Investors must believe that investments will continue to rise in value. There is no guarantee this will be the case. It’s a leap of faith. There is a rational reason why stocks should go up in the future – the objective of a business is to make money and that should create value for shareholders. However, in the short-term stock price is based on the irrational passions of the market. We can even cherry-pick cases like Japan or time periods like March 2009 to show that sometimes even the long-term isn’t a sure bet for stocks. Why would you bet your hard-earned money on something that’s not guaranteed to work?
Why do we date? Get married? Have friends? Adopt pets? In the short-term, all of these relationships can cause us stress. Try explaining how cheeseburgers work to an 8 year-old who wants a cheeseburger for dinner, but “without meat”. These episodes are spikes in our daily volatility. There are rational reasons to have these relationships. Studies point to increased longevity for married couples (or at least married men), people with healthy friendships, and pet-owners. How many of us looked across a crowded room at their future spouse and thought “that’s the person who’s going to add years to my life”, though? Our first impressions are often much less sophisticated.
The stock market is coming off of an October we’d rather forget. We have lulls in our relationships, too. Maybe the kids are passing the same cold through the house non-stop. Maybe the cat keeps bringing half-dead chipmunks into the house. Maybe your favorite baseball team lost the World Series in game 7 after a rain delay. We eventually break out of the funk and we’re stronger for it.
A relationship is built on accumulated days of little upsides. Maybe not much happens day-to-day, but our lives are better because we get to share it with a spouse, friends, or a dog. It’s said that the market takes the stairs up and the elevator down. The downsides are often abrupt and move the needle farther, but occur in a shorter amount of time. Over the long-term, though, investing in the market and relationships is worth it. Yes, there are toxic relationships that are all downside, but I won’t get into the Cleveland Browns here.
The relationships-investing analogy gets stretched when we take it too far. I don’t advocate diversifying across spouses, for example. I was just thinking about why we invest in the first place and realized that the case for relationships was similar.