Hello, everyone. Welcome back. Charlie Blow here bringing to you today a special video called 20 Rules for Markets and Investing.
Excited to bring this to you. These are 20 different rules I've developed over the years that have helped me a lot and hopefully will help you on your own investing journey. So let's begin here. Number one, be humble. This is probably the most important characteristic for an investor to have.
Because markets are very difficult, investing is very difficult, and if you don't have humility going into it, eventually the markets are going to humble you. So what does the data show in terms of confidence or overconfidence? People who have a big ego, what they tend to do is trade more. They tend to trade more. They tend to take more concentration in their portfolios.
And as a result, they tend to have worse performance. So trading is hazardous to your wealth, as the study has showed here. the investors who traded the most had the lowest returns 11.4 percent per year versus the market returns of 17.9 percent per year and the central message here is overconfidence and over trading was harmful to your wealth you can see in this chart here the inverse relationship between turnover so trading activity and returns higher the turnover lower the returns as an interesting aside here when it comes to finance when it comes to investing Men tend to be much more confident than women, and they tend to have a worse return as a result on average. So be humble when it comes to markets.
Rule number two, don't trust, verify. So you have to have skepticism when it comes to investing. When you see things like high yields, smooth returns, perfect market timing, your radar should go up. You should immediately say, well, I don't believe this. To be true, I need to verify this.
Is there something else going on here? One of the best examples of this would be this fund that had no down years from 1990 to 2008. 10.6% annualized returns over that period of time with volatility less than the bond market and a maximum drawdown, here's the kicker, of less than 1%. Now, is this too good to be true?
Absolutely it was. but investors poured billions of dollars into this Fairfield Century Fund, which was the biggest feeder fund for Bernie Madoff. And you can see here the unbelievable reported returns for this fund. Again, no down years, lower volatility than the bond market and a max drawdown of less than 1%.
Billions of dollars chasing this idea that you can have the Holy Grail, you can have upside, you can have smooth returns with no downside. And that's simply isn't the case in markets. So don't trust, verify.
Rule number three, play the long game. So as an investor, you have a huge advantage as an individual investor that you don't have to play the short-term game of trying to trade in and out of stocks and trying to get the highest return in a week or a month that hedge funds play. What you can do is play the long game as an investor.
And the reason why that's so effective is the longer your holding period. the higher the probability you're going to have a positive experience when it comes to investing. If you're looking at just a single trading day, the odds of a positive return are only a little bit better than a coin flip.
You're talking about 53%. If you're looking at a month, 62%. One year, it gets to three out of every four periods, 75%. You go out to 20 years as an investor, there's never been a down year for US stocks. looking at the S&P 500. And the important thing as an investor is not just the probability of having a positive return, but narrowing that range of return.
So in a one-year period, you could see here, there's a huge range between the best performance and worst performance in any given year. And as you go out in time, your risk of that big negative downside actually goes down. You could see over 30-year periods, the worst return for the S&P 500. has been 8% per year.
And if we look at where the big money is, this is an important concept for investors. It comes with patience and time. So the short-term periods, the average or median returns are very low.
You're talking about 0.1%. Yes, there can be a huge up day where you're going to have a huge return in a short period of time, but that shouldn't be your expectation. Where the big money is made for most people comes from compounding, from holding over. decades.
You can see here the median 10-year return for the S&P 500, 170%. You push that out to 30 years, you're at over 2,000%. And if we're looking in terms of dollars, you can see immediately the big difference here in terms of what your money can grow to over a long period of time. If you're holding for a year, you're getting a little over 11,000 starting with 10,000. If you hold for 10 years...
you're at 26,000 and change. 20 years, you're at 80 plus thousand and 30 years, you're above 200,000. So play the long game and you will be rewarded as an investor.
Rule number four, understand that every time is different. And you're not supposed to say that saying this time is different. It's supposed to be like dismissing the notion that this time. is going to be better or this time isn't going to follow the historical path.
