You are about to embark on a long and convoluted analogy that conflates a yo-yo with investment markets. Obviously, there’s going to be a tonne of holes in this! But, take the main message and don’t contact us with your pedantry!
We hate it when the yo-yo is on a downer. That’s natural. It’s easy to equate a temporary decline in the value of your life savings with a proportion of your annual earnings, then think “gosh darn it, that’s another x months that ill have to work”
But, remember, it’s a yo-yo. This little baby is tied tightly (pedants, very tightly! It is fused to the bone!) to your finger, it’s just gone down a long way, maybe past your knees, maybe to your ankles. You’re scared it’s going to run out of string and fall off from the security of your finger or bash the floor and explode into a million pieces. You’ve noticed the spin is reducing and it’s struggling to climb back up to your finger. It’s slow at first, but then after what seems like an eternity, sure enough, it starts climbing back up.
The crowd are applauding you, as the yo-yo performing street entertainer, they are bunging tenners into your yo-yo holder. You’re thinking “this is my standard move, I’m not on the real tricks yet!”
Why you should want to buy a yo-yo
How much are you going to earn staring at a piece of string wound around a reel? Who wants to pay to watch that? That’s really boring! And that, my friend, is a bank account. It’s dull, it sits there doing nothing. Essentially losing you money, as that string could be put there entertaining the world and earning money, but instead it’s wrapped up on its own little world on a counter or in a drawer. It’s losing money as inflation is increasing the cost of string, amongst other things, every year.
So let’s put it to work! Let’s make it earn its living. But for that, it’s going to go up and down.
The more it goes up and down, the more you are likely to earn in busking fees. This is why we take ‘risk’ because the up downs give us extra return. And it must be true, right? If there was no greater reward for putting up with the downers, why would anyone do it ? So, on average, there must be reward for more volatility. If you buy a globally diversified portfolio of investments, they cannot all go bust… well, they could. But is it likely? If it happened you have lost everything anyway even if money is ina bank because EVERYthing has gone bust! Banks, engineering companies, yo-yo manufacturers etc. all gone.
Every time a portfolio like this has gone down, it has come back again and them some! It was ever thus. It could change, but is it likely? Are people going to stop working for companies and stop making a profit? Surely, companies must make a profit and most of us have worked for one at some point. If they didn’t, there would be very few jobs. If we own a share of a company we get a share of the profits.
Why do stock markets bounce around like yo-yos?
It’s because of people. People and their ‘thoughts’. In the long term, stock markets must relate to the performance of the companies that make them up. In the short term, peoples’ feelings they enact upon, like if they are scared and sell, or optimistic and buy, drive the ups and downs in market values.
Other yo-yo related tricks
Walk the dog – here the yo-yo spins along the ground. Your investment returns may be flat for a while, just wait. Good investors take the dog for a walk and don’t look at their returns.
The creeper and the elevator – this is where the yo-yo rolls along slowly and then before you know it, a new trick makes it roll up suddenly! This is like investments, you don’t notice much different each month or year and then some day you look and the longer term return is more significant.
As we have seen, there are going to be ups and downs in the value of your investments. So what?
The more changes you make, because they make you feel better, the more likely it is to affect the performance.
Do nothing. Learn yo-yo.
If you’d like to learn more about behavioural investing, or how we can help you maximise your investments, contact us!