“If you don’t like the weather, wait five minutes.”
That’s one of the first things you hear when the subject of weather comes up in Denver. While that’s a slight exaggeration, it’s not terribly far off.
Case in point: Last Tuesday afternoon. The high temperature was a beautiful 72 degrees. My wife and I went out on a walk with our son early that evening and the weather was bordering on perfect.
Standing outside, you’d have no idea that the scenery was going to change so drastically in less than 12 hours. With the sun beaming down on your head, the prediction for a few of inches of snow the following day might have seemed like an April Fool’s joke come early to an out of town visitor.
However, if you’ve ever spent any time in Colorado, you know that the weather can turn on a dime. In this case, a few inches of snow quickly became nearly a foot and a half, as we saw blizzard-like conditions nearly all day on Wednesday. Denver International Airport shut down for the first time in almost a decade and the freeways turned into parking lots.
The Futility of Forecasts
From what I can gather, none of the meteorologist’s weather models even came close to predicting the magnitude of the storm. Instead, the news channels were scrambling that morning to provide reports on road closures and how many flights had been canceled.
While clearing my driveway for the second time on Wednesday, I couldn’t help but find parallels between the crazy weather we sometimes have here in Colorado and the challenging markets that we often face as investors.
Although weather forecasters in Denver have notoriously poor track records, my experience has been that at least they are directionally correct most of the time. In other words, while they were way off with the volume of snow we got last Tuesday, at least they predicted snow.
Unfortunately, the same cannot be said for our investment forecasting friends. Their predictions are often so bad that the weather equivalent would be like calling for buckets of rain on a day that turns out to be 80 degrees without a cloud in the sky. Needless to say, such forecasts aren’t even worth the paper they are written on.
Putting that aside, instead of diving into the quantitative aspects investing today I thought I would share a few quick tips for managing through weather in Denver that apply equally as well to successful investing. If you keep these tips in mind, you’ll be in good position to stand firm through both volatile weather and volatile markets.
Tip #1: Be Prepared in Advance
Most people that live in climates that can experience sudden changes in weather know that it’s a good idea to take some basic steps of precaution. During the winter months, that means stashing some extra non-perishable food in the house, storing a warm blanket in your car, and keeping your gas tank at least a quarter full at all times. Of course, these things should be done before you actually need them because you’ll be hard pressed to track them down in the middle of a snow storm. Undoubtedly, however, every time you watch the news after severe weather you realize just how many people fail to prepare in advance.
The same type of basic preparation applies to your investments. Since we don’t know where markets are going in the near-term or when they will shift directions, we simply can’t follow a “just-in-time” approach to investing. Instead, we need to determine the proper level of risk for our portfolio at the outset so that when the unexpected inevitably happens, we’re well positioned to successfully manage through it.
This type of preparation is critically important when we’re talking about growth as well. For example, while international and emerging market stocks had a rough third quarter last year, they responded with very strong returns in October. Without continued allocations to a wide range of asset classes, we run the risk of missing out on positive returns.
Tip #2: Dress in Layers
A timeless principle of living in Denver is to always be prepared for a wide range of temperatures by dressing in layers. After seeing a few days with 30 or 40 degree swings, you understand just how good this advice is. So when you reach into your closet before heading out the door, you learn pretty quickly that it’s a bad idea simply to “grab a heavy jacket” because it’s January. While that would probably be good to have at 7am, you might find yourself sweating through it by the afternoon.
The same principle of dressing in layers applies to your portfolio as well. We call it diversification. While a diversified portfolio doesn’t guarantee any specific return or eliminate risk, it does ensure that you aren’t going to experience the extreme swings that are so common with a single stock or even a single asset class. Most importantly, when you invest in a wide range of global asset classes, you not only have the ability to reduce risk, but you can also increase your expected returns. That’s a win-win.
Tip #3. If You Don’t Like the Weather, Wait Five Minutes
Having discussed weather quite a bit already, this tip doesn’t need much of an introduction. However, in my view, it’s probably the most important one for us as investors. The reason is because in the heat of the moment, it can seem like the world is falling apart when stocks are in decline. Every news headline is negative and the tone of every pundit is dire. It truly seems like an economic catastrophe in the same way that the Denver storm was a weather catastrophe last week.
However, in the same way that things improved in short order weather-wise (most of the snow was melted in a few days and it was 66 degrees yesterday), the same can also be said for a bear market. While it may not happen in five minutes, in the grand scheme of things, stock market declines are a handful of fallen trees in an otherwise beautiful forest. For that reason, the next time it seems like the financial world is coming to an end, just pause and remember that brighter days are right around the corner.