But in investing in markets, it really is the case that every time is different. If we look at bull and bear markets, we can see this time. And again, I'm just pulling up here the most recent bear market, 2022. And you can see here 27.5% from the beginning of the year, from January 2022 through the low in October. But nobody knew at that point in time it was going to end there. And a lot of people were talking about parallels to different bear markets, especially the bear markets from 2007 to 2009 and 2000 to 2002, where the S&P 500 would go down over 50%.
So a lot of people at this point in time were saying, well, we're going to see the same thing. We're going to see stocks continue to go lower. Of course they didn't.
The market would bottom in October, 2022 and start to go up and it would never look back. But if we look back at the history of bear markets, It really is the case that every time is different. No two bear markets are alike. Before the 2022 bear market, we had the 2021, which was the shortest bear market in history.
It was one month in duration and very quickly recovered to hit new highs. In 2022, we kind of had the typical, more of the typical bear market at nine months and 27%, but there's no such thing as a textbook bear market. Every single time is different.
Sometimes it could last for years. Sometimes it's over in a single month. And if we look on the flip side in terms of bull markets, this is what has transpired since that low in October 2022, the S&P 500 up over 60% in that period of time. So the question, of course, today is, well, how does this compare to other bull markets?
And what we could say definitively is we don't know what's going to happen next because every bull market is different as well. It could end right here. It could continue for a number of years.
We just don't know because every time is different. Okay. Number five, pay no heed to predictions and price targets. So what gets all of the attention in terms of financial media?
It's outlandish forecasts. It's these price targets. Investors love nothing more than a prediction that gives a set price at a set time. And that's what we have each and every year. It's a huge game that Wall Street likes to play saying, where the S&P 500 is going to end the year.
And if we look at this year, very interesting, we came into the year, very low expectations. The expectation was about for a 2% return for the S&P 500. The average target, 4,800 for the S&P 500. Where we are today at the end of September, 5,700 for the S&P 500. So more than 300 points higher than the highest target. and 18% above that average target. So that should tell you all you need to know about price targets.
They're very rarely on point, and you should definitely not follow it in terms of your own investing portfolio and strategy. But for those asking, well, does this happen every year? No, sometimes they're closer, but it's been a few years in a row. If we look at last year, the S&P 500 also finished above every single Wall Street target at 4,770.
That happened in 2023. And if we go to 2022, we actually saw the opposite where strategists were predicting a 4% gain for the S&P 500 in 2022. And actually the S&P 500 finished down 19%. So don't follow these forecasts. Don't follow these price targets.
Have your own plan and stick to it as an investor. Number six, rule number six, embrace risk. This is a very important concept. for investors because you have to take risks if you want a chance of having higher returns in the market there's no other way there's no upside without the risk of downside and if we look at these three major asset classes here stocks bonds and cash over time you can see why you're compensated for these higher returns so since 1928 stocks have done 9.8 percent per year 10-year treasury bond 4.6 percent and cash 3.3 percent so why are you getting that higher return in the stock market it's not a free lunch you're getting it because of higher volatility you can see 19.6 percent annualized volatility versus 7.7 percent for bonds and three percent for cash and if we look at this chart here it's extremely instructive it's showing you the entry year drawdowns for the s p 500 and you can see Every single year, there's a drawdown.
Actually, the median drawdown is around 13%. So your expectation coming into a year is I'm going to see probably a 10% drawdown this year. And that's why you're going to get that higher long-term return. If there was no risk in the stock market, there would be no reward. So embrace that risk to have higher long-term returns in the stock market.
Number seven, buy the haystack. This is a very important concept because most investors, when they're first exposed to the stock market, they hear about different stories and particular story stocks. All the attention goes to which stock should I pick?
Which sector should I pick? What is the hot stock today? The implication being that you have to pick these stocks in order to do well as an investor.
That simply isn't the case. And actually, the odds are stacked against you if you're individual stocks. This is an important study that came out looking at US stock market since 1926. And what they found was the majority of stocks, 58.6% actually underperformed treasury bills.
