The Price Of Pessimism
Lessons for investing (and life)
Let me tell you a story. A true story, not some bullshit I made up for the sake of allegory1. It was June of 2022, and I met with a man named Jerry2. He was 62 and had just retired with his wife at the beginning of the year with about $1.3m, a decent chunk of change in the Midwest. They had just built an $800k house on a large plot of land in the country. Jerry told me about all the travelling his wife wanted to do, and how they wanted to help their kids and grandkids. They had all sorts of plans that they were excited about.
Jerry also had a bit of an anxious personality, as if he was always worried about something around the corner. He told me he had always been a conservative3 investor, because he was terrified of stock market crashes. He had just taken his 401k to cash over worries about the war in Ukraine and inflation. He was right to be worried, those things are terrifying! There’s just one problem- there’s always a crisis somewhere.
Just in Jerry’s lifetime, there was rampant inflation in the 70s that put the last few years to shame. There was the Savings & Loan crisis of the 80s, along with crushing interest rates. There were multiple currency crises in the 90s. The 2000s brought terrorist attacks, the war in Iraq, and the Global Financial Crisis. The 2010s had a widening political divide4, and a debt crisis in Europe. Our current decade had an unforeseeable pandemic, war in Europe, and crushing inflation. The future will be full of crises too; it is always something. However, despite Jerry’s worries, the market is up over 17% since then.
What does this mean for Jerry? Well, he was too skeptical to hire me5, and I don’t blame him. A lot of people in my industry are shady salespeople masquerading as advisors6. But based on some reasonable assumptions and some back of the napkin math, here is the price of Jerry’s pessimism-
If he would have invested more aggressively during his working years when he didn’t need the money, he would have about $2.2m, a difference of $900k.
If he would have stayed invested in 2022 and moved to a moderately conservative 60/40 portfolio when he retired, Jerry would have $2.4m now. That’s another $200k.
With $2.4m in a 60/40 portfolio, Jerry and his wife could live on a very comfortable $170k per year for the next 30 years (pretax, inflation adjusted, assuming $50k from Social Security). They will likely have at least $1m left to pass on as a legacy to their children, possibly significantly more.
Since he didn’t do 1 & 2, they can afford a lifestyle of $80k a year (same assumptions as above). They will have little to nothing left.
In practical terms, Jerry’s pessimism cost him $90k retirement spending. Before you say “money doesn’t mean everything”, go read my article from a couple weeks ago. This is about more than money. It is about the house that they were so proud of. It is about his wife’s travel plans. It is about paying for their daughter’s upcoming wedding, and contributing to their grandkids’ college funds. It is about being able to afford the best medical care7. It is about not having to worry.
Like it or not, being alive costs money. Hell, even dying costs money! It is not my job to tell you what your lifestyle should look like8, now or in retirement, but the things you do with money now will affect you in real ways later. The more you spend now, the less you can spend later. Likewise, if you are too conservative about investing during your working years, there will be consequences later in life.
This metaphor also extends to everything else in life. All the best things include an element of risk. Dating and marriage, starting a business, applying for jobs, skydiving9… there is always risk of failure. That last one would be a terminal failure, so make sure you have life insurance! If you live life in a bubble, you will have a very boring, unfulfilling life10. When you are on your deathbed looking back at your time in this world, you will realize all the highlights were because of reasonable risks that you took, and the failures were really just learning opportunities. Sure, the world could end tomorrow in a nuclear holocaust. If you really believe that, go build a bomb shelter in your back yard and stockpile it with ammunition and beans11. Maybe that will work out for you. In the meantime, I am going to work up the courage to go skydiving instead.
Kyle Thompson, MBA, CEPA
Founder/Lead Advisor
The content contained herein is intended as education and entertainment, and does not constitute investment, tax, or legal advice. Please consult the relevant advisor before making any decisions. Additionally, any opinions expressed here are solely those of the author, and do not represent the opinion of Leetown Advisors or its affiliates.
I wasn’t sure I was using that word correctly, and had to look it up. Turns out, I am smarter than I look.
His name was not Jerry. I did make that part up.
This means something different to everyone, but I am going to assume his portfolio had historically been 50% stocks and 50% bonds.
Neither side actually cares about you anyway, they just tell you what you want to hear to get your vote.
I wouldn’t take him anyway, because he refused to include his wife in the process. He never even once said her name.
Go read the 10 Questions You Should Ask A Financial Advisor.
Half of all bankruptcies are due to medical debt.
Or the spending that comes with it.
I am personally terrified of this, which is why I want to do it.
I once had a personal trainer tell me that artificial sweeteners were going to kill me. If that is the case, my life was too boring and I lived too long.
And Gas-X so you don’t turn the shelter into a poison gas chamber.