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AS WE CELEBRATE 250 years since the Declaration of Independence, I’m reminded of an expression that’s popular in the investment world: “This time is different.”
The phrase dates to a 1993 publication titled “16 Rules for Investment Success,” authored by the veteran investment manager Sir John Templeton. Rule number 11 included the following admonition: “The investor who says, ‘This time is different,’ when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.”
Templeton’s message, in other words: Human nature doesn’t change. Though the facts change with each new market cycle, the outcome will ultimately be driven by the same human tendencies and emotions as we’ve seen many times before.
The phrase “this time is different” was further popularized by a book by that name published during the worst of the financial crisis in 2009. Economists Carmen Reinhart and Kenneth Rogoff studied dozens of market cycles going back centuries and concluded that Templeton’s somewhat informal hypothesis turned out to be more accurate than even he might have guessed. Things always seem different but rarely are.
As a result, “this time is different” is an expression that’s usually invoked with irony, as if to suggest that whatever investors are excited about today is likely—with the benefit of hindsight down the road—to look no different from similar events in the past.
What makes this notion tricky, though, is that sometimes things do change in ways that are fundamentally new and discontinuous. In other words, we can’t dismiss every new development we see in investment markets with the glib assertion that the future will be no different from the past. Even if human nature is a constant, in other words, a more critical analysis of current events is always warranted.
Here are four such areas where change is underway but the ultimate result is still an open question.
Question 1 – The impact of the internet on investing. Years ago, the assumption was that the internet would democratize investing because it would make more information accessible to more people at lower costs. This hypothesis was logical, and to some degree, it was accurate. Information that was previously only available through a pricey Bloomberg terminal is now available through any number of free or low-cost online services.
But there have been unintended consequences. As much as the internet enables the spread of information, it also accelerates the spread of less-than-useful information that can drive events like the meme stock craze in 2021.
The internet has also given rise to various forms of gambling. It’s enabled inventions like non-fungible tokens, which seem to be of dubious value. And the internet has enabled cryptocurrencies, of which there are apparently millions. Many have lost all or virtually all of their value.
Which way will this go? On the positive side, the internet has lowered costs dramatically. Where brokerage commissions were more than $100 not too long ago, most brokers now charge little or nothing to trade stocks and exchange-traded funds. At the same time, recent trends suggest that the internet has been of mixed value, especially with the recent rise in so-called prediction markets. But reversion to the mean is a powerful force, and ultimately the internet may be a net positive for investors.
Question 2 – The impact of artificial intelligence on the workforce. Not long ago, there was the belief that AI would displace large numbers of workers. This view was supported most notably by OpenAI co-founder Sam Altman, who commented more than once that AI was likely to “replace most of the jobs people do today.” But he’s since changed his mind. “I’m delighted to be wrong about this,” Altman said this spring. “I thought there would have been more impact on entry-level white-collar jobs being eliminated by now than has actually happened.”
What did Altman overlook in his earlier prediction? Investor Bob Haber offers an analog. When railroad networks became widespread in the 1800s, there was the assumption that demand for horses would fall significantly. But the opposite happened.
As Haber explains, “rail displaced horses in one narrow function, long-haul transport, but it increased demand for them almost everywhere else. Rail depots needed drayage. Growing railroad towns needed more cartage. Farms connected to wider markets needed more local hauling. Rail automated one visible task while enlarging the surrounding economic system in ways that created more complementary work for horses and for the humans who depended on them.”
We may see something similar with AI. The jury is still out, but it’s clear that the most pessimistic predictions overlooked potential second-order effects.
Question 3 – Whether the stock market is overvalued. For a decade, and maybe more, there’s been hand-wringing over stock market valuations. Using the popular cyclically-adjusted price-to-earnings (CAPE) ratio as a yardstick, the market’s valuation has been rising almost continuously since 2009 and is now just a few percent below the peak reached in 2000. Through that lens, there’s a lot to worry about, and those who argue that this time is different seem like they’re straining to justify numbers that shouldn’t be dismissed.
There’s another side to this argument, though, driven by the fact that the composition of the market has changed over time. Today’s largest companies are almost all in technology and are faster growing than the largest firms were in past generations. As a result, the argument goes, today’s technology companies deserve higher valuations. And that, in their view, makes the CAPE ratio an outdated metric.
Who’s right? Of course, time will tell. That’s why investors’ best defense, in my view, is a defensive asset allocation.
Question 4 – The value of international diversification. Twenty years ago, the accepted wisdom was to diversify a stock portfolio internationally. One reason was because many economies outside the U.S. were growing quickly. Another argument was that exchange rate fluctuations were a potential source of added returns. Those who limited their investments to the U.S. were accused of “home bias.”
But this view came under pressure when, for most of the past 20 years, domestic markets outpaced their global peers, and that’s reversed only recently.
How should we think about this question? One point of view is that we shouldn’t abandon diversification simply because it delivered a string of losing years, and indeed, the recent resurgence of international stocks might represent the beginning of a new trend.
The opposing view cites the relative anemia of many international markets, especially in Europe. Over the 15-year period between 2008 and 2023, GDP per capita in the European Union fell from 76.5% of the level in the U.S. to just 50%.
Which side is correct? It is, of course, anyone’s guess, which is why I continue to believe in international diversification.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
I would add another important factor: the Federal budget deficit, and the resultant vast increase in the money supply.
In the past 25 years, M1 and M2 have gone up sharply, and there is more money in circulation than the economy needs to run. With structural wealth inequality, this excess gravitates to the investing classes, who already have more money than they can spend. These people will use the money to buy stocks and bonds, driving up the prices of investment assets.
Of course, this can’t go on for ever. But it can go on longer than you would expect.
Adan, I salute you for having the audacity to discuss alternatives to the Boglehead credo that This Time It’s Never Different.
None of us knows the near or longer term future.
I also believe that one cannot consider these questions without foregrounding time horizons. In general we all, at some point, invest or invested for the long term, ie decades, possibly many. But for many people, for many reasons, the time horizon – the financial need – is different,
Adam,
Good article, lots to ponder.
For you your statement, “That’s why investors’ best defense, in my view, is a defensive asset allocation,” what does defensive look like to you… what assets and at what percentage of one’s portfolio. And then secondly, what is your recommended percentage in international (global market percentage, something less or a more dynamic percentage based on global market conditions, rising/falling U.S. dollar, etc.)?
Contrary to the views expressed here and on many other investing sites, I have never simply sat through every market meltdown without taking action.
During each major downturn, I spent time reading the work of John Bogle, Warren Buffett, and many other respected investors about why holding the S&P 500 for decades has historically been successful. For most investors, that approach works well.
However, I never fully accepted the idea of holding through multiple declines of more than 50% (2000–2002 and 2007–2009) and several additional 20%+ corrections since then.
I also studied valuation metrics extensively. Over time, I concluded that while metrics such as P/E and CAPE (Shiller P/E) and dozens of economic indicators can provide context, they often remain disconnected from market performance for years.
If investors never look beyond traditional market metrics or consider broader global trends, they risk missing important opportunities—or making costly mistakes.
If they can be wrong for such long periods, why do so many investors rely on them as primary decision-making tools?
Here are several ideas that I rarely see discussed.
Consider some examples of when I took actions.
I was born and raised in another country, where we were taught from an early age to question assumptions, challenge conventional thinking, brainstorm alternatives, and develop practical solutions rather than simply accept prevailing opinions.
These are several principles I have followed since 2000.
1. The S&P 500 should remain the core of most portfolios.
The U.S. remains the world’s economic engine. If the S&P 500 is performing well, I have no problem being invested almost entirely in it.
However, when the S&P 500 enters prolonged periods of underperformance, I look at other broad asset classes such as value stocks, small-cap stocks, and international equities. A good example is 2000–2010, when the S&P 500 produced essentially no return over the decade, while small caps, value stocks, and international markets performed considerably better.
2. Diversification is situational.
Diversification sounds appealing, but I don’t believe it should be permanent for its own sake. Buffett and Bogle both emphasized concentrating in the S&P 500. I prefer to diversify only when evidence suggests the S&P 500 is unlikely to be the strongest-performing broad asset class.
3. Only a handful of managers consistently outperform.
When investing outside the S&P 500, I look for managers or funds with long records of superior risk-adjusted returns. My primary criteria include strong long-term performance, Sharpe ratios above roughly 1.5, low standard deviation, and strong Sortino ratios. The stricter the screening criteria, the fewer funds qualify—and, in my experience, the higher the quality of the remaining candidates.
4. Core-and-explore is an excellent framework.
I believe allocating 20–30% of a portfolio to exploring other strategies is valuable. It helped me better understand markets, risk management, and my own investing behavior. That doesn’t mean trading every day or every week.
Since 2000, I began by rotating into the strongest risk-adjusted funds based on 3-, 6-, 12-, and 36-month performance, rebalancing every six months. Later, I shortened the interval to four months. Over time, the results were so strong that I gradually increased the allocation from roughly 30% of my portfolio to 55–60% and even more.
This approach is certainly not for everyone. Most investors are likely best served by simply owning a low-cost S&P 500 index fund. However, for investors willing to challenge conventional wisdom, study market behavior, and remain adaptable, I believe there are opportunities to improve both returns and risk management.
Hindsight certainly makes every major market turn look obvious. I definitely don’t have the world-class, super-duper impressive top-tier analytical skills you possess, so this mere mortal will just keep trundling along with basic index funds. It has worked out great for me over the last forty years. It’s amazing what you can achieve without all the fancy pants faffing about.
Good article. I would add a question #5 which is how will our government resolve its spending and debt problems. We all can see we are on an unsustainable path but there is no willingness to confront the issue in a meaningful way.
Bill
Thanks for the article Adam. I found it interesting and thought provoking as always. I tend to agree that humans will find ways to adapt as we always have and that jobs and the economy will simply evolve as a result of AI, likely in ways that we have not yet considered. The one area where I believe that it might be different this time is our historical measures of market valuation. As I have commented on this site before, the rise of households now investing in the markets combined with many fewer publicly traded securities seems to have created a supply & demand imbalance that may enable the markets to sustain the higher PE ratios than have prevailed historically. I think we need to at least consider that a market PE closer to 18-20x earnings is the new norm. For what’s it’s worth, I also continue to believe in the power of diversification, including international stocks, small caps and even a
small amount of commodities.
Thanks Adam for continuing to write thoughtful articles. Im my mind nothing is ever the same, we just keep evolving. I chose not to diversify internationally, sticking with Buffetts idea own the S&P500.
I’ve always assumed that every time is different — and unpredictable. I could see the dot com bust coming as well as the housing crisis. What did I do? Absolutely nothing. I was still investing in individual stocks at the time and most of them didn’t make any sense to me, so I hadn’t invested in any of them. The housing crisis affected just about everything, but if I had panicked, I would have missed a couple of years of growth before the crisis and also missed the recovery afterwards.
I’m somewhat diversified internationally but I haven’t seen many other countries develop the institutions and the mindset that has allowed the U.S. to dominate most new technologies.
Adam, the need to soothe unsettled thoughts by insisting there’s a correct answer for every question right now is strong. So is the temptation to sound smart enough to provide that answer. I appreciate this article, which urges us to admit that some questions are as yet unanswerable, and thus require us to try to be ready regardless of the outcome.