So not only are stocks not giving you that high return, most individual stocks are not even outperforming an investment in treasury bills, which is akin to cash. And if we look at this chart here, it's extremely instructive. because it's showing you that most of the shareholder wealth for investors is created by a small number of stocks. You could see just three stocks historically responsible for 10% of shareholder wealth. If we're looking at 50% of wealth, just 72 stocks, and 100% by 966 stocks.
This is out of 28,000 total stocks over this period of time. So very small percentage. We're talking about 3.4% responsible for 100%. of the stock market gains over time. So the question is for investors is if you don't pick this small group of stocks, what's this going to do in terms of your portfolio?
Well, you're going to be missing out likely on the enormous gains. So the odds are if you're picking individual stocks, you're likely to miss a few of the big winners and that's going to cost you in the end. And if we look at professional stock pickers, this is an important point. So people who do this, Every day, all day, they have a team of analysts. They're studying these stocks year in and year out.
How do they do versus simply buying the haystack, buying the index? Well, you can see here over a 20-year period, a vast majority, over 90% in every single category, whether it's large caps, small caps, mid caps, growth or value, over 90% are actually underperforming their benchmarks. And the lesson is pretty simple. Don't look for the needle.
just buy the haystack. Rule number eight, fight the Fed. So there's this famous saying, don't fight the Fed. And the implication is you should really be following Fed policy as an investor. And when the Fed is easing, you should be a buyer of stocks.
When the Fed is tightening, you should be a seller. So you should be hyper-focused. The saying goes on what the Federal Reserve is doing.
And I simply... debunk that theory 100%. You should not be paying attention to the Fed's every move. The historical data actually shows the opposite, that regardless of what the Fed is doing, the stock market tends to be higher over time. You can see here over a long period of time, this is since the 1950s, S&P 500 versus that Fed funds rate.
If you're trying to find a relationship in here, good luck, because there simply is none. Whether the Fed funds rate has been high or low, the stock market- on average, has been higher over time. And the most recent history, the most recent example we have is very important to look at because a lot of people said back in March 2022 that the stock market had to go down because the Fed was hiking interest rates. Don't fight the Fed, get out of the market. And we can see here by the time the Fed started cutting rates, which was in September of 2024. the S&P 500 is 35% higher than where it was when they started hiking rates in March of 2022. So that Fed hikes rates over 520 basis points, and you have a 35% gain for investors.
So people who sat on the sidelines and said, I'm not going to get back into the market until the Fed starts cutting interest rates where they missed out on a 35% gain for the S&P 500. And this chart really tells the story here. I looked at every different scenario here. when the Fed funds rate is low, when the Fed funds rate is high, when monetary policy is easy, when monetary policy is tight.
And if you're looking at this chart and saying, Well, what's the signal here? The signal is that there is no signal. It's all just noise in terms of the Fed funds rate.
There's no relationship between how high or low it is and forward returns. You actually see the best returns historically when the Fed funds rate has been really high looking forward, which is kind of unbelievable given the narrative that you need EZ's money for the stock market to go higher. That's not to say that stocks...
should be expected to go down when the Fed is cutting rates or that easy money is necessarily bad for the stock market. That's certainly not true. But looking at this data here, you can also say that tight monetary policy and high interest rates have not been bad for the stock market.
And it isn't always the case that cutting interest rates and easy monetary policy is good for the stock market. You can see that clearly here in this chart when the Fed was cutting rates in 2001, and the Fed is cutting rates in 2007, 2008, you can see cutting rates down to very low levels. And what is the S&P 500 doing?
It's going down. So if the Fed is cutting interest rates because there is a recession and because earnings are going down, well, that's not very good for the stock market. So there's no simple rule when it comes to Fed policy.
And that's why I like to say fight the Fed, which is essentially saying don't listen to the Fed in terms of your long-term investing plan. Rule number nine, expect the unexpected. This is an important concept for investors because the markets don't follow a normal distribution, which simply means that these fat tail events, these big moves in markets happen much more frequently than what a normal distribution would imply. And that we're looking at things that happen all the time that should never have happened in the history of the universe.
