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How Your Investments are Like the Weather

Written by Ed Snyder on .

weather

Here in Central Indiana we are coming off a weekend of two days of temperatures in the low to mid 50s. For February in Indiana we will definitely take it. People were out walking their dogs, kids were on their bikes and scooters and playing basketball in their driveways. It was great while it lasted but tomorrow's high is forecast to be 30 degrees. I'm just glad the 50 degree temps hit on the weekend!

The historic average high temperature for this time of year is 37 – 38 degrees. So what do you think the actual average high temperature has been so far for the first eight days of February? Probably higher since we had those two warm days right? Wrong. The average high through the first eight days has been 38 degrees. Even though we had a couple 50 degree days we also had a 24 and 27 degree day in there too. The average high doesn't mean that the high temperature is always exactly that or within a couple degrees. It means when the month is done we add up all the high temps, divide by the number of days in the month and we have our average high temp. From a weather standpoint we all understand this.

We know we can and do have unseasonably mild or cold days from time to time. Just because it was in the 50s the last two days doesn't mean that we now think that it will continue to be in the 50s in February. Similarly, in January when historically the average low is 20 - 21 degrees, we had several days of single digit lows and even a few days of negative low temps. We knew that it wasn't going to continue to be in the single digits for the low temperature. But how did we know? We just knew. Because historically, through many years of data, that has been the truth.

What if I told you that investing works the same way? The average return of your investments does not live or die by what they did last week, last month, last quarter or last year. And I think many, if not most of you, reading this understand that. But if you understand then why do you worry so much when the market is down 10 or 15 percent or more? If, as has historically been the case, the decline is temporary, why would you worry? Why not do like you did when the temperatures dropped down to the single digits and just say, you know what, it stinks but it's not forever and we will withstand it and move on. The temperature will not stay in the single digits forever and the market will not stay down forever. In reality, for those of us still putting money into investments like 401(k)s, we should welcome these declines for the sale events that they are – the opportunity to buy investments at a discount from where they previously were. But that's a whole different article. But how do we know the market won't continue down without recovery? The same way and to the same degree (pun intended) we know with the weather. We just know. Because historically, through many years of data, that has been the truth.

Here is the beauty of both of these - the weather and the market - you don't have to know ahead of time what the temperature will be on a day to day basis to know that in February in Indiana it's going to be cold – no matter how much the temperature bounces around during the month. And you don't have to know on a year to year basis what the market is going to do to know that over the long term it will do just fine – no matter how much the market bounces around during your investment lifetime. So wherever you are in your investing life – spring, summer, fall or winter – go enjoy the unseasonably warm days in the winter and don't worry about the unseasonably cold days.