There's nothing magical about one orbit around the sun.
I mean, the whole universe is very impressive, but there's no reason we should measure our life in solar orbits.
December 31 and January 1 are neighbours, yet for all sorts of reasons we consider them as distant relatives when it comes to summing up what has been and what's yet to come.
We also measure things like share markets over those arbitrary 365 day periods, as if they are meaningful. But why not 137 days? Or 491? Yes, I suppose we do have to choose some regular timeframe over which to assess our returns, but did you ever stop to think about whether doing so was a help or a hindrance?
In a purely theoretical sense, it's neither. Measurement is just, well, measurement. But our brains, spectacularly evolved in so many ways, just can't stop there. We measure, then feel compelled to act.
Shares of Company X are up 54%, so I'm going to…
My portfolio is down 5%, so I should…
You get the idea. Measurement gives results, and results demand action.
I'm something of a 'moderately okay' vegetable gardener. I really enjoy it, and most of the things I grow do okay. Most…
But I know better than to throw out a punnet of freshly planted seeds, just because they haven't sprouted inside 7 days.
I also know that most of the really productive growth comes in the last couple of weeks of most plants' lives. And it's far from linear.
If I judged the results on an arbitrary day or week, I may well miss the bigger picture (and harvest).
Just like compounding, the really impressive returns comes at the end, as growth begets growth. It is the big picture that matters, and the long term.
When it comes to investing, to steal a line from John Denver, some years are diamonds, some years are stones.
Let's pause the tape in July. The ASX 200 was sitting at over 6,350 points. 5%, plus a little bit for dividends isn't bad for 6 months' work.
Hitting play again reveals a much less enjoyable back-half of 2018, with the ASX now sitting at 5,654, off by around 7% for the year, and double-digits away from the mid-year highs.
Which means what, exactly?
Well, our Super balances are likely to finish 2018 below where they started (at least, before any contributions), the stock market will almost certainly end in the red (but who can tell, given recent volatility!), and the 'year that was' summaries will look bleak.
Shares will probably decline by less than residential housing — at least in the capital cities — but that's small comfort if you own both a house and a share portfolio!
Now, students of financial history will know that:
1. The share market tends to average about 10% per annum, compounded, over the long term; and
2. Shares have a negative year about one-third of the time; but
3. Point 1 already allows for Point 2 — and the result of compounding at 10% per annum for decades (and adding more along the way) is pretty bloody impressive
Indeed, perhaps the greatest challenge — and opportunity — for many investors is making their peace with Point 2.
Just avoiding the temptation to fiddle, to sell, to 'reposition your portfolio' or to succumb to the ever present doom-and-gloomsters who see a tragedy in every opportunity… well, that can be tough.
But it is important. Essential. You must resist the Siren song.
It's probable that our last trip around the Sun has left investors poorer for the journey. But it is, as ever, an arbitrary and not very helpful time period.
Still, the end of one year and the beginning of another at least allows us to wipe the slate clean. For some people, that's a useful way to deal with a tough year: simply put it behind you once the calendar clicks over. I can't fault that approach; it is, as always, the future that matters, not the past.
And if you're one of the many (capital-F) Fools out there who understand the truth of this message, but still can't help feeling a little cheesed off with the losses, I hear you.
And given misery loves company, at least take heart from this: it could have been much worse.
Bitcoin started the year at around $16,500. With only a day or so of 2018 left, it's now selling for around $5,311 — a fall of more than two-thirds.
Kinda puts the market in some sort of perspective, huh?
Fool on!
Scott Phillips
Chief Investment Officer
Motley Fool Australia