Ben Carlson: Why "Buy and Hold" Still Wins (Even After a 30-Year Market Crash)

Thank you. And I'm no longer under 40. So that was a one-time deal.

Yeah. So, I've been there a little over a decade. I'm part of the investment committee. My background is in the nonprofit space and then I started writing and blogging just to kind of have an outlet and to further my learning and realized that there was a desire for my work in wealth management. And actually the first people who emailed me about my blog back in the day were financial advisors saying, "Hey, I kind of like what you're doing here. I like how you explained it in plain English," because my first audience was my family, friends, people outside of finance. That was my idea. I'm going to, because I keep getting all these questions as the finance guy for everyone else, I want to explain it in a way that regular people can understand it. My grandmother, my mother, my father-in-law, people in my life that ask me these questions all the time. And so that was the idea and a lot of people said, "Hey, our clients are just normal people too. They don't work in finance. They're not paying attention to this stuff every day. I like that you're explaining in plain English." And me being in the nonprofit space at the time, I wasn't even thinking about it in that context. And it was kind of a light bulb moment for me. Like, oh, that makes sense. People want to take the complicated, complex stuff and explain it in an easy way. And my roundabout way to getting there was it was way too complex for me in the institutional space. I thought people made it way more complex than it had to be. There was this idea that like you're a more sophisticated investor. People loved that word sophisticated, right? If you do the more complex stuff, it's more complicated, you're more sophisticated. And I thought this doesn't match reality. There's no way this is true. So that's kind of how I came into wealth management. I got to know Josh and Barry and Michael because they were doing content as well. And we realized like, oh, we have a similar philosophy, we have similar values, we have similar ideas about how clients should be treated and how markets work and all this stuff. Let's bring you into the fold. And that's how I got to where I am today.

I'm writing. Yep. I'm writing. I find someone once said that I write to find what it is I really think or believe. And writing, when I first started it, was kind of cathartic for me because I was in a place where I wasn't happy with the way that things were going in my industry and I wanted to figure out a better way. And so writing is a thing that I need. It's good for me, I feel like. And so that's why I write a lot.

Now, I've been writing for a while now and I've been espousing the idea of long-term investing and the blog kind of came about because there was so much negativity in the world coming out of the Great Financial Crisis and I lived through that and I understand why it happened because it was a very scary time. You know, we had two 50% plus crashes in the stock market within the span of like nine years, right? It was a scary time. And I felt like there was so much pessimism and so many people telling you why the system's broken and everything is rigged against you and long-term investing is broken and doesn't work anymore and all these things. And I said, "Well, that's not what I learned and that's not what I think." So, I wanted to be more kind of a glass-half-full person. And along the way, I constantly, every time I post something about the benefits of long-term investing, I get people saying, "Yeah, but what about this and what about that? Did you think about this? There was this time or this happened." And people want to constantly poke holes in it because I say that buy-and-hold investing is the worst investment strategy there is, except for all the other ones, right? It's like, I'm paraphrasing Churchill there. There's a lot of bad stuff that comes and goes with it. You would have to take all the good with the bad and the bad with the good, but I still think it's one of the better ways of going about it from a baseline perspective. But I think for a lot of people it's so hard to do that they would just rather throw their hands up and fight back. And I get a lot of this exception and that exception and did you think about this and it doesn't work because of this. And so this book is like me trying to play devil's advocate with my own investment philosophy. I'm trying to poke holes in it and show all the really nasty, gnarly bad stuff that can and has happened and will happen in the future and why it still makes sense to think and act for the long term.

And the point is that the history of investing is inclusive of all this bad stuff, right? If you look at the last 100 years, the U.S. stock market is up roughly 10% per year. That's not just picking and choosing and cherry-picking the best stuff. It includes all the nasty crashes, all the inflation, everything bad, all the really bad days and bad months and bad years. And I go through all that stuff. The whole point is like open the kimono and show you, no, it's not going to be easy. You can simplify your investing process, but there are some really uncomfortable hard times when investing, and then here's some context around them and here's how to sort of try to hedge those risks. But that's the idea that, yeah, even with all the bad stuff that's happened, you still get this wonderful long-term outcome and it's still the best wealth-building machine on the planet.

