfolios to choose from. Each portfolio is optimal because it offers either the maximum potential return for a given level of risk, or the minimum amount of risk for a given level of return. Suppose, for example, your goal is to earn 5% annual returns. You could simply locate that point on the efficient frontier, and it would tell you how to construct a portfolio geared to that goal. Prefer 7% returns or maybe 10%? Those options, along with others, could all be found on the efficient frontier. [xyz-ihs snippet="Mobile-Subscribe"] The efficient frontier can be used to build a portfolio of stocks, as Markowitz illustrated in his initial work. It can also be used—and today is more commonly used—to build portfolios that combine multiple asset classes. Suppose, for example, you wanted to build a portfolio combining stocks, bonds and real estate. An efficient frontier could provide you with the optimal combinations of those asset classes—or any others. For this reason, MPT seems ideal. But here’s the problem: It’s a little too good to be true. To build an efficient frontier requires that you have data about the future—and not just a little bit of data, but a lot. Here’s the data you need for each asset class: Expected annual return Expected standard deviation, a measure of the year-to-year variability of returns Expected correlations among all of the asset classes included in the analysis All of this data is readily available on a historical basis, of course. But it’s impossible to predict going forward. William Bernstein, writing in his book The Intelligent Asset Allocator, described the problem this way: “It’s a little like trying to generate electrical power by placing a battery and a lightning rod at the last place you saw lightning strike. It isn’t likely to strike there again.” As Bernstein notes, “Next year’s efficient frontier will be nowhere near last year’s.” To illustrate, he cites Japan’s stock market, which peaked in 1989 and still—more than 30 years later—hasn’t fully recovered. If you had built an efficient frontier using data prior to 1989, it would have recommended a hefty allocation to Japan. But data since 1989 would recommend the opposite. In short, Modern Portfolio Theory, as appealing as it sounds in theory, is difficult to implement in practice. That said, Markowitz’s fundamental insight—for which he won a Nobel Prize—does carry a key lesson for every investor: Correlations are paramount. I can’t tell you when or if the stock market will see a correction. But the good news is, you don’t need to worry about building a strictly optimal portfolio, in the textbook sense, to protect yourself. You just need a sensible mix of stocks, bonds and other asset classes that aren’t tightly correlated. As you think about your portfolio and the risk posed by today's stock prices, this is, I think, the most important thing. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, he advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman and check out his earlier articles. 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IT'S OFTEN SAID investors are driven by fear and greed. But I’d add a third item to the list: regret. The past year and a half have been enough of a rollercoaster to rattle even the most even-keeled investor, creating ample opportunity for regret. Since the fall of 2018, the stock market has dropped 20%, gained 30%, dropped 35% and then gained 30% again. Result? Here are some of the sentiments I’ve been hearing over the past month: “Why didn’t I sell at the top?” “Why didn’t I buy at the bottom?” “Why did I bother with international stocks?” “Why did I buy high-yield bonds?” “For the love of God, why didn’t I ever buy a single share of Amazon?” None of these reactions is surprising—but it’s worth asking if regret like this serves a purpose. There are two schools of thought. Nietzsche famously said, “Remorse would simply mean adding to the first act of stupidity a second.” In other words, don’t waste any time looking back. But the second school of thought sees a lot of value in looking back—because it allows us to reflect on our decisions and ponder what we might do differently next time. I’m not sure either approach is 100% helpful amid today’s financial upheaval. It’s just too unusual. Still, there’s been a lot of research on the topic of regret. It’s worth understanding some of the tricks that our mind plays on us at times like this. To help manage the stress and make better decisions going forward, keep these key behavioral finance concepts in mind: Loss aversion. Probably the most famous concept in behavioral finance is something called prospect theory. The research has found that we hate losses, and disproportionately so. In fact, people dislike losses about twice as much as they enjoy gains of a comparable size. That’s especially important this year. Since the market peaked in mid-February, the S&P 500 is down about 13% through the end of April. But the stock market was slightly higher than it was a year earlier. Still, because of our natural loss aversion, it feels much worse than that. It’s very hard to fight this instinct. The most valuable strategy, in