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particularly those vehemently against active investing.
Beating the market should be hard; the odds of success
should be low. If they weren’t, everyone would do it, and if
everyone did it there would be no opportunity. So no one
should be surprised that the majority of those trying to beat
the market fail to do so. (The statistics show 85% of large-
cap active managers didn’t beat the S&P 500 over the
decade ending 2019.)⁷¹
I know people who think it’s insane to try to beat the market
but encourage their kids to reach for the stars and try to
become professional athletes. To each their own. Life is
about playing the odds, and we all think about odds a little
differently.
Over the years I came around to the view that we’ll have a
high chance of meeting all of our family’s financial goals if
we consistently invest money into a low-cost index fund for
decades on end, leaving the money alone to compound. A
lot of this view comes from our lifestyle of frugal spending. If
you can meet all your goals without having to take the
added risk that comes from trying to outperform the market,
then what’s the point of even trying? I can afford to not be
the greatest investor in the world, but I can’t afford to be a
bad one. When I think of it that way, the choice to buy the
index and hold on is a no-brainer for us. I know not everyone
will agree with that logic, especially my friends whose job it
is to beat the market. I respect what they do. But this is
what works for us.
We invest money from every paycheck into these index
funds—a combination of U.S. and international stocks.
There’s no set goal—it’s just whatever is leftover after we
spend. We max out retirement accounts in the same funds,
and contribute to our kids’ 529 college savings plans.
And that’s about it. Effectively all of our net worth is a
house, a checking account, and some Vanguard index funds.
It doesn’t need to be more complicated than that for us. I
like it simple. One of my deeply held investing beliefs is that
there is little correlation between investment effort and
investment results. The reason is because the world is
driven by tails—a few variables account for the majority of
returns. No matter how hard you try at investing you won’t
do well if you miss the two or three things that move the
needle in your strategy. The reverse is true. Simple
investment strategies can work great as long as they
capture the few things that are important to that strategy’s
success. My investing strategy doesn’t rely on picking the
right sector, or timing the next recession. It relies on a high
savings rate, patience, and optimism that the global
economy will create value over the next several decades. I
spend virtually all of my investing effort thinking about
those three things—especially the first two, which I can
control.
I’ve changed my investment strategy in the past. So of
course there’s a chance I’ll change it in the future.
No matter how we save or invest I’m sure we’ll always have
the goal of independence, and we’ll always do whatever
maximizes for sleeping well at night.
We think it’s the ultimate goal; the mastery of the
psychology of money.
But to each their own. No one is crazy.
To understand the psychology of the modern consumer and to grasp where they might be
heading next, you have to know how they got here.
How we all got here.
If you fell asleep in 1945 and woke up in 2020 you would not recognize the world around
you.
The amount of economic growth that took place during that period is virtually
unprecedented. If you saw the level of wealth in New York and San Francisco, you’d be
shocked. If you compared it to the poverty of Detroit, you’d be shocked. If you saw the price
of homes, college tuition, and health care, you’d be shocked. If you saw how average
Americans think about savings and spending in general, you’d be shocked. And if you tried
to think of a reasonable narrative of how it all happened, my guess is you’d be totally
wrong. Because it isn’t intuitive, and it wasn’t foreseeable.
What happened in America since the end of World War II is the story of the American
consumer. It’s a story that helps explain why people think about money the way they do
today.
The short story is this: Things were very uncertain, then they were very good, then pretty
bad, then really good, then really bad, and now here we are. And there is, I think, a
narrative that links all those events together. Not a detailed account. But a story of how
things fit together.
Since this is an attempt to link the big events together, it leaves out many details of what
happened during this period. I’m likely to agree with anyone who points out what I’ve
missed. The goal here is not to describe every play; it’s to look at how one game influenced
the next.
Here’s how the modern consumer got here.
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