And it's because everyone, after my whole experience with the Great Financial Crisis was after it happened, everyone said, "All right, I need a black swan fund and I need a downside volatility hedge and I need all these things that I wish I would have done." And of course the next risk is nothing like you thought it was. And if you would have laid out what's happened this decade in terms of the landmines we've gone through, you mentioned the pandemic and 9% inflation and oil goes from being negative to shooting to $150 a barrel almost and all these crazy scenarios, we have tariffs and we have all this stuff we're dealing with, and the stock market is still up double digits, almost the same exact annualized return as it got in the 2010s with a totally different environment, right? 9% inflation and all this stuff. And I talk about in the book that I think it's probably never been harder to, like you said, put your head down and ignore the noise because we're constantly beat over the head with it, right? We have these little supercomputers in our pockets now, constant alerts. And so to me, it's not even so much like ignoring the noise anymore. It's finding the right filters so you're not just focusing on them to your own detriment.

Yeah, one of the other reasons that I wrote the book, it's funny. So if you remember, the stock market peaked before the Great Financial Crisis in October of 2007. We didn't hit new all-time highs again until I think March of 2013. So it was a long time. And then when we hit those new highs again, everyone said, "Oh no, one of these highs is going to be just like that high was and we're going to fall off a cliff." And so people thought, no one wanted to believe that. And even I don't think I would have believed if you would have told me in 2013 that this thing's going to go on until the mid-2020s and maybe beyond, this bull market with some setbacks along the way. But people thought like, okay, it's going to end now, right? Double dip, whatever. And so I said, well, okay, fine. What if you do happen to invest at a peak and you have the worst luck in the world? What happens if you only invest then, but you hold, right? And so I made this story up, and it's so funny when I write these posts, sometimes I'll have the data in mind and I'll do the data and then I'll write the blog post, and sometimes I have the idea in mind and then I'll run the numbers. And for this one it was more the idea and I wanted to kind of see, well, what does it look like? And the numbers were way better than I thought. So this guy only invests, you know, he had 40-plus years of investing and saving and he invested every time right before a huge crash and he held his money but then he kept it in the market. And the point was the fact that he kept it in the market even with these really bad timing trades, he still ended up a millionaire just by the fact that he kept the money in the market over so long a time frame. And it's by far my most-read blog post ever. I still get like a hundred thousand people who read the post every year. And I wrote it in 2014. And it's funny, we actually a number of years ago did a video on it to make a cartoon of this story and our production team was looking at it the other day and seeing how it's doing still. And I scrolled through some of the comments and a lot of the comments are the same. It's like, okay, great, that's in the U.S., the winners write the history books, things did great there, but what about a place like Japan and what about this scenario? What about the lost decade and all this stuff? And that's one of the reasons that I wrote the book because everyone wants to talk about the exceptions to the rules. And I do think it's fair game, but I think you don't want to get to the point where you take those exceptions and you invest exclusively on them, right? You're paying attention to the stuff that happens 5% of the time or 2% of the time or whatever and basing your baseline exclusively on that. So that was the point of the book is let's go through these really worst-case scenarios and the outliers and talk them out a little bit.

It's funny. It would have been a little too inside baseball, but I told my editor, like, what if we just called the book Now Show Japan? And they said that's a little too much of an inside joke. I think no one would really get it and wait, what is this book about? And that's the thing is that you have, and that was not only a lost decade, it was back-to-back-to-back and then some lost decades, right? Plural. And people look at that and they say, "Okay, this is why buy-and-hold or long-term investing doesn't work because you had this period of long-term returns that were just awful." And, you know, the Japanese stock market didn't hit new all-time highs after topping out in 1990. They didn't hit new all-time highs until last year. Right. Which is crazy. And that's the one that people throw in my face all the time. "Well, yeah, what if you did this in Japan? How would Bob have done?" And I think actually that outlier of Japan actually shows the power of buy-and-hold investing even more because at the peak in 1989-1990, Japan was the largest stock market in the world, 45% of the total, right? Which is where the U.S. was heading into this bull market, like right around 45%. So in 1989, Japan is bigger than the U.S. in terms of market weight and it fell all the way from 45% to I think 5%, probably lower than that, of the total. It's now 5% or 6% of the total maybe. It's a much smaller percentage maybe depending on what we're looking at.