We got one in August of this year, the Nikkei 225 index has a crash. It goes down in two days, 17.5%. That was a 10 standard deviation move. And that simply using probability theory simply should never happen in history of the universe. But of course it did happen and will happen again in many different areas and markets because they don't follow normal distribution.
They're fat tails. And so these unexpected events. happen much more frequently than you can model.
So as an investor, you have to suspend disbelief. You have to expect the unexpected. You're always going to see these seemingly impossible things happening in markets. What I like to say when it comes to markets is there is no impossible.
You're always going to see these crazy things because it doesn't follow normal distributions. It's actually a big mistake to model your portfolio assuming that these extreme events aren't going to occur. Rule number 10, don't chase the past. So we all have this temptation to believe that what's happened in the recent past is going to continue in the future. It's called recency bias.
And if we look at something like the NASDAQ 100 in the mid to late 1990s, you can see here just this incredible run, biggest bubble in history for the stock market, up 817% in this five-year period. And the expectation at the end of 1999 was very much this is going to continue. These are the type of returns that investors should expect going forward.
What happened in the next five years? You can see here, very different story. NASDAQ 100 has a drawdown about 80% over that period of time. And you can see five years later, more than 50% lower than where you started. And in terms of investing, this is an important concept because very often, what has done the best tends to lag going forward.
There was an important study looking at equity mutual funds saying, well, the best performing funds, if you just bought them, how would you do going forward over the next few years? And what they found is you would actually do worse than had you bought the worst performing funds, which is another way of saying there's mean reversion when it comes to markets. And when you have these extreme moves, you're more likely to have this type of mean reversion.
And you should really follow the rule of thumb to say, don't chase the past. The past has already occurred. When you're buying the NASDAQ 100 in 1999, you're not getting these past returns. Everything is about going forward, about the future. And oftentimes the case, when you have this extreme performance run, you have very high valuations.
And when you have very high valuations, you tend to have worse forward returns. So don't chase the past. Only think about the future.
Evaluate each and every investor as it stands today, not based on what it has done in the past few years, because that's not likely to continue. Okay. Rule number 11, focus on saving. before investing. Everyone wants to start investing.
You want to start getting those compounding returns. I'm all about that. But first, you have to save. If you don't save, you don't invest.
You have to have a net positive in terms of you're saving money in order to have money to invest. If we look at the savings rate in the US, it's a little under 5%. This is an average rate. You have people saving higher than this.
You have many people saving. close to nothing. The important thing when it comes to saving is start as early as possible. Try to live below your means so that you can start early and the compounding can start earlier for you.
You can see that in this chart, how important that is. If you invest $5,000 annually and you start at age 25, you have an 8% growth rate. By the time you're 65, you're going to have over 1.2 million. If you wait... until you're, let's say 40 to get started, you're going to only have 365,000.
If you wait till you're 50, 135,000. So let that compounding work for you earlier. And this is a crazy example of how important savings is versus investing when you're first starting out.
What I did was I looked at the median household income in the US, which now is around $80,000. Then after taxes and FICA and all that stuff has taken out. you have around 68,000 of disposable income.
So I looked at different savings rates, let's say saving 1% of that, 2% of that, 3% of that, all the way up to 10% of that, which would be a great savings rate for anybody. And what I compared here is if you had invested for 30 years and you're earning 10% on your money and saving just 1%, what would you be left with at the end of that 30-year period? You could see here, you're going to be left with 111,000.
Now, if you had the worst return imaginable, had 1% annual return, but saved 10% of your income each year, you're actually left with more than double that, $236,000. So the amount you save very much is going to trump what your annual return is. Another way of looking at that is to see what changes in terms of a 1% increase in your savings rate versus a 1% increase in your returns.
You can see here... If you can bump that savings rate up from 1% to 2%, it's going to double what you're going to have at the end of 30-year period. And if you increase your returns from 5% to 6%, you get a marginal increase, but much lower from 45,000 to 53,000.
So the lesson here for investors is when you're first starting out, saving much more important than investing. And this is actually good news because... It's something you can control.
The investing returns, what you're going to get if you have a diversified portfolio, they're going to be whatever they're going to be. What you can control is actually that savings rate. So this is good news because the more you save, the more you're likely to have over time.
