We are products of the world around us. Over time our experiences and the people who surround us shape and mold us into ourselves. Often these experiences and moments include turning points, inflections that redirect our worldviews for the rest of our lives. The world we experience during our adult formative years often becomes the world we expect to experience from then on.
Every generation has its defining moments. These watershed moments are often scarring, horrible experiences. Imagine you are 22 years old and it is 1973. In a period of 2 years, oil prices will triple (for just the first time in the next ten years). You will see political turmoil, ration lines at the gas station and costs skyrocketing. Headline inflation will push to double-digit annual growth – in 1974 CPI was over 12% in this country. A few short years later oil prices tripled again, driving CPI up 13.29% in 1979 and 12.52% in 1980. You’re kidding yourself if you don’t think these early adult experiences don’t shape the way you see the world for the next 50 years.
Likewise, children of the depression learned one single thing – safety above all else. Members of this generation keep cash savings and CDs at a dozen banks across town, not to mention the cash hidden in a coffee can and the gold coins buried in the back yard. Many of them swore of stocks forever after seeing the crash take the life savings of their parents and their friends (despite the fact that, as always, markets recovered and healthy gains awaited the patient investor).
Members of “Generation X” witnessed two bear markets of 40%+ declines in a matter of 10 years. Many were convinced that the stock market is “rigged” and that periods of extreme volatility were all the market had to offer. Unfortunately, people came to this conclusion at the bottom of the bear markets, suffering the short-term losses in stock portfolios and missing out on a lifetime of long-term compounded returns.
Younger members of GenX and older millennials were coming into adulthood during the greatest housing boom this country has ever seen. They saw friends flipping houses for huge gains from 2003-2007 and many bought their first homes at the tail end of this period, convinced that home prices only ever went up. After suffering large losses in their home values in the midst of one of the worst recessions in history, young people swore off asset ownership, sold their homes short or simply walked away, some turning to bankruptcy after escaping an underwater mortgage. Again individuals missed out on the rebound in asset prices (this time with housing) and may miss out on the potential long-term benefits of asset ownership.
We can’t do anything about how the world unfolds around us. We can’t control the generation we are born into and what will be happening on the global stage as we become adults. In all likelihood some material event will unfold while we are young. War, politics, recessions, bubbles, crashes, manias and panics are just part of our shared experience with other people on this planet.
We need to recognize these events and recognize their impact on our perspective. We need to be aware of our new worldview and the biases we carry around every day. We need to ask ourselves hard questions about the things we choose to worry over and the things we choose to ignore. We need to have thoughtful conversations with members of other generations and learn what they worry about and what they choose to ignore, and learn why. We need to study history, to learn what has happened before and it it may be likely (or unlikely) to happen again.
Most of all, we need to be aware of how these formative thoughts affect our financial decisions, and how our worldview may be clouded by unrealistic expectations about risk and potential returns. We need to create self-imposed restrictions to limit the impact of these biases on our portfolios and our wealth by making sure our decisions are data-dependent, rational and long-term oriented based on the full history at our disposal, not just the history that personally affected us the most. If we don’t, we will let our scars lead us into irrational, faulty narratives about the world around us, which may be more dangerous than any reality we will face in the future.
Bason Asset Management 