Yeah, it's probably a little higher now. Japanese stocks have actually done pretty good the last decade or so. But even with that, you know, one of the biggest developed economies in the world, the stock market does nothing for three and a half decades. The MSCI World Index still gives you like 9% a year, again, inclusive of that Japan situation. So, and if you look at, I show this in the book, the problem with the Japanese stock market is that the returns were so compressed and so high. And the name of the chapter for that one is like the biggest asset bubble of all time. I really think Japan, that bubble makes anything that we've gone through in America look like child's play, how crazy it was. It was the stock market, it was the real estate. The funny thing is there haven't been a ton of books written about it. A couple here and there I found, but not a ton like you'd think about like the Great Depression or something like that. And maybe because it wasn't like an event. It was like this long drawn-out thing, right? It didn't happen immediately. It happened over...

Yeah, three decades. It was a slow death by a thousand cuts. No victim or no villain that you could pinpoint. Yeah. Yeah. Yeah. It was a process, not an event, but the returns were so compressed that from 1970 to 1989 you got like 22% per year in Japanese stocks, which is insane. Like you can't compound your capital that high. I think the number I found was small caps in Japan did like 30% a year for 20 years, like putting Warren Buffett to shame, you know, for two decades. And so you compress the returns in such a short period of time. The mean regression of the mean was really mean because then the next three and a half decades were basically nothing at like 1.5% per year. But the total over that like 55-year period if you start in 1970 was still close to 9% per year. So like the very long term actually still worked in Japan. It's just the returns were so compressed into the beginning that the returns at the end had to be really, really bad to compensate for that. And again, I think the biggest lesson for Japan is not necessarily that buy-and-hold doesn't work. It's that if you put all your eggs in one basket in one particular strategy or region of the world, you could have a really bad outcome. And diversification is like the simplest way to hedge against that risk.

I think the biggest transition I've seen, and maybe I'll start with myself in this, when I first entered the industry was people need help understanding the markets and the economy and building a portfolio and having portfolio management. Like that's what people need help with because that's what people were worried about coming out of 2008 and that's where you can add value. And I wholeheartedly agree that that stuff is still very helpful to clients. Like they need someone to explain how this works, how investment strategies work, how the market works, providing context and setting expectations and all that stuff. I think you can absolutely add value on portfolio management. The thing that I totally underestimated coming into this line of work is how important the financial planning aspects are. And most clients come to you thinking, yes, I need someone to manage my portfolio for me, but no, it's like I need someone to manage my portfolio within the context of this broader comprehensive plan that includes a financial plan and includes helping me out with all these other needs, taxes and insurance and estate planning and passing money on to my kids and charitable giving and all these questions. That stuff matters so much more than the portfolio side of things. And I think I personally underestimated just how important those things are. And I think a lot of clients, because that's almost every inbound call now. Every inbound question that a client has is rarely why is this holding underperforming or should we get more access to AI. Their questions are not in understanding the markets. It's trying to understand themselves and trying to understand how this money impacts them, not how the world impacts their money. And that's been a big shift again post-financial crisis for our firm has been, all right, we're done talking about the markets for right now, hopefully forever, but you and I both know there's going to be some sort of other event, but it's making sure that they understand themselves when it comes to their money is mostly what our goal is.

So as an independent RIA, anything with a conflict, anything commissionable, anything to me is... I mean, I guess if that commission is transparent and everybody understands what's happening, then it's clean. I just want to see the conflict go away and have it be more about the client and less about the firm. Our firm, we don't have sales goals. We don't have AUM goals. Our goals are strictly impact. How are we impacting our clients' lives from a day-to-day basis? If we keep measuring that, my dad taught me that lesson early on. He owned a property and casualty insurance agency for 51 years and he said if you are taking care of your clients, the money will take care of itself. And nothing's been more true. I wish that would wave over our entire profession when it comes to how we treat our clients.

