'Time please, gentlemen...'

For something that is so integral to everything that we do, we humans have never really got to grips with time. Mostly we curse its passage as one birthday rolls relentlessly into another. Conversely, there are occasions, as any seven year old trying to sleep on Christmas Eve will tell you, when it seems to have stopped altogether. We can even view it as some kind of physical presence as demonstrated when well-meaning friends attempt to soothe your broken heart by telling you that ‘time’s a great healer’. On such occasions you can always try cutting off one of their more useful limbs to see if they still maintain that sentiment. ‘Not so clever and smug now, eh?’

Time is actually a dimension. It is the fourth one to be precise, after height, width and depth and seems to be universally misunderstood by most people who aren’t physicists.

Let’s consider a few little-known facts about time. Firstly, there is no such thing as the past or the future. Only the present exists. The past is merely a collection of memories stored by your brain and is therefore unique to the individual. The future is merely the brain attempting to create a storyboard by anticipating likely scenarios based on the situation as it is in the present, taking into account its memory of what happened when similar situations were encountered previously.

As you are reading this, Kennedy is being shot, one of your ancestors is legging it from a Velociraptor, man is taking his first steps on Mars and Cliff has just celebrated his 200th birthday. Just because your brain categorises them into past or future events doesn’t change the fact that they already exist in the fabric of time.

The manner in which we envisage time is therefore a purely human concept. We imagine it like an arrow moving from the past, through the present and into the future when actually it doesn’t happen like that at all. Time’s movement is dictated by the universe’s expansion or contraction. The said universe is currently still expanding from the Big Bang and it is this that stipulates the direction of time as we need to perceive it.

Think of it like a vinyl record. If you happen to be under 25 then these are the thin round things that your dad has stashed in a box in the loft (no, not that box) which always made you wonder who Floyd was and why he was pink. You’ll find them next to his Bullworker and once only attempted home brewing kit. Anyhow, the record player needle focusses on an extremely specific point, which we might imagine to be the present. However, you can lift the needle and reposition it at any point and the record will play that particular section. You can move it forwards and backwards whenever you like and it doesn’t change the words in the song or the order of the verses on the record. Nor does it alter the fact that they have been played previously and are likely to be played again at some point.

Newly educated as you may be about the fourth dimension through reading this particular blog (if you’re still with us), you may be pondering what on earth all this has to do with anything financial. And ponder you might. The premise that we are lurching towards is that time also does funny things to your investments which can either make you happy or make you sad.

The returns we get from our investments are directly proportional to the level of risk we take with the capital. Cash deposits offer the lowest level (allegedly) of risk and return, and the scale moves upwards from there, through fixed interest funds, corporate bonds, managed funds, property and stocks and shares all of which offer a progressively higher rate of return in exchange for greater risk to your capital in times of woe.

The problem for most investors is working out where on the scale they feel comfortable. Human nature dictates that we want the returns associated with the higher risk things coupled with the capital security of the lower risk stuff. Which is a bit like asking for the cheap Ferrari or the low maintenance supermodel wife, they just don’t exist.

However, time can distort and even reverse this equation. That is because the length of time that you intend to hold your investment for, can either increase or decrease the risk associated with that particular asset.

Think of it like this. One day you decide to buy the house next door and do a quick deal with Bob over a pint. You march home and announce to the disbelieving wife that you have purchased said house and intend to sell it on in a few weeks for a profit. Displeased is possibly a marginal understatement to describe her feelings towards you and if you listen carefully to the subtler points of her screaming rage, you may discern a thread indicating that she feels that it is a high risk investment strategy.

Conversely, if you had instead announced that you intend to hold it for ten years and then sell it with a view to making a profit then the verbal lashing may not be so savage and it is possible that she may view it as a lower risk investment. So, by extending the time period you have decreased the risk of the investment. The same applies to equities. Viewed over the short term, especially in the current climate, they can appear volatile and risky however if you view almost any ten year period in history then equities are normally the most consistent producer.

But how can time make an investment more risky? Well consider that you take a five year fixed rate bond at a rate of 4% (if you’re lucky). Now, 4% is not particularly attractive when inflation is 5% as it guarantees you a 1% per annum loss in real terms. Over the lifetime of the bond that total loss is 5%.

Consider though, if inflation and or interest rates rise whilst you hold the bond to say 7%, then your 4% interest looks even worse as your losses are now 3% per year which is a 15% loss in real terms over the five year term that you signed up for.

Simply put, time has increased the risk of your fixed rate deposit account to the volatility of short term equity trading. Which is disheartening.

As a crumb of comfort though, sooner or later the universe will start to contract and at this point the direction of time will reverse. You will then get to live your life backwards and any losses that you make with your investments in this lifetime will be profits in your reverse life. Admittedly, it’s not a recognised financial planning technique but if it gets you through the day....

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