Drought, Floods and investment markets
Rain.
Rain.
Rain.
Despite being in the midst of an extended period of drought, we’ve now had constant rain for the past two weeks in Sydney and everyone is feeling waterlogged.
The collective mood of the city (as far as I can tell) has shifted from being grateful for the initial falls, to being somewhat weary that it has continued for this long.
With the prospect for further rainfall over the next week and potentially beyond, the mood may continue to darken.
Looking at the rainfall patterns over the course of the year however shows we have had a year dominated by clear blue skies. Looking at it on a daily basis, we’ve had more than 1mm of rainfall on less than 1 day in every 5 over the course of the year. Overall, we’ve have only had 59% of the average rainfall over the course of the year with under 20% of the year remaining.
In the normal course of events you would expect the weather gods to play catch up to get us closer to the long term averages – that’s the way averages work.
But when we’re enjoying consistent blue skies, or an extended run of wet days it can feel like this will continue forever.
When it changes, the shock can be quite pronounced.
We see the same thing with investment markets.
We see extended periods of positive returns (the blue sky days), and we get used to it and expect it will continue. Logic dictates that this cannot happen, but we become used to feeling of things going up – it’s a nice feeling.
Like a sudden change in the weather, when investment markets turn negative we can experience a similar feeling of shock.
As with the weather, we can see extremes in investment markets. But these don’t happen every day, or every year. Provided we are prepared for them, we can generally ride them out safely – although there might be some hairy times along the way.
We’ve had an extended period of strong returns now going back to 2009. This will not continue indefinitely.
We know that the economy works though by rewarding investors over the longer term for the risks they take with their money. Our role is to help you understand the level of risk you need to take to achieve your investment goals, and to balance this against the level of risk you are comfortable with, and to ensure you are adequately prepared to ride out the good weather and the bad as it strikes.