By: Edward J. Leach, CFP®, MBA
“Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.” -The Psychology of Money, Morgan Housel
I was having dinner with friends in December of 2018, and at the time, the markets were in the middle of a 20% drawdown. While we were out, one of my friends met an acquaintance of his who happened to be a Sales Representative for one of the large Wall Street brokers. I was happy to listen to his perspectives on the markets. It went something like this:
I love times like this – whenever people are scared, it is always an opportunity to sell something. I do most of my business when the markets are down because everyone worries about something.
The Pessimist vs. The Optimist?
It’s an interesting take – and unfortunately, it’s the truth. Pessimism is highly seductive, and as Morgan Housel points out in his book, The Psychology of Money, a dark view of the future accompanied by a potential solution to “save you” can sound like someone trying to help. Meanwhile, someone who believes the world will get better, even during the worst times, sounds like a crazy person with something to sell you.
When it comes to your money – to whom should you pay attention? The Pessimist who only foresees adverse outcomes or the naïve optimist who only sees a bright future full of rainbows and sunshine?
Follow a Disciplined Approach to Investing
From my perspective, you shouldn’t listen to either but follow a disciplined investing approach.
One of the definitions of Discipline in the Merriman-Webster dictionary is “Self-Control,” and the definition of Self-Control is “restraint exercised over one’s impulses, emotions, or desires.”
The longer you can maintain a disciplined approach to your investment portfolio, the greater the probability you will have success.
Here is my evidence:
From 1950 – 2021 (data from Chart below courtesy of JP Morgan Asset Management’s Guide to the Markets):
If you invested in a basket of large-cap US stocks and looked at your statements once per year, you would have experienced a year up as much as 47% or down as much as -39% (Yikes!).
If you invested in a basket of large-cap US stocks and instead looked at your statements every 5-years. Your best 5-year period had a 28% average annualized positive return, and in the worst 5-year period, a negative annualized average return of -3% (Wow – not ideal, but not catastrophic either.)
If you invested in a basket of 50% US Stocks and 50% US Bonds and looked at your statements every 5-years, you would have never experienced a negative 5-year period. Instead, in your worst 5-year period, you would have experienced a positive 1% annualized return.
If Discipline is the answer to investing, what do we do with our friend’s optimistic or pessimistic worldviews?
Listen to both, and draw your conclusions, but don’t take either view too far. More importantly, don’t underestimate how much progress humans can make over a lifetime, from economic growth, stock market gains, and technological and medical breakthroughs to social equality.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.