Nobody wants to read “Steady as she goes, just stay the course” but “Here’s why a crash is coming” will top the charts.
Not only will negativity get you noticed, but it can also be safer to err on the side of caution.
Focusing on the potential risks and things that could go wrong seems to add to one’s credibility.
In contrast, those with a glass half full view can be mistaken for being overly relaxed.
After all, could they really have done the work if they haven’t unearthed a looming crisis?
Financial forecasters often have more to lose from being too bullish, which means the path of pessimism can sometimes be the safer one.
If they’re pessimistic and wrong, people are pleasantly surprised things turned out better than expected, while grateful they were warned anyway.
But if they’re optimistic and wrong, people end up out of pocket and their carefree attitude can get the blame.
There’s nothing wrong with being mindful of risks and let’s be honest, at any given time the list of concerning issues is a lengthy one.
However, when it comes to investing being an optimist pays off.
The S&P 500 index in the US has (including dividends that were reinvested, rather than spent) delivered an annual return of 10.8% over the past 30 years.
If you’d invested $100 in 1994 and left it alone, it would’ve grown more than 20-fold since then and you’d have over $2000.
New Zealand shares have returned 8.5% annually over that period, while the Australian market has delivered 9.1%.
Now consider everything the world has thrown at investors over that period.
There’s been the September 11 terrorist attacks, numerous wars, a US housing crash, a global pandemic, and three recessions.
I can point to 14 occasions where the S&P 500 fell by more than 10%, including four instances where it was down more than 20%.
Two of those times the market was cut in half, sinking close to 50%.
There have been plenty of reasons to sit fearfully on the sidelines, in case one of the many potential risks became a reality.
In fact, some of them did, yet the market still has a flawless track record of recovering and moving on to bigger and better things.
Pessimistic investors aren’t without options, mind you.
Cash in the bank hasn’t lost a cent at any point over the past three decades, no matter what’s been going on in the world.
The return of 4.9% per annum is fairly subdued though, and $100 invested in 1994 would’ve only grown four-fold (assuming you reinvested all the income) to a little over $400.
Not only has the anxious pessimist spent a lot of energy worrying about what might go wrong (but probably won’t), they’ve also found themselves 80% less wealthy than the more relaxed optimist.
US tech investor Nat Friedman famously said “pessimists sound smart, optimists make money”.
He wasn’t referring to financial markets, but there’s something we can learn from that as investors.
A healthy dose of scepticism can keep us on the straight and narrow, but too much of it can hold us back from making progress or taking opportunities.
Don’t write off the optimists just because they aren’t panicking enough. They might have more common sense than you think, and maybe even a longer-term view.
The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
