There is a book by Annie Duke called Thinking in Bets.  One of the terms she coined is “resulting”.  Resulting is when someone judges a decision based on its outcome.  The problem is that the result itself isn’t always indicative of whether the decision itself was proper at the time it was made.

Annie Duke was a professional poker player.  If you get a hand with pocket aces, it makes sense to play the hand and probably to raise the stakes.  This doesn’t always mean that it will result in you winning the hand.  You may get unlucky.  Someone else might have had a 2 and a 7, which is typically a terrible hand.  But if two more 7s come up on the flop, it is all of a sudden a great hand.

The reason this is so important is because you don’t want resulting to dictate future decisions.  If you lost a hand with pocket aces, it doesn’t mean you shouldn’t bet with them in the future.

For another example, think about an insurance policy.  You pay $3,000 for an annual insurance policy for your house.  During the year, your house doesn’t burn down.  You don’t have any severe damage to your house from anything, so you don’t file any claims with your insurance.  Should you conclude that it was a waste of money to get the insurance?

If you could have predicted the future and known that there would be no damage to your house in the next year, then it would make sense to go without insurance.  But you don’t know what the outcome will be.  You have to make the decision with the knowledge you have at the time.

Investment Performance

Even though the above makes sense to most people, they tend not to apply this thinking to their investments.  Let’s say someone has half their investments in stocks and the other half in a money market fund.  The stocks go up 20% in one year, while the money market fund returns 3%.  It would be easy to say, “I should have put it all in stocks.”  In fact, that’s what many would say.

But like your poker hand, you didn’t know what the outcome would be.  It would make sense to say, “If I had known, I would have put everything in stocks.”

But you didn’t know.  Nobody knows what the stock market will return in the next year.  The whole point of diversification is that you don’t know what the future holds.  That is the point.

This is why it also doesn’t make much sense to judge a portfolio based on its results, especially in the short run.  Tell someone that you invest in the permanent portfolio or something else with diversification.  In most cases, they won’t analyze the holdings and how the assets perform in different environments.  Instead, they’ll want to know the returns.  They’ll want to compare it to the S&P 500 or maybe their own portfolio.

This isn’t a way to judge a portfolio.  This is especially true when you are in a major bull market in stocks.  At the very least, you need to look back at how it performed during different economic environments.

The Everything Bubble

Just because we have been in a bull market, it doesn’t mean that the same things will keep going up.  In fact, it is a good reason to go the other way and be more protective of your investments.

Going just based on results, it would have been better to invest in stocks in the last 10 years than in bonds or in the permanent portfolio.  Actually, it would have been even better to put your money in Bitcoin.  But this doesn’t mean that would have been the right decision based on what was known at the time.

And it certainly doesn’t mean that is the path forward.  Based on the results of the last 10 years, you should put your money in Bitcoin if you think the next 10 years will be similar.  But that isn’t typically what happens, and it would be extremely risky (and probably irresponsible) to put all of your money in Bitcoin.

We are probably in an Everything Bubble where all major assets are in a bubble.  Some are worse than others.  Stocks and crypto currencies may be the biggest of the bubble.  Even here, I can only make decisions now knowing what I know now.  I won’t focus on the results of previous decisions except as far as it helps my decision-making process going forward.

The Securities and Exchange Commission (SEC) has a disclaimer that “past performance is no guarantee of future results”.  As Harry Browne said, this is one statement by a government agency that is truthful.

Judge your portfolio based on whether it is doing what it is supposed to do.  Don’t judge it by comparing it to a particular asset class.  Ask yourself whether your portfolio will hold up in any economic environment, perhaps with the exception of a complete collapse of the division of labor.

If your portfolio isn’t well diversified, are you accepting of the fact that you are vulnerable to losing a large percentage of it?  If you aren’t ok with that, then it probably makes sense to change your portfolio.