Right. Right. Because there are plenty of advisors who do things certain ways, but some of the things that we just, you know, we won't make promises about certain things and other advisors will. And I think taking on a client that you know you shouldn't is like not only a waste of your time, it's a waste of their time, it's a waste of everyone on your team's time. And we've done it. I mean, every advisor's done it in the history of their growth, especially when you're young and early on and you're just hungry for every client that you can get, but it never works out. You're always stressed that you're outside of your bandwidth. You're worried that you're doing something that you don't know how to do, and it never works out. And you're right, it's not worth it for any of us.

didn't work out. And even though, so I think having some of those rules like that in place of the type of clients you will or won't work with, that was really eye opening for me because I thought like, this is insane. Why would we not take this professional athlete on? This is awesome. It's a cafe and all, you know, it's exactly what we're trying to do every day, right?

Well, that's a good question. What we try to do is just have it be kind of all in one as much as we can. Like, you know, clients ask like, "Am I going to be charged if you do this for me? Am I going to be charged if you do that for me?" We want it to be like, no, what we do is it's all under one roof here. And so I think one of the places that the advisor practice has gone is that, you know, it's funny for years people have said, oh, fees for advisors have to come down, like it's going to follow like the mutual fund index fund route.

A lot of people in the fund industry made those predictions, right? This, you guys are next. We were first, you're next. And it hasn't come to fruition. And I think one of the reasons that it hasn't come true is just because they had it backwards. It wasn't that fees were going to fall. It's that margins were going to fall and advisers were going to be expected to do more services. Right? If we're coming to you, we want you to be like a one-stop shop for us and do everything. And we want more services. And I think that is kind of where we're going in the future as technology continues to improve is just that advisers are going, clients are going to expect more from their adviser. They don't want to have to go to somewhere else to get advice. They want you to be the one to provide it. You want to provide the service, provide the technology platform, whatever it is.

So I'll give an example for our firm. We were getting requests from clients to do tax returns for a number of years and we were very hesitant to do it because our thought process was you make one mistake on a tax return and like that client is gone. Right? People hate tax mistakes. It could be a hundred dollars or something. People, they'll never forget it. Right.

So we found a person, Bill Artzer is his name. He did it for another RIA. He came in, he built the practice out for us and we very slowly rolled it out and we went to like 100 clients first to just make sure that this works. And I think the response was like 99% yes. People just said yes, please just do it. We were kind of, we didn't know what the response would be and the idea was just like, yes, just, I don't want to have you talk to my CPA and have to. And so it was kind of eye opening that people wanted to have it under one roof and do it. And again, we were pretty hesitant to do it because we didn't want to screw things up. The funny thing is it actually kind of helped the client relationships because we were finding mistakes that other people were making because it was kind of like, listen, you know the portfolio, you know the investments, you know what's going on in my whole financial life. You should be able to understand this better than anyone. So it's interesting how much people like, "Yeah, just do it all for me. I want you to handle it."

It's funny. I feel like this decade has completely flipped the scripts and in the 2010s it was people were worried about what can go wrong and when's the next crash going to come and we almost have a big new generation of investors now and now it seems like the prevailing wisdom is just whatever happens is not going to matter and things are going to come back immediately because we've had these like V-shaped realities, right? And anytime something goes wrong, the government's going to step in or the Fed's going to step in and someone's going to fix it, right? And part of that, I think, is just markets moving faster and there being more coordination among fiscal and monetary policy and these things. So that's definitely like a change in the market environment.

And a lot of that stuff doesn't happen if 2008 doesn't happen, right? Because I think they learned, right? It's like each crisis we learned something. But I guess the way I view it is risk never completely goes away. It just kind of changes shape and changes form. And so I do think that like my worry is that there could be some complacency. That, you know, people think markets are too easy and just every time something goes down you buy it and it comes back up right away. So that'd be a concern that we've been on just a crazy, crazy run in US stocks for more than a decade and a half now. Like we're closing in on two decades almost, right, of just really, really good returns. We've had bear markets along the way, but they haven't been long lasting. My contention is we haven't had a real recession since 2007 to 2009, right?