Take Time For A Wider Perspective …
It takes planet Earth 365 days to orbit the sun. The whole universe is impressive, but it’s funny to think that we measure our life in solar orbits.
December 31 and January 1 are neighbours, however, for different reasons we considered them distant relatives when it comes to summing up what has been and what is yet to come.
We also measure share market performance over those arbitrary 365 day periods, as if they are meaningful. But why not 150 days, or 452 days? Yes, it does make some sense that we choose some regular timeframe to assess returns, but do you think having a regular timeframe to measure performance is helpful or a hindrance?
When thinking about this question theoretically, the answer is neither helpful nor hindrance. Why? Because a measurement is simply just a measurement. But humans have evolved in such a way that we can’t just stop there. We measure, then we feel compelled to act.
My portfolio is down 15%, so I should…
Company XYZ shares are up 28%, therefore I’m going to…
You get the picture. Measurements produce results, and results demand action.
I’m something of a ‘moderately okay’ vegetable gardener. I find it enjoyable, and most of the things I grow do okay. Most…But I know better than to toss out a bunch of newly planted seeds, just because they haven’t sprouted inside 7 days.
I also know that most of the high productive growth comes in the last couple of weeks for most plants’ lives. And it’s far from linear. If I judged the results on a random day or week, I may as well miss the bigger picture (and harvest).
In essence, it is similar to compounding. The really impressive returns come at the end, as growth begets growth. It is the big picture and the long term that matters most.
When it comes to investing, singer-songwriter John Denver sums it up perfectly;
“some years are diamonds, some years are stones”.
Can you remember back to July 2018? The ASX 200 finished the month of July at 6,320. That is 5% in the first-half of 2018, which is not bad for six months’ work.
However, for the back-half of 2018 things weren’t as enjoyable. The ASX finished the year at 5,619. That is a fall of 11% for the remaining six months.
What does this mean exactly?
Well, our Super balances in 2018 likely finished below where they started (discounting any contributions), the stock market finished in the red, and the ‘year that was’ looked bleak.
Shares will probably decline by less than residential housing, at least in the capital cities, but that’s small comfort if you own both a house and a share portfolio!
With that said, financial history states the following:
- The share market tends to average about 10% per annum, compounded, over the long term; and
- Shares have a negative year about one-third of the time; but
- Point 1 already allows for Point 2 -- and the result of compounding at 10% per annum for decades (and adding more along the way) is pretty bloody impressive.
Indeed, perhaps the greatest challenge, and opportunity, for many investors is making their peace with Point 2.
Just avoiding the temptation to fiddle, to sell, to ‘reposition your portfolio’ can be extremely tough, I get it. But it is vitally important. Essential. You try your best to ignore measurements that can influence irrational decisions. The last thing you want to do is crystallise your losses.
Often in times of uncertainty we seek a professional opinion. It steers us in the right direction and provides confidence in our decision making. If you are feeling uncertain about your position, I encourage you to contact me and have chat. It might be the best thing you do, it might help you sleep at night, it might even make you a better vegetable gardener!
Damian Gibson. Financial Adviser @ Elevate Wealth Solutions, Hobart