my view, is to maintain perspective. When you consult historical charts, it’s much easier to tune out the hyperbolic headlines and focus on where you really stand. Rumination. Our minds are prone to rumination, considering and reconsidering what we might have done differently. For the most part, this isn’t productive since the past can’t be changed. That said, if you’re going to ruminate, I’d recommend translating your thoughts about the past into specific plans for the future. If some aspect of your investment portfolio hasn’t behaved as expected this year, spend time researching that particular investment and consider updating your investment strategy. Many people, for example, are reexamining their bond portfolio. Others are reconsidering the composition of their stock portfolio, because of the weakness of traditionally “defensive” stocks such as utilities and the surprising strength of seemingly risky technology stocks. To the extent that there’s a silver lining in all this, it’s the opportunity to learn and thus be better prepared for the next big decline. The breakeven effect. While there should be a difference between gambling and stock market investing, they often trigger similar behavior. That brings us to the breakeven effect. Researchers have found that gamblers who suffer losses in the morning will often make riskier bets in the afternoon in an effort to recoup the money lost. The same thing has been observed among investors. The solution? Fortunately, unlike a gambler, you don’t need to take any action to make back your losses. As this crisis passes, there’s every reason to expect that the market will recover. It may take some time. But if you believe that the economy will eventually heal, there’s no need to turn up the risk level in your portfolio to break even. It will happen on its own. The brother-in-law effect. There will always be someone in your life who profited—or claims to have profited—from whatever investment looks the smartest on any given day. These days, that might be Zoom Video Communications or Teladoc Health. But just as you should tune out the headlines, you should tune out your brother-in-law or your know-it-all neighbor. Research suggests you’ll be far better off. Adam M. Grossman’s previous articles include Defending Yourself, As If and Look Around. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]

AT THE 2016 SUMMER Olympics in Rio de Janeiro, South Africa’s Chad Le Clos challenged Michael Phelps for the gold medal in the 200-meter butterfly. A famous image emerged from that event: Throughout the semifinal, Le Clos repeatedly looked over at Phelps as he struggled to keep up. Meanwhile, Phelps just kept looking forward. The result: Phelps ultimately won the gold, while Le Clos trailed in fourth place. I believe there’s a parallel between what we saw in that race and what we see in the investment world. Why do people pile into speculative investments like meme stocks, dogecoin, SPACs or NFTs? One explanation is so-called FOMO—the fear of missing out. When we see friends and neighbors making gains—like Le Clos seeing Phelps take home yet another gold medal—it can be hard to ignore. FOMO is a real phenomenon. But there may be another reason investors are drawn to popular investments. In an excerpt from their new book, Like, authors Martin Reeves and Bob Goodson explain why “like” buttons on social media are so powerful. Human beings, they write, are observant, and we try to learn from one another’s experiences. This is especially true when we encounter people who seem to be traveling the same path. “When we observe others who are similar to us, we have higher confidence that their experiences are relevant to our own journey through life.” This makes sense. If a friend or coworker figured something out, why reinvent the wheel when we could piggyback on what they’ve learned? Through this lens, some of the seemingly irrational behavior we see in investment markets may begin to make more sense. Those who appear to be mindlessly jumping on the bandwagon of a popular investment just might be making an intelligent move if they assume others have done the research on this investment. Unfortunately, there’s a fly in the ointment. Wall Street is a step ahead of us. Marketers know how we think. They know people are susceptible to FOMO and will mimic their peers, so they use these powerful effects to sell us the investments that seem to be the most popular. If your inbox looks anything like mine, you know what I mean. This year, with gold having gained 30%, sales pitches for precious metals have piled up. The investment industry is very good at selling the flavor of the month. How can you turn down the volume on these sorts of things? Here are some suggestions. For starters, it helps to recognize that when it comes to investing, there’s always more than one road to success. Just because someone else is making money with a particular strategy doesn’t mean we need to do the same thing. In other words, try hard to be like Michael Phelps, always looking forward. Don’t worry about what’s happening in the next lane, or anywhere else. More to the point, if your