Just because it is raining it does not mean the drought is over!

Just because it is raining it does not mean the drought is over!

One of the things I enjoy doing is collecting rainfall figures…I have been doing this for over 9 years and have built up a bit of a data base. I know this has nothing to do with financial planning but it is probably a legacy from my student days when meteorology was one of the subjects I studied.

Earlier on this year, I posted a blog called “Will it ever rain again in Cape Town ?” This was during one of the driest starts to the year that we have had in Cape Town in at least the last 9 years and also during a time when it seemed that most of the Cape-fold Mountains were on fire. The just of the post was that as sure as winter follows autumn, it will rain again – even if it did not seem likely at the time. I reasoned that in the same way, the equity markets would recover – that’s what they are designed to do – and that it was not the death of equities as we know it.

Anyone who was sitting in cash and trying to time the market was in danger of missing out on its recovery. Sure enough, both “forecasts” have happened – it is raining as I write this, and markets are up (significantly) from their lows. The problem now though, is that if you ask anyone about how much rain we have had, or about how dry it still is in Cape Town) most people will answer that there was never any doubt in their minds that it would rain again or that there is no way that this was the driest start to the year – after all, look at how much it is currently raining (it was still, however, the driest start to the year that I have recorded in 9 years).

This phenomenon is well explained by behavioural finance! People tend to place over emphasis on the current and as a result tend to forget the past. So anyone who thinks that because equity markets have run hard and recovered well from their lows, that all is over and that there is no volatility risk from investing in shares, they need to remember the past.

Equities are the most volatile asset class and there will still be (significant) periods of (significant) volatility ahead. If this is going to affect your income and/or sleeping patterns then perhaps you should not be in them to the extent that you are. Equity investing requires time – 25% in 6 months is a great return but this is not a significant period of time! The way to iron out the volatility is to diversify your assets and to give your equity portion time.

So watch out, there could still be some dry spells ahead. Just because it is raining it does not mean the drought is over!