And it's going to likely be much more important factor in terms of what you have in retirement than what your actual returns are going to be, which is going to be much harder to predict and much harder to influence as an investor. Rule number 12, simplify whenever possible. We have this tendency, I would say, to try to seek more complicated things. What the belief is, is that if it's more complicated and it's more difficult, perhaps we should be rewarded for that.
In markets, that simply isn't the case. A good example here is comparing a hedge fund index, an equity hedge fund index. looking at long short equity. So buying stocks and shorting stocks versus a simple 60-40 portfolio. So here we have a lot of things at play here.
The hedge fund index, of course, is going to have much higher fees. Some of these funds are charging 2% and 20% of the profits. They're going to have more complexity. They're going to have less liquidity. And they're going to have this situation where it's much harder to predict what's going to happen.
over a long period of time because they could be invested in any number of things. They could be concentrated in a few individual stocks. They could be short, different sectors. So returns much more difficult to predict than a simple 60-40 portfolio. But here, looking at the last 15 years, you can see all of that complexity in the hedge funds on average.
Of course, there's certainly hedge funds that have done very well in this period, but the average hedge fund up 117%. in this HFRI equity hedge index versus 295% for a simple 60-40 portfolio here. I'm just looking at 60% SPY, 40% AGG. So you're talking about fees of less.
then 10 basis points versus much higher fees, talking about much lower complexity, talking about much higher liquidity, and you have a much higher return. So you don't always get what you pay for in terms of investing. And many times it's often the opposite. You're actually getting a lower return with increased fees, increasing complexity. So what I like to say is on average, passive tends to beat active on average.
Lower fee tends to beat higher fee on average, and simpler tends to be more complex on average. And we'll talk about this later. The importance of knowing what you own in your portfolio is extremely important.
It's one of my top rules in terms of investing. And when it comes to hedge funds, many investors don't know what they own. So as soon as it goes down, they bail on that portfolio.
So even if it's a good hedge fund... unlikely you're going to be able to stick with it because of the complexity. You don't really know what you own. Okay.
Number 13, rule number 13, learn to be good at suffering. What does suffering have to do with investing? Well, it has everything to do with investing because you're going to suffer as an investor. It's simple.
When you look at this chart, most of the time as an investor, you're going to be in a drawdown. You're not going to be seeing your portfolio go up and up and up. You're going to see... it lower than a previous point in time over 90 of the time the s p 500 has been in a drawdown since 1928 and you can see here the drawdown is nothing to fear because the market eventually always has come back because earnings have come back the economy has come back and the bigger the drawdown historically this should be comforting news for investors the better the long-term forward returns are looking out 20 years from a 50 drawdown you have the highest returns buying an all-time high definitely not a bearish signal but actually has the lowest long-term forward returns of any of the situations so you're going to have drawdowns in markets you have to learn to be good at suffering so you can not only withstand them but you can take advantage of it you have extra cash on the sidelines the best time to put it to work is when valuations are cheaper and if you have a 20-year horizon you're likely to have a better experience buying during a drawdown than when the market's at an all-time high so learn to be good at suffering rule number 14 never interrupt compounding unnecessarily this is from a famous charlie munger quote and many investors have a difficult time with this because they don't have to interrupt it so i'm not talking about a situation where you're retiring or you lost your job you need the money or some other liquidity event. I'm talking about behavioral stuff where they're getting out of the market because there's something bad going on in the news.
Of course, March 2020, a lot of bad things going on. It was the COVID crisis and investors thought, or they were being told at least, that there was going to be another Great Depression. They pulled a record $326 billion from the stock market in that month alone.
And what we see here on this chart is what that would have done to you if you didn't get back in. So all that money that was pulled out, some of it might've come in, but a lot of it didn't. And if you're looking at the last 10 years from September, 2014 through September of 2024, you can see what that would have done to your portfolio's returns.
The market has had a very strong last 10 years, 13.5% annualized. So above the 10% historical return, 256% cumulative. But if you got out in March 2020 at the lows, which a lot of people did, and you didn't get back in, your return would have been only 2.5% annualized, 29% cumulative.
