Slide 1
Serving our clients for more than 25 years
Slide 2
Trusted to deliver peace of mind solutions
previous arrow
next arrow

Should you be an Optimist or a Pessimist With Your Money?

by | Financial Planning, Saving & Investing

“Both optimists and pessimists contribute to society. The optimist invents the aeroplane, the pessimist the parachute.” (George Bernard Shaw)

Cast your mind back to the middle of March 2020, when fears around Covid-19 sent the JSE into a spiral. The All Share Index dropped more than 25% in just a few days.

Pessimism about how the hard lockdowns would impact the economy was so extreme that many people abandoned the stock market altogether. It just seemed too risky.

At that point it would have seemed naïve or foolish to suggest that the JSE would finish the year higher than it started. Yet, that is exactly what happened.

Once the initial panic passed, investors started to realise that there were actually all sorts of reasons for optimism. It became clear that forcing people to stay at home would benefit companies like Amazon, Microsoft and Zoom. A new focus on the environment could also make Tesla the most important car manufacturer in the world.

Fear and greed

This was an unusually swift and sharp example of the constant battle playing out in markets. There is always a tension between fear and pessimism in one direction, and greed and optimism in the other.

For an investor, the challenge is knowing where to position yourself in this argument. Famously, Warren Buffet advised that you should “be fearful when others are greedy, and greedy when others are fearful”.

But this is really advice about when to buy and sell individual stocks. It is not useful guidance for long-term investors, who shouldn’t be trying to time when to go in or out of the market.

Morgan Housel, who wrote The Psychology of Money, has a different way of thinking about it. He suggests that “progress requires optimism and pessimism to co-exist”.

Prepare for the worst

“The best financial plan,” writes Housel, “is to save like a pessimist and invest like an optimist.”

In other words, it’s good to be prepared for the worst. Have a diversified portfolio that can withstand the kinds of extreme market movements we saw in 2020, because, from time to time, markets will turn against you.

Your financial plan also needs to be able to protect you against the worst life events.

If you fall seriously ill or a disability stops you from working, you need to have insurance in place. And you need to have emergency savings in the event that you lose your job or are hit by a large, unexpected expense.

Take advantage of the best

But, at the same time, don’t neglect the lessons of decades of history that show that, over the long term, stock markets will deliver the best compounded returns.

You won’t be a successful long-term investor if you are always too conservative. You have to be prepared to take some risks with your money. You need to appreciate that stock markets will be unpredictable over the short term, but if you stay invested you will see the reward.

That was true of the Covid crash, and of every crash that preceded it. In time, markets always bounce back.

Staying optimistic will therefore give you the best chance to grow your wealth. But you will only have that opportunity if you take the necessary precautions to not get financially derailed along the way.

As Housel notes: “The trick is being able to survive the short-run problems so you can stick around long enough to enjoy the long-term growth.”

To discuss your investment and savings plans, speak to us.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© FinDotNews