Should I just put everything in $SPY?

Diversification sucks

"Why don’t we just put all of our money in SPY?"

Well, have you done that before?

"No."

Would you?

"I'm not sure, that's why I'm asking, but it seems like a good idea. it's performed the best. Warren Buffet says that's all I should do. so does my buddy at Goldman"

Why not buy the Q's? It's destroyed the S&P over the last decade.

"Um... I'm not sure."

If you think you can put all of your money in SPY and never touch it, without panicking or making other mistakes along the way, go for it. But do you think Warren and your buddy at Goldman might be playing a different game than you?"

"Well, idk, I don’t think I would, but I’m just hung up on the idea."

And what are your goals?

"Right now, I just want to make sure that I'm on track to retire, buy a new car, a lake house, etc."

Do your goals require you to put all of your money in the S&P?

"No, maybe, idk. I guess not. but it would be nice to have more money at the end. I could do a lot with that, and be a lot less stressed."

Does the S&P guarantee you'll have more in the end? And along the way, thinking about more reward/more risk, do you think you'll be less or more stressed?

"I guess not, and I would probably be more stressed along the way"

But let’s actually define your risk. Your risk isn’t underperforming an index. It’s the risk you don’t hit your goals. And your goals are to fund a certain lifestyle.

What happens in the market is out of our control. So, we have to prioritize process over outcome.

"..."

More?

"Sure..."

I would agree that SPY has been the best thing to own for the last 30+ years, and it might be when we look back 30 years from now, but I can't tell what will happen between now and then.

I can't tell you that the American economy will keep up this pace, that earnings will continue to grow the way that they have, or that the S&P will repeat its success from this last decade over the next decade.

I have no idea.

But I can tell you that we don't live our lives in 30-year increments. We live them in 3-year increments, at best. Don't you think?

"heh, yeah (fake laugh)."

I’m not telling you to invest with a 3-year time horizon. I’m telling you to hedge your own emotions.

The S&P has had enough disappointing 3-year, 5-year, and even 10-year periods for me to know that it can be really hard to stick with. You'd have to be almost completely emotionless about your money. Are you emotionless about your money?

"Well, no, not at all."

Neither am I. It's hard to accept this possibility because we all suffer from recency bias, and the S&P and the Q's have crushed it for the last ~15 years, but you can try to picture yourself in these situations. Can you imagine what you’d do if your portfolio got cut in half or worse? Don’t you remember what you did in 2020?

“Right, yeah, but I think I’ve learned from my mistakes in 2020.”

I’d like to think so, too.

Drawdowns and underperformance happen for a reason. They happen because something is expected to go wrong or it’s going wrong. And you have to fight emotions and what appears to be the most obvious and rational decisions to stick with it. I’m not saying it’s impossible, but it’s really fkn hard.

Everyone knows the S&P has averaged about 10% per year, but no one's picking that apart. 43% of the time, the S&P delivered returns below that number—sometimes far below, and sometimes for a long time.

I tell you this because your expectations of an investment matter far more than the investment itself.

Look, I’ve seen some really shitty portfolios in my day where people were losing money year after year while everything else did fine.

Why would they stick with it? Because they expected the company to outperform in the future. They simply believed in it. Unfortunately, they were dead fucking wrong. They bet their future on the exception to the rule.

No, you’re not speculating like they were, but if I can't be sure that concentrating the bulk of your wealth into the S&P, the Q’s, or any other part of the market would give you the same probability of success as a more diversified portfolio, then it's in your best interest to have a more diversified portfolio. Wouldn't you agree?

“meh, I guess so"

Good. The next step in Investors’ Anonymous is acceptance. We must remove the potential for future landmines, and diversification is one of the best ways to do so.

You have to accept the fact that you can't depend on historical returns for your life. Investing can be simple, but it’s never easy, and it's not black and white. Your desire for certainty will get you killed out here in these streets.

"you sound like my parents"

That’s my job. Who else is helping you navigate your adult life?

“Good point.”

Look, I know how you feel, but what's better than the possibility of achieving the best possible return is having clear goals with a well-defined plan to help us reach those goals in a portfolio that we can stick with through ALL markets.

Focusing on our plan and what we can control will do more to reduce your anxiety than excess returns; I can promise you that.

So, we embrace uncertainty. We invest this way because we don't know what’s going to happen, but we know we won’t be ruined by it. In the end, we’ll always feel like we left money on the table. That’s the cost of risk management, but it’s better to be consistently good than occasionally great.

“Tap out”

[A reminder to the advisor: People don’t work with us for more ill-fated attempts at outperforming markets or their neighbor's portfolios. They come to us for a reliable strategy, designed to perform in the most difficult environments to maintain their quality of life.]