So don't interrupt compounding unnecessarily. Rule number 15, tune out the noise. Peter Malouk and I do the show Signal or Noise every couple of weeks, and we're always talking about the noise that's going on, the headlines that's going on, and a lot of it...
Most of it is just pure noise. You should ignore it as an investor. I want to point out probably the most historic piece of noise that we've ever received in terms of investing that happened in 1979. Businessweek puts out this article, The Death of Equities, famous last words here from Businessweek. And why is that?
Because not only was it not the death of equities, it was really the birth of equities. If we look at what happened over the next 20... years for the market.
It had its best 20 year period in history. You're talking about 17.4% annualized, 2,375% return in the 20 years following that headline. So definitely Don't listen to these magazine covers. And when they're at an extreme, when they're talking about something after the fact, so the 1970s were not a great decade, of course, for the stock market, but at the tail end of it, they're saying the equities are dead, not at the start of it, but at the end of it, you're oftentimes better to go in the opposite direction. And each and every month, each and every year, we have these examples.
What Peter and I pointed out last year, was this crazy article saying presidential election years are bad for stocks. And what we simply said at the time was that you don't want to follow this because the data doesn't suggest that whatsoever. I look back in history at every presidential election year and compare it into non-presidential election years.
And as it turned out, you actually had higher returns during presidential election years on average, not a huge difference, but 10.0% versus 9.7%. So you Certainly nothing in the data suggests they were bearish in terms of presidential election years. And if we're looking this year so far, it's actually been well above that 10% return. It's been so far in 2024 through September, the best presidential election year in history, up 20.8%. So don't follow these headlines.
Ignore the noise as an investor. Stick to your portfolio and plan. have a long-term strategy don't let these headlines don't let the noise deter you from your long-term objectives and goals rule number 16 respect reversion to the mean this is especially true in terms of volatility and we have these volatility spikes seems like every year but in 2020 we had a spike that we had never seen before we had an all-time high in terms of close for the vix talking about 82 on the vix the historical average It was around 19 and a half, so well above that. That was during the COVID crisis.
And when you're in the midst of this, it seems like it will never end, that the bad news will continue. The volatility is going to stay high forever. And of course, that simply isn't the case.
Bad news, what follows bad news is eventually good news. And fear, when you have these extreme levels of fear, it doesn't persist forever. eventually it comes down. It's mean reverting in both directions.
When volatility is very low, you should expect it to be higher. But when it's very, very high, you should actually expect it to come down, which it of course did. And in terms of the stock market, when the VIX spikes, when you have these extreme fear events, you tend to see mean reversion there as well.
So you have these huge down moves in stocks when volatility is spiking. And what you tend to see is a snapback rally. a rubber band is stretched in one direction and it snaps back and i'm showing you here the highest weekly closes for the vix index and forward s p 500 returns you can see here all green and well above the averages and what are the dates here 2020 2008 2009 these are the worst periods historically in the markets over the past 30 years and what we've seen is extreme fear extreme panic you should embrace that as an investor because there's mean reversion. Investors overreact on the downside, assuming that the worst news is going to continue. And what we've seen historically is the market comes back every single time and the average returns of these highest fixed levels well above the average in other periods of time.
So if all else equal, as an investor, you're much better off buying when there's a panic than buying when there's extreme. calm and complacency in the markets. Rule number 17, know what you own and why you own it.
Peter Lynch once said this. I love this quote because you have to know what you own in your portfolio or you're not going to stick with it. And most investors, they're building blocks of their portfolio, of course, stocks, bonds, and cash. So I'm going to just quickly run through what you own there, why you own it.
Why do you own stocks, first of all? Well, the big reason you own stocks are for growth, long-term growth. and outpacing inflation over the last 100 years.
Single best inflation adjusted return has come from the stock market. What I'm showing you here in this chart is the purchasing power of the consumer dollar versus the S&P 500 adjusted for inflation. You could see the US consumer dollar lost over 50% of its value in the last 30 years.
Why is that? Because of inflation. And inflation is going to continue in the future. We don't know how much it's going to be.
We just know that that value of the dollar is going to go down historically the best way to protect yourself against that has been stocks you can see here inflation adjusted returns s p 500 up 961 about eight percent per year inflation adjusted and if we look at the stock market versus bonds and cash here. You can see this is where the long-term compounding and growth comes from, usually the stock side. And that's because the higher level of returns, you can double your money quicker.
Losing the rule of 72, stocks tend to double on average every seven years. Of course, that's not linear. That's not every seven years.
Sometimes it'll happen shorter. Sometimes it'll take longer, but on average, much faster than bonds, which is 15.7. years on average and cash usually over 20 years on average.
Of course, that depends entirely on what the interest rate on cash is going to be. But why do you own bonds? We talked about stocks, you own stocks for growth to outpace inflation, maintain purchasing power.
You own bonds for liquidity needs, let's say in the next five to seven years, and you need a interest on your money to use over that period of time. and you're not likely to hold, let's say, for more than five years. We need to have some part of your portfolio that's liquid and that has lower volatility.
And that historically has been the bond market. And the best way to predict what you're going to get from the bond market, much simpler than the stock market, is simply what that yield is at the start. So today, the yield on the 10-year treasury bond is around 3.8%. Well, that should be your expectation for the next seven years. Could it be higher?
Yes, if interest rates fall, could it be lower? Yes, if interest rates rise. But over the next seven years, that's likely what you're going to get from the bond side. So if you have some liquidity needs in the next few years, you're likely to have some position in the bond market. It also helps you as a cushion for when the stock market goes down, it gives you the ability to rebalance, take money from the bond side, add it to the stock side.
Of course, 2020 being a great example where stocks went down a ton. Bonds actually went up. You could take money from bonds, put it into the stock market, and it ultimately comes down to your asset allocation as an investor. So why not just put everything in cash?
It has no drawdown. It always goes up in terms of treasury bills. Well, because you're not being compensated for that in the long run.
It's not likely to significantly outpace inflation. In many periods, it underperforms versus inflation, but you can see here 3.3%. annualized return historically. Sometimes it'll be higher, sometimes it'd be lower, but you take stock risk because you want a higher level of returns. You have a long-term goal where you need more money at the end in terms of retirement or to have financial independence.
So the trade-off is you're going to have larger drawdowns along the way. You're going to have larger volatility in terms of your portfolio swinging back and forth much higher, the higher percentage of stocks in your portfolio. portfolio, but your expectation should be a higher long-term return and a higher return relative to inflation. You can see that here very clearly. And nothing is static.
So there's no sense of, I'm going to have a 60-40 portfolio. I'm going to get 8.2% because that's what it's been historically. Absolutely not. But what we can say is we're going to have a higher level of risk, most likely. then a portfolio that's 2080. And your long-term expectation should be a higher level of return.
But what happens in the short run? Nobody knows. So know what you own, why you own it.
So we just covered here, stocks, bonds, and cash. Obviously, there's other asset classes, real estate, private equity, everything. You need to understand what's in your portfolio, not for the good times, but for the bad times.
When you have these big drawdowns, the only way you're going to stick with it and the only way you're going to continue adding to that portfolio... is if you understand what i own why i own it what is it doing there why should i keep investing in this what is it going to bring me in the long term so you should be looking at your portfolio and every single thing that's in it and say what it's what is its purpose here why do i own it and understand what it's what it's going to do for you in the long run so know what you own and why you own it number 18 diversify diversify diversify i'm sure you hear this all the time it's Pretty boring concept because concentration is the fastest way to build wealth. We know this by looking at all the CEO founders like Zuckerberg and Musk. They have the highest net worth, but most people are not Zuckerberg or Musk. As an individual, the best odds of successful outcomes in terms of investing is to diversify because we don't know the future.
We can't predict what's going to be the best performing asset class or stock. 10 years, 20 years, 30 years from now. And if we look at where we are today, what has been the best the last 10 years, clearly large cap US growth stocks.