strategy fits your goals, there’s no need to do anything else. Author Mike Piper illustrates this idea in a recent article. Imagine, Piper says, that you’re on a vacation somewhere and enjoying yourself. That would be terrific—except that it’s probably also true that there might be another vacation you could have taken that you would’ve enjoyed more. Many others, in fact. That’s always going to be the reality, Piper says. In building a portfolio, “no matter what you pick, there’s going to be countless other options that would have been better.” But, Piper continues, “as long as your original decision was reasonably well informed, it’s not helpful to spend a bunch of time looking at other allocations, other mutual funds, or other individual stocks that you could have selected instead.” Not only could that lead to regret, Piper says, but also it could lead to performance chasing. That brings us to another key point. Because Wall Street marketers like to talk about what’s popular, there’s the danger that the investments they’re promoting may be the ones that are near peak valuations. So, almost by definition, if Wall Street is trying to sell you a fund, that may be one to avoid, or avoid at least at this time. This risk isn’t just theoretical; Jeffrey Ptak, an analyst at Morningstar, has quantified it. Earlier this year, he looked at investors’ results in thematic funds—so called “because they tend to tap into a trend that’s captured the imagination or entered the discourse somehow.” The results were clear. Over a recent three-year period, “the average dollar invested in thematic funds lost around 7% per year.” Over that same period, the S&P 500 gained 11% a year. Ptak’s conclusion: “By the time a thematic fund reaches investors’ attention, it might already have been picked over by other investors who had already tapped into the theme. That can leave thematic fund investors holding the bag―that is, an overvalued basket of stocks that courts hefty price risk.” To be sure, this doesn’t mean you should reflexively avoid everything Wall Street promotes. But caution might be warranted. In investing, it’s also important to keep in mind both sides of the risk-return equation. In general, risk and return go together, but marketers don’t always go out of their way to point this out. That’s another reason to follow the Michael Phelps model. There might be other strategies that’ll deliver higher returns, but that doesn’t mean those strategies are right for you. Consider Bill Gates. If you didn’t know who he was, he might look like any other 69-year-old. But, of course, his investment strategy shouldn’t look like anyone else’s. The idea is: Even when you think what someone else is doing might be relevant, the reality is we often know little about another person’s circumstances. A recent analysis in The Wall Street Journal can also help us turn down the volume on Wall Street marketing. The article described the talent war among hedge funds for top-tier stock pickers. In some cases, funds are offering pay packages north of $100 million to lure top talent away from competitors. What this tells us is that the number of investors capable of beating the market in any meaningful way is very small. Yes, they do exist, and they may be worth paying for, but they aren’t easy to find. And even when they do exist, their funds typically aren’t open to individual investors. So, when we hear about outsized success stories, we should recognize them as the outliers that they are.  For most investors most of the time, the data tell us that simplicity and low cost are the way to go. Keeping that in mind may be the best way to tune out whatever might be happening in the next lane. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

CONGRATULATIONS ARE in order for Jay and Kateri Schwandt, a Michigan couple who recently welcomed a new baby girl. This might not seem like an event that's worthy of national news, except this is the Schwandt’s 15th child—and the first 14 are all boys. In an interview, Jay Schwandt said he didn’t think a girl was even possible: “You know after 14 boys, we just assumed perhaps medically it just wasn’t meant to be.” The Schwandt’s new baby illustrates a point that’s often debated in the world of personal finance: When you see a pattern, especially one that’s been repeating for a very long time, is it safe to assume that it will continue indefinitely? An example: The U.S. stock market has risen by 10% a year, on average, for nearly 100 years. Is it safe to assume this will continue? The simple answer is “yes”—or “yes, probably.” Despite the dysfunction in Washington, we continue to lead in technology and innovation. Ultimately, this helps drive the stock market. That would be the simple answer. But it would also be easy to make the counterargument: The U.S. population is growing much more slowly today than it did in the past, and population growth is a key ingredient for economic growth. We also have unprecedented levels of federal debt. Some believe those factors will combine to slow future growth. Personally, I’m in the first camp: I believe the U.S. will continue to grow and innovate, and I