How Your Investments Are Like the Weather

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Wherever you live, it’s not unusual to have a few days where the temperature is either unusually high or unusually low for that particular time of year. For example, there could be a day or two in February with temperatures in the low to mid 50s followed by more normal temperatures in the 30s.

It’s also not unusual to have some days with highs only in the 20s. If we assume the average high temperature for February is 37 degrees, that doesn't mean the high temperature is always exactly that or even 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 arrive at our average high temperature.

We know we can and do have unseasonably mild or cold days from time to time. If it was in the 50s for a couple days in February, that doesn't mean we now think it will continue to be in the 50s in February. 

Similarly, in July, if historically the average high is 87 degrees and there are a couple days with highs only in the 70s, we understand it’s not going to continue to be a high in the 70s just because of those couple of days. But how do we know?Because through many years of data, that has been the truth and we are confident in it. From a weather standpoint we all understand this.

Average Investment Returns

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% or more? If, as has historically been the case, the decline is temporary, why would you worry?
Why not behave like you do when the temperatures act differently than their averages and just say, "you know what, this is what happens from time to time and it’s to be expected."

Unseasonably high temperatures don’t last forever, nor do bull markets, and unseasonably low temperatures don’t stay that way forever, just like stock market downturns don’t last forever. But how do we know the market won't continue up without correction or down without recovery? The same way we know with the weather. Because 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 the winter in most of the United States 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. Wherever you are in your investing life—spring, summer, fall or winter—stop worrying about the short-term fluctuations. History and data tell us they are perfectly normal. 

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