We know all the names, Google, Apple, Amazon, Meta. Nvidia, they've been the big story stocks the last 10 years, far and away outpacing everything else. Russell 1000 growth up 342%.
S&P is at 239%. We look at small caps, 145. Value stocks, much lower, 134. You got REITs, 93%. Bonds all the way down at 18%. And international underperforming the last 10 years.
So if the future always looked like the past, you would say let me just put everything in large cap growth stocks, assuming that's going to continue. Cullen Rochefoucault Why don't we do that? Because we don't know what the next 10 years, what the next 20 years is going to bring. It could be the same, could be different.
And on the chance that it's very different, you're going to want to be diversified because you could have a situation like we had in 2000 to 2009, where it was the opposite scenario, where international emerging markets actually did very well, yet growth stocks doing very. Robert Leonard poorly after the dot-com bubble burst. Will this happen again? No, every time is different, but the possibility is that the cycle is going to change.
Nothing lasts forever in terms of markets. And the best way to protect ourselves against our inability to predict the future is to diversify, diversify, diversify. Rule number 19, control your emotions.
If you don't have this, you don't have anything else. So you have to control your emotions. What are the two big emotions?
Fear and greed. And this is an important concept, I think, for investors to consider looking at the returns of stocks and bonds historically. They're all over the place. So this idea that you're going to predict what the S&P 500 is going to do in the next 10 years, not likely. You could see sometimes it's below zero.
Many times it's... been above that 10% historical return. We've actually been above it the last 10 years. We had a great run here.
You could see bonds very correlated with interest rates. Interest rates were very low 10 years ago, not a good 10 years for bonds. They're higher today, should be a better 10 years for the bond market.
You can't control any of this as an investor. Can you control your habits, your behavior, not chasing in terms of performance? This is so important because if you want to receive the returns- of what you're invested in you can't be buying only when it's going up and selling when it's going down that's going to hurt your returns and studies have shown this concept of the behavior gap where investors actually receive a lower return than the funds that they're investing in and they that's because they are buying after a huge performance run on the upside and selling after downside performance on the downside you can see here last decade it's been about 1.7 per year. So just controlling your emotions, not having FOMO, not on the downside, panicking and selling out, well, you can eliminate this behavior gap and be in the top few percent of investors by just not doing this simple behavioral stuff. It seems simple, but much more complicated, obviously, in practice by not succumbing to fear and greed.
So what I like to say is you're having this temptation to chase, to make a wholesale change in your portfolio. Take a break, go out for a walk, read a book, get your mind off of it. The market will be there when you come back and you'll likely be in a much better place mentally to make any decisions. Don't make any rash decisions when you have these emotional reactions based on fear and greed. Okay, last rule here, rule number 20, value time over money.
Of course, there's nothing more important than time. And why is that? Well, as...
Peter Malouk showed in this tweet here, time is the only currency you spend without knowing your balance. Use it wisely. So you can always make more money. You can't make more time. And we often talk about asset allocation, how much to put in stocks, how much to put in bonds, how much in real estate, how much in gold, all these different things.
Time and time allocation far more important because you can't get that time back. And when it comes to balancing between time and money. a scale should be very much tipped towards time so what are we investing for what are we trying to make money for what are we trying to compound growth for we're trying to compound it for most people to get more time to have financial dependence to do what you want to do with your life however you want to spend it so just be aware of that don't just focus on the money aspect of it Focus on what you're going to do when you achieve financial independence. Focus on that time. We only have a short period of time on this earth.
So make it count. Okay. Those are the 20 rules for markets and investing. If we could help you in terms of your own investing journey, reach out today, creative planning.com slash Charlie.
Schedule a call. Schedule a meeting with us today at creative planning. We have over 300 billion in assets under management and advisement.
We're in all 50 states, so we likely have a location right near you, and we're here to help. So creativeplanning.com slash Charlie. Thanks, everyone, for watching the video today.
If you're watching this on YouTube, take a moment, hit that subscribe button for more content just like it, and I'll see you next time on the regular edition of The Week in Charts.