I know some of you clicked to see what the heck are we doing eating uncooked food or where did we do such. Maybe even a picture of us getting sick would be fun, right? Farther from the truth, as we travel we are enjoying healthy and local food. I wanted to use this analogy to make the point of similarities with investing, many of us forget.
Cooking & investing are similar as they both need somewhat ‘prescribed’ time to reach their ‘cooked’ point. With investing, different from cooking, the prescribed time is less exact, but still we can take hints from long-term charts like below. We define ‘cooked’ investments as the ones that have achieved their long-term potential and allowed us to achieve our goals.
I have calculated the performance of every 3, 10 & 30 years period for S&P 500 since 1928 to 2016 (chart below). They’re known as rolling averages, as they include every rolling period (3, 10 or 30y) and calculate the performance no matter which year you started investing. So, for example, a 3-Year rolling period will look into performance from 1928-1930, 1929-1931, 1930-1932 and so on and calculate the annual average return for the period. Look at the unpredictability of performance on the 3-year holding chart and compare it to the 10 and 30-year charts. You can see that the volatility (or waves) gets smaller and almost disappears during the 30-year holding period chart.
The predictability of investment returns on the 30-year chart is much stronger, looks almost like a straight line hugging the 10% annual return, with much fewer waves than the shorter holding periods. While not everyone has the 30-year timeframe (but many of us do) we can see that TIME is on our side, and the longer we hold, the higher our chances of achieving our goals, seeing a positive performance and with less variability.
Just like cooking, investing needs time in order to get to its ‘cooked’ version. If we remove the food (investments) while still cooking, we will:
Spoil the recipe (lose money)
The food won’t be edible (the performance will suck).
While food may get overcooked or burned if you cook them longer than needed, with investments the longer you ‘cook’ them, the better they get. Maybe at this point, it becomes wine.
Until next time, eat your vegetables.
Look for the ‘cooked’ investments – the green line
