“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill
Equities perform well over time. We’ve all heard this at some time or another. You only need to look at historic returns for equities to see that this has been true. Yet it appears that despite this evidence, whenever the equity market is falling, many investors start selling.
During the equity market retreat last December, $46.2 billion was taken out of equity funds in just one week. This amount was just shy of twice the net redemptions of any other week going back to 19921. I’ve often joked that my business must be the only one where people run away whenever our product goes on sale.
Dr. Siegel’s Investing Wisdom
I believe that one needs to be an optimist in order to be a successful investor. Yet optimists tend to appear reckless and out-of-touch with reality when it comes to investing. Dr. Jeremy Siegel, Wharton Professor and author of Stocks for the Long Run, states that equities have returned an average of 6.5% to 7% over inflation over the past 200 years, and he expects this trend to continue.
Dr. Siegel’s book was first published in January 1994 when the Dow Jones Industrial Average was 3,800. The index is up more than six-fold since then, and yet Dr. Siegel is seen as a reckless cheerleader for equities.
“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”
— John Stuart Mill, 1828
Investors need to be optimists to be successful over time if we believe Dr. Siegel’s research and his conclusion that this long-term trend will continue. A little skepticism might be good, but a pessimistic outlook makes it hard to hold positions during the equity market’s frequent corrections. I firmly believe that to be a successful investor, you need to have the mindset that economies will recover and companies will figure out a way to return to profitability after a downturn.
I believe investors need to be optimists. This is not to say investors should not be cautious. Investing in equities incurs risk. There have been great companies that have gone under, which is why diversification should be part of every investor’s strategy.
Tom Corley devoted years to studying the habits of the rich versus the poor. He learned there is a trait that may help build wealth: optimism. Mr. Corley found that 67% of self-made millionaires in his study forged the habit of being positive and upbeat2.
How the Media Can Feed Into Pessimism
The financial press doesn’t help investors by playing up the negatives or by putting a negative spin on an otherwise positive news item. How many times have you read an article about the “overvalued stock market”?
Investors need to recognize that pessimism sells. It creates a call to action. “Staying the course” doesn’t help sell newspapers or get viewers to tune in at 11 for more details.
Consider this headline at the end of 2018:
Markets poised to finish year with worst performance in a decade — and the volatility seems certain to continue.
— The Washington Post, December 29, 2018
What is volatility? What inference do you take from that headline? Worst performance in a decade? It sounds like volatility is bad. According to Investopedia, “Volatility is a statistical measure of the dispersion of returns for a given security or market index. In the securities markets, volatility is often associated with big swings in either direction (emphasis added).”
In this case, the Washington Post headline turned out to be correct. The volatility did continue because the S&P 500 Index rose more than 8% in January 2019. Is there such a thing as good volatility?
Investors should be aware of the downside. However, focusing on the negatives could blind an investor to opportunity. At the end of December 2018, the major equity market indexes were already down nearly 20% from the highs made three months earlier. Were equities a better value after a price decline of 20%?
Never forget that equity investment involves losing money from time to time. This is a fact all investors need to accept. Investors should take a genuinely long-term view of portfolios, so temporary declines in the market will be erased when the market eventually recovers. Even temporary declines can be substantial, which was the case during the great panic of 2008–2009. Anyone who knows they could not handle that kind of decline should take heed. Selling into a decline and sitting on the sidelines while the market recovers is a sure way to lock in permanent losses.
Optimism is a key part of long-term success when investing. Having a trusted financial adviser who can help you stay optimistic and navigate the volatility of the stock market is important. Find out how the financial planners at Rodgers & Associates can help preserve your wealth with tax-efficient investment strategies.
Rick’s Tips:
- $46.2 billion was taken out of equity funds in just one week in December 2018 during the equity market decline.
- Stocks for the Long Run states that equities have returned an average of 6.5% to 7% over inflation over the past 200 years.
- Tom Corley learned there is one trait that may help build wealth: optimism.
1Record-Breaking Weekly Mutual Fund Flows: Capitulation Or Transitory? By Tom Roseen. Lipper Alpha Insight.
2Rich Habits: The Daily Habits of Successful Individuals. By Tomas C. Corley, 2010.
