I think we would all agree the weather in the UK this summer has been dismal. This is more noticeable as southern Europe has been enveloped in a heatwave, and it is just twelve months ago that we hit record highs here.
I must admit last year I was seduced by the fact we had experienced three good summers in a row, and with talk in the media of us needing air conditioning in the future I decided that some new garden furniture and a barbecue would be a good purchase as a starting point for a future outdoor kitchen!
Don’t I feel stupid now? Had I looked at the long term average temperatures before being so rash they would have highlighted the last few years were the exception rather than the rule. I know Alan Steel used to say the average human has one breast and one testicle, but sometimes looking at averages can be helpful in preventing you getting carried away, or too down hearted, by short term trends.
In many ways my spending in the local garden centre was no different to how people view investing in the stockmarket. In the stockmarket investors tend to be far happier putting money in when it is high rather than when it is in the doldrums when logically this should be the other way round.
Comparing stockmarkets to the weather, a summer's heatwave is the equivalent of a bull market, while cold, damp and dreich weather reflects the downturns. However, just as my judging the future climate in Fife based on a few years weather led to a distorted view, looking at the stockmarket's performance from a short-term perspective is equally dangerous as it blurs the bigger picture.
Consider investing like planting a seed. Growth isn't immediate, and occasionally, cold weather might even stunt its progress. But given time, the seed can grow into a resilient and fruitful tree.
Although it is tempting when markets are in the doldrums, holding too much in the bank is like keeping the seed in a drawer. While it's safe from the cold, it lacks the potential to grow, benefit from the sun's energy (or positive market movements), and multiply over time.
As the last couple of years have shown the stockmarket comes with its share of stormy periods, but history has shown time and again that over the long term, the performance of investment markets has far exceeded that of cash. This is mainly due to the compounding effect, which — like the growth rings on a tree — accumulates value over time.
This brings me back to averages. I recently saw the graph below in an article by Ben Carlson which I think highlights the difference between short term movements and long term trends.
It shows the annual movement of the S&P 500 index since 1980 (the bars on the chart) and the average returns over the previous 30 years (the relatively flat line). As you can see, although some individual years have had significant downturns, over the long term these have had little impact on the returns achieved.
Proof if it was needed that making a decision based on the short term can prove costly as my unused barbecue can attest. However the forecasters are suggesting that summer 2023 in Fife will be this Thursday so I live in hope!