believe this will be positive for the stock market. But patterns do reverse—even longstanding patterns. This year has witnessed several such reversals: Warren Buffett likes to say that his favorite holding period for a stock is “forever.” But in a recent regulatory filing, his firm, Berkshire Hathaway, revealed that it had sold nearly half its stake in Wells Fargo after a series of scandals tarnished the bank’s reputation. Wells Fargo had previously been one of Berkshire’s “Big Four” investments—a company Buffett had praised for decades. For a while, in fact, Berkshire was Wells Fargo’s biggest shareholder. But then things changed at the bank. As a result, despite his long history with the company and his "forever" philosophy, Buffett walked away. Over the summer, the Federal Reserve upended decades of policy when it overhauled a document some refer to as the Fed’s constitution. For years, value stocks have underperformed growth stocks. Multiple articles and essays in recent years have carried the headline, “Is Value Dead?” But after years of lagging, value stocks—and especially small value stocks—have suddenly caught fire, easily outperforming their more popular growth stock peers. Look back further into investment history and there are many similar cases. In the 1960s, the so-called Nifty Fifty stocks were called “one decision” stocks, because it was believed that investors needed to make just one decision—to buy them—and thereafter would never need to sell. But by the early 1970s, sentiment shifted and, as a group, the Nifty Fifty lost more than 80% of their value. More recently, crude oil prices—and, along with them, the stocks of energy companies—have seen a similar collapse. For a long time, people believed that the world might run out of oil, a theory known as “peak oil.” This led to a dramatic runup in oil prices. Just before the recession hit in 2008, the price for a barrel of crude oil topped $140. But then suddenly the market changed. Today, the concept of “peak oil” has been discarded and a barrel of crude is barely above $40. Time after time, there have been trends in the investment world that looked like they might continue more or less indefinitely. But then something happens, causing the trend to break down or even reverse. The difficult thing as an investor: It’s so easy to build an argument to support practically any view of the future. On any given question, reasonable people differ, but no one truly knows how things will turn out. Where does this leave you? How should you proceed in the absence of a crystal ball? As a starting point, I’d adopt the mindset that Amazon founder Jeff Bezos exhibited in a talk a few years ago, when he acknowledged that nothing lasts forever. “I predict one day Amazon will fail,” he said. “Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not 100-plus years.” [xyz-ihs snippet="Mobile-Subscribe"] Perhaps that explains why Bezos has sold more than $10 billion of Amazon shares this year and has a plan in place to regularly sell further shares. I’m sure he isn’t worried about Amazon’s near-term outlook. But it’s not inconsistent to also acknowledge that things could change. This sort of balanced view is, I think, exactly the right way to look at any investment. My second recommendation: Take others’ opinions with a grain of salt. Recognize how easy it is to build a story about the future. Also recognize that Wall Street analysts get paid to make predictions and to sound authoritative when delivering them on TV. I’d be especially wary of extreme predictions. You may recall that, a few weeks back, I talked about investment legend Jeremy Grantham, who is advising investors to get out of the U.S. stock market. In the end, he might be right or he might be wrong, but his prescription strikes me as extreme. I don’t question Grantham’s wisdom or his experience, but I’d be cautious of any recommendation that doesn’t sound balanced. I’d also be especially wary of recommendations that sound alarmist. We’ve seen this repeatedly around elections. When each of the last three presidents was elected, those who weren’t the biggest fans of the new president were quick to predict a negative outcome for the economy. But instead, the market went up under President Obama, it went up under President Trump, and it’s been going up in the three or so weeks since the most recent election. People who predict doom often garner headlines—but they’re rarely right. Simple as it sounds, I believe the best route to investment success is to build a logically diversified portfolio and to avoid making too many changes in response to recent performance, economic data, stories, predictions and opinions—especially political opinions. I don’t pretend that this is easy. It can be difficult to build a portfolio that includes investments and asset classes that have been lagging, especially if they've been lagging for a long time. But as we’ve seen this year and throughout history, trends can reverse. Just ask the Schwandts. Adam M. Grossman’s previous articles include Getting Personal, Sweat the Big Stuff and Emerging Concerns. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]