Life is Not a Vacuum and Neither is Investing

The art of comparison creates many challenges for our personal and professional lives but especially our finances. The desire to keep up with the “Jones’” next door in the newest car, biggest house and best vacation hopefully fades as we age. Other aspects of comparison tend to creep into our lives and take over that role over time.

One such comparison is looking at our economy today and comparing it to another time. Recently there was an attack against Saudi Arabia. The last time this happened was 1991, and that shock created a drop in the stock market and a spike in oil prices. That was then, but this is now.

Sure enough, the following day pundits filled the news and explained what this meant for your 401(k) and the overall economy. You don’t – in the opinion of advertisers – watch the news for information any longer. You are watching for conclusions and actionable items. How sad.

We do not live in a vacuum and neither does our economy. Yes, oil prices spiked, and equity markets declined rapidly in 1991 over a similar event. What the newsmakers left out is the market in both cases went back to their senses over the next year. More importantly, they left off that at that stage, the US was energy-dependent upon oil-importing. Last year we actually became a nation of oil-exporting. Things change.

Our human bias is to think we can look at an event or what the academics would call a “cause” and then make sense out of that by predetermining an outcome or “effect.” The usual rule of thumb is this event created this outcome last time so here is the answer. Things change!

Examine your favorite past time or hobby and see the problems when you know the whole story or at least most of the story. For instance, I am in no way mechanically inclined. I rely totally on my friends at the dealership to keep my car in good order.

A few years ago, my car was acting like I remember my first car acting more than 30 years ago. I was told that my carburetor had an issue and needed to be repaired. I will never forget my embarrassment when I told the mechanic that I think my car needed a new carburetor based on my past experiences. He laughed and explained I was more than a decade late in my analysis.

There is a natural human behavior to explain things, but please be careful. My car was only saved by my willingness to hire a professional that knew the entire story, not just my personal opinion of the cause and effect. This happens in economics all the time.

There are academics, for instance, who teach that contributing to a Roth IRA is no different than using a Traditional IRA over time. They are living in a vacuum assuming inputs like taxes remain consistent. Just like carburetors, things change, and there is often more to the story.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.