Why is investing like dieting.. what is a “correction”?

90 second blitz – key points if you are in a rush:

1. Markets won’t go up in a straight line. Sometimes “corrections” happen where the market changes its mind about the value of a company based on changing economic factors

2. In May we have seen a bit of a correction with the value of the largest companies in the world (and the shares investors own in those companies) fall by 3-4% – which would mean a £100 investment at the start of the year is now worth £97

3. Put that into context though… if you had invested in the companies 5 years ago, your investment would be worth £120!!! An extra £20.. for nothing!

4. Investing is a long-term game, 5 years minimum. Don’t expect big results straight away, stick with it and you will see the benefits with time.

5. So don’t let this last couple of weeks put you off investing.. markets have bounced back from a lot worse than this to make their investors lots of ££££.

Want to know more about why investing is like dieting?

Lose 5kg in a month! All you have to do is follow this [extremely complicated, expensive, hard to follow] diet plan. Then all of a sudden [through a combination of complicated words like ketogenesis, macrobiotics and some disappointingly small meals] your weight will just drop off [but also it might not and even if it does, you are only human and will want to eat chocolate again one day!]

We all know that it is really simple to just eat a healthy, balanced diet. Simple rules like eating 5-a-day, 3-meals-2-snacks, burn-more-calories-than-you-eat and chocolate-is-not-for-breakfast… ok I made that last one up and maybe I have a chocolate problem. But that is besides the point!

Investing has the same problem.. too often investing is set out as a menu of over-promises, with a side of complexity, and followed by a healthy serving of fees! When, actually, it can be really quite simple and easy, and with time, can deliver good outcomes.

Let’s start with the over promises...

Big returns from investing in the short term is possible, but it is certainly not guaranteed. Just like dieting.. investing won’t be a steady trend in right direction. You will have days where the scales show more and less progress.

Why is that?

When you invest in stocks and shares (also known as equity) what you are buying part of a company. The value of the ‘share’ you own will change over time (go up and down).

Using the diet theme.. let’s take Unilever, the maker of the beloved Ben & Jerry’s ice cream. The value of that company will be affected by:

1. The consumer – how much demand there is for ice cream (and therefore how much it can be sold for)

2. The competition – how much better we think Ben & Jerry’s is relative to Haagen Dazs (don’t mean to open a can of worms here..)

3. The economy – how much it costs to produce ice cream, hire the staff, transport the produce, and lots of other moving parts that makes the world economy tick

4. The future – how these things might all evolve in future (the guessing game)

The way these things interact will impact how much the company is worth, and therefore how much your shares in that company are worth.

Unfortunately.. that means, the investing journey isn’t always a straight line. When they go down, these can be called “corrections”.

Corrections...

A correction is what we are seeing happening this month.

This is really focused on that 4th bucket.. “the guessing game”.

There are people who are tasked with estimating the future of ice cream demand, sale price and Ben & Jerry’s success in the market. This will determine how much a company is worth.

With all the ins and outs of Brexit, political uncertainty in the UK, Trump arguing with China and so on, this is a difficult thing to do. Occasionally these people change their minds and have to adjust the value of the company.

When these corrections happen as a result of changes in factors that affect almost all countries (in this case inflation, tax and interest rates) then we see markets as a whole (rather than just a single company) fall in value.

What does this mean in real money?

If you invested £100 in the market at the start of this month, it would now be worth £97 (sad face).

But let me put that into perspective. If you had invested £100 in these same companies at the start of this year, your investment would have gone up £111.

And if you invested 5 years ago.. your investment would have gone up £120.

Back to the diet analogy.. you may have seen the weight creep up a bit but that’s the worst time to stop. You have to give it time to get results.

Time is really the big factor.. if you give it enough time, investing will give you results! Markets have recovered from worse than this.