Currencies, commodities, stocks and other financial instruments/products can seem incredibly complicated. Anyone who watches the daily news knows that all of these things seem to fluctuate wildly and usually without any apparent reason. One day, stocks are up, then the next day they are back down-- who could possibly know what they are going to do tomorrow?
Short Term Fluctuations Vs Long Term Trends
The truth is, anyone focusing in closely on these daily trends would have a very difficult time gaining any useful information about the future performance of their investment. For an example, take a look at some graphs indicating the performance of the stock market over the last couple years. Looking at a graph depicting a one week trend for the Dow Jones Industrial Average in the last week of January 2015, might give the impression that the stock market is about to crash and burn. Extending that query out to the entire first month, things don’t look much better. However, the bigger the picture, the more things seem to be in dire straights. A six month history from the first month in 2015 starts to reveal a very subtle upward trend, while each subsequently wider time interval starts to show much more obvious upward trends. In fact, if you zoom out to see the trend over the last 30+ years, the trend line seems to imply that our stock market has almost been in a state of perpetual exponential growth.
Most of us alive (or that have an interest in reading this) should be able to remember the last great market crash of 2008, which triggered “The Great Recession”. What might be slightly lesser known, but is still the single largest drop in the history of the Dow Jones Industrial Average, was the market crash dubbed “Black Monday” of 1987. Then of course, there was “The Great Depression” of 1929, which is probably the single most well known event in the history of the stock market. Actually, throughout the last hundred years, there have been a multitude of huge market crashes and disasters.
So, if the stock market has suffered such a large number of devastating catastrophes-- why do we see an exponential growth trend over the last hundred years? At least to some degree, this must seem counter intuitive. However, the explanation is quite simple. In the short term, it is easy to lose a lot of money. For example, if a stock had a gain of $10, one day, theoretically, it could just as easily drop by $10 the next day. Or, it could lose $2 a day for the next week, effectively destroying all the value of that $10 gain. However, if someone had invested in that stock over the course of several years that had many $10 days every year, then having a couple bad days a year isn’t so devastating. That is, over the course of a week you might lose $20 or $30, but over the month you gain $50 or $60.
The concept seems relatively simple, but investment amateurs and professionals alike can lose sight of the bigger picture. Persisting downward trends can create uncertainty and drive rash decisions. However, in long term investments, it is often those that can weather the storms who will come out on top for returns.
Risk and Uncertainty
Just because an investment is long term doesn’t mean that it will be profitable. The Dow Jones Industrial Average has performed well over the last 30 years, however this is a summary of many different companies from many different industries. When the Dow Jones is doing well, it means most of these companies are doing well, but unfortunately, not all of them are doing so well. At any given point in time, many companies and businesses are failing. If an investor pools all their stock into one of these failing companies, then they will likely lose all their money. There several ways to defend against situations of this nature. One is for investors to keep a watchful eye over the companies they’re invested in. Another method is diversification, a practice in which investors insure themselves against the risk that some of their investments might fail, by purchasing a lot of different types of investments that aren’t likely to all fail simultaneously.
Trying to keep a close eye on a few different companies and trying to predict their performance can be a tedious task. To actively monitor the performance of any one company in the modern economy, one has to monitor the actions of various countries, political policies, companies, industries or any other number of factors. Furthermore, a company’s performance can also rely heavily on their internal processes, which may be a bit less transparent than other aspects of their business.
To these ends, diversification makes a lot more sense than just trying to focus attention exclusively on a few select investments. That is, even when focusing on a single enterprise, investors are actively following a myriad of economic factors which can give insight into many enterprises and industries. Also, since its impossible to be able to follow all of the economic factors governing a single investment, having some sort of insurance against uncertainty is desirable.
So, if an investor believes that a particular industry might be on the verge of a huge boom, they might start looking at different companies within that industry. If they believe that the companies within that industry aren’t necessarily ready to handle the ensuing workload, the investor might diversify their portfolio by investing in several companies within this industry, incase any one of the companies fail. Similarly, if an investor knows that a particular industry is doing well, but isn’t sure how long it will remain that way, the investor can diversify by investing in a different industry. Perhaps they might invest in a related industry (like a supplier) or they might decide to invest in an entirely different industry all together.
Currency and Coins
Treasury Vault Specializes in investments dealing with currencies and precious metals. Our team of experts keep a close eye on the currencies we deal in and the economic factors that affect the countries where those currencies come from. Our professionals also keep a close eye on the economic factors that affect precious metals like technology, mining, economic instability and much more. Dealing with these factors on a worldwide scale can be quite complicated, so we try to give our clientele the most information we can, in a clear and concise fashion. If you have any questions about currencies, precious metals, or investing, please don’t hesitate to contact us. This is our passion and we want you to be as invested in it as we are.