It's hard to be a successful investor unless you're an optimist.
Those are the first words a couple say every time they visit our office. The question they are asked that prompts such positivity? "How have you been?"
They are a long-term client, now into their mid 50s whose optimism never fails to impress us. You might be wondering why is this couple so positive? There could be plenty of reasons. Some people may call them optimists.
"Well, you know, I think there will be a market crash next year."
Those were some of the words of a young man who called us up trying to figure out some direction for his financial future. He's 32 and interested in retiring in a couple of years. He thinks crypto currency might be the answer, but he's not sure. His thinking is incredibly chaotic.
It would be easy to make light of this, but at 32 he won't be retiring in a couple of years without a stroke of luck. He had figured out that a large part of an early retirement was driving down living costs, but the other part is having an asset base that can be drawn upon for expenses. We couldn't help him with the assets (or cryptocurrencies I should say), but hopefully with this column we can influence people like him and their thinking. Because without thinking straight, people will have a stronger headwind to deal with.
The market crash belief was evidence of that. There wasn't much reasoning behind it, beyond "some stuff" he'd heard, so we didn't ask him for the specific crash date. The only thing we can influence (hopefully) is his outlook. We gave him a book on investing and sent him on his way.
Why would the couple in their 50s have such a different outlook to the man in his 30s? The obvious response might be the global financial crisis occurred when the younger man was 19 and the Covid crisis occurred when he was 31. Those are considerable financial calamities to occur before you're 35 and they might colour a person's view on the world and how precarious it is.
But what has the older couple been privy to? They grew up in the 1960s and 70s. The end of the post-World War II boom, the Vietnam war, stagflation in the 70s and an oil embargo.
Inflation continued throughout the 80s, while there was also the '87 stock market crash. The 1990s began with a recession across much of the West, it rounded out with an Asian economic crisis and the dotcom bubble, which burst in early 2000. A year later 9/11 happened, destabilising financial markets and leading to wars in Iraq and Afghanistan.
Most of this before Mr 32 finished his primary schooling.
While it all seems very dire, in the midst of all this havoc, it should be very easy to see why the older man is positive. Long term, our circumstances have never failed to improve. The couple has seen nothing but ongoing improvements throughout their life and into their 50s and they have the ability to put them in perspective.
As financial writer Nick Murray points out in the 2019 update of his book Simple Wealth, Inevitable Wealth, "The computer embedded in a middle school child's iPhone is a million times smaller, a million times cheaper, and a thousand times more powerful than all the computing power that was available to NASA the night Apollo 13 exploded." And as former doctor and educator Hans Rosling notes in his 2018 book Factfulness, "over the past 20 years the proportion of the global population living in extreme poverty has halved".
In Rosling's case, he put together a 13-question test to measure whether people actually know about the incremental improvements in the world. It may be considered a test of general optimism and pessimism in the world.
Multiple choice questions about poverty, births, deaths, education, health, gender, and violence. In a 12,000-person survey across 14 countries, the average strike rate was 3 correct answers from 13, with the majority of people choosing the most pessimistic answers.
While these are just normal people taking the test, what about the world's leaders and thinkers who should be more aware of what's going on? It's not pretty, as Rosling notes:
I have tested audiences from all around the world and from all walks of life: medical students, teachers, university lecturers, eminent scientists, investment bankers, executives in multinational companies, journalists, activists, and even senior political decision makers. These are highly educated people who take an interest in the world. But most of them—a stunning majority of them—get most of the answers wrong.
It's well acknowledged we're fed a steady diet of bad news. And it's easy to blame the media, but good news is gradual which makes it more disguised to our eyes. Bad news is sudden which makes it prominent and in our faces.
It's hard to be a successful investor unless you're an optimist. Firstly, if everyone does well, you're likely to do better as an investor. And if you understand everyone is doing better, and that we have always gotten better, you're less likely to be agonising over someone huffing and puffing about the next crash. When I hear crash talk I often think of the saying, a broken clock is right twice a day.
Optimism doesn't mean abandoning your principles. Risks exist at every level, but they're often more pronounced at a micro level. Taking on too much debt, buying individual stocks, getting involved in untested investment schemes.
In contrast, working with an adviser, investing in a globally diversified portfolio, balanced across asset classes has historically done a good job at capturing gains and protecting against the downside. The human race's progress is distilled into capital markets which has reliably rewarded investors with capital growth and income in their pockets.
As our friends say: good and getting better!
· Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions
· This article is prepared in association with Mancell Financial Group, Australia. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz