In practise, over time, you will see something like the diagram below. As you can see, the economy goes up and down. The GDP level will increase for not only the peaks, but also the troughs/ recessions when compared to previous recessions; this is the market advancing. This shows the market is progressing over the long term.
This shows the importance of investing for the long term. This will mean that in the future, even during a recession, the market value will be higher than when you initially invested. If you are young, you have time to ride out the recessions. As a result, the younger you are, the greater the risk you can take (think back to the risk scale in chapter 4). It also means that the older you are, the less risk you should be taking, as putting it bluntly you have less time for the market to recover again. These are basic lessons that we should be teaching you in school to avoid you making rash decisions when you see the economy going up and going down. At school, we should be focusing more on being patient and making small but gradual progress. Unfortunately, in the modern age we are too focused on quick wins and instant rewards. This transfers to investing, where the safest approach to take is the long-term view where you have to be willing to wait (Dalio, 2013).
Why is there a gradual increase in average GDP over time?
This gradual upward trend that you see over time is due to a few different factors. As it is being measured in GDP, the most obvious comes back to productivity. This happens because businesses learn to be more efficient and more productive over time, thus increasing GDP. This efficiency is down to factors such as improved management techniques, improved machinery and staff learning more effective techniques. Some people may say “but what happens if these improvements don’t happen?” This is extremely unlikely when you think of the level of investment going into research and development of new ideas and products. As new ideas and products are developed, these are only going to breed new ideas and developments. Remember, we have the whole world thinking up these new ideas all the time. It doesn’t take many of them to be correct for progress to occur.
This table is very much UK based and is a rough outline; I have put the table together to show some of the developments we have made over the course of a lifetime. Many of these developments have helped to improve business practises and efficiencies. Some would argue that they have made some inefficiencies. Overall, I would say that they have all had positive impacts on our day-to-day lives and led to improved levels of productivity over the long term (Dalio, 2013).
This is last blog post on the Economy (3/3). I hope the main this you have taken from this is that markets are constantly progressing, there will be ups and downs, but the key principle to invest over the long term.
That’s it for this week, next week I move on to the S of PESTLE, Social factors.
This post has been largely influenced from my book ‘Money lessons left at the school gate’, please follow the link if you would like to read the first three chapters for free.
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