Investing Weather - Be Prepared for the Changes
“This is awesome!” she smiled.
Her tiny craft seemed to almost float over the smooth waves. The water was a deep turquois blue set against baby blue skies marked with wispy white clouds. It was a beautiful day to be sailing.
Until the weather changed. Almost without warning, dark clouds lumbered their way across the sky. The wind picked up and the once peaceful waters turned choppy and violent. The little boat struggled to stay afloat during the fierce storm. She soon had a very unpleasant reminder of what she’d had for breakfast.
“This is terrible!” she wailed, heaving over the side of the boat. “Whose stupid idea was this to go sailing today?!”
Weather on the water isn’t always easy to predict and when it turns ugly, things can get dangerous quickly.
The same can be said of the investing environment. Everyone wants to see their investment and retirement accounts grow, and “as fast as possible” may sound like a good idea…at first. But then the weather changes…
Suppose you were an Englishman 200 years ago wanting to cross the English Channel to go to France. Any crossing must be done by boat. The kind with sails.
You have several choices to make.
Boat. You can choose your boat. Do you want a small fast one, a large stable but slower one or something in between?
Captain. You can choose your captain. You might be able to serve as your own captain (if you own the boat!). Or you could hire the cheapest guy on the dock. Or you might decide to hire someone who isn’t the cheapest, but who has a lot of experience and a great safety record.
Route. You’re the only one that knows where you want to go and how you want to get there. You may want to reach your destination as quickly as possible. Or you may want to stop off and visit a few islands along the way and work your way slowly up the coastline. So, it’s up to you to either chart a course, or hire someone with the skill to do that.
Time table. Are you in a hurry? Got plenty of time? You’re in charge of when your journey begins (though you don’t control when your journey ends).
Weather. But there is one thing you don’t get to choose, and that’s the weather. You can do your best to determine when the weather is favorable, but as anyone familiar with maritime travel knows, weather on the water can turn ugly quickly.
Remembering that you don’t choose your weather is necessary for survival on the high seas. It’s also a pretty good rule to keep in mind when investing. You do not get to choose your weather. And weather makes all the difference.
In both sailing and investing, when the weather is good, everybody out there looks like an expert. The captain appears skillful, the boat is perfect, the route is lovely and there’s plenty of time to spare.
But when the dark clouds roll in and the ship begins to toss to and fro, the skill of the captain, the selection of the boat, the advisability of the route and the choice of the time table are all revealed as wise or foolish.
To put it another way, do you want to head out into the open seas, having assumed good weather or bad?
By now I think you get the point, but just in case, let me state it plainly. The economy and the financial markets are two major contributors to what we might call the “financial weather.” And that financial weather is both unpredictable and powerful.
If winds are favorable, it’s hard not to make progress in the markets. You can have mediocre investments overseen by mediocre managers and a novice investor may think he’s employing a genius.
But if the financial weather turns negative, even the best investments overseen by the world’s best managers can seem like a mistake. To a novice.
So, understand those things that are in your control, and those things that are not.
Nobody can promise you no bad weather along the way. But if you set out on your journey expecting some, your chances of weathering the storm go way, way up
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