There's plenty in the world to be concerned about right now. ISIS, the US presidential election, the earnings recession, and central bank policies are all things contributing to anxiety about the future. As an analytical person, it’s only natural to try and identify the many roadblocks ahead. For years I've felt pessimism was a form of prudence.
I like to think of myself as an optimist, but I do tend to overanalyze things. By overanalyzing issues, I’m constantly identifying all the potential pitfalls with a given strategy, circumstance or idea.
We seem to be stuck in an environment where everyone is accepting a bleak future of lower returns. Many investors are increasing their cash positions, waiting for a better entry point into the stock market, instead of investing at elevated levels. A few months ago, I came across an article titled “Why Does Pessimism Sound So Smart.” Pessimists are easy to find, and they make many compelling arguments about why doom may lie ahead. I’ve been guilty of a pessimistic mindset, regarding the stock market, over the past few years, which is why the article resonated so much with me.
The author of the article, Morgan Housel, lays out 5 reasons pessimists get a lot of attention:
Optimism appears oblivious to risks, so by default pessimism looks more intelligent.
Pessimism shows that not everything is moving in the right direction, which helps you rationalize the personal shortcomings we all have.
Pessimism requires action, whereas optimism means staying the course.
Optimism sounds like a sales pitch, while pessimism sounds like someone trying to help you.
Pessimists extrapolate present trends without accounting for how reliably markets adapt.
You don’t need to ignore all the potential risks out there, but you shouldn’t let fear and uncertainty cripple you. The economy is incredibly resilient and innovators continue to find ways to make the world better (or at least, make life easier. Case in point: ordering pizza from a mobile app). Pay attention to the risks out there and try and identify solutions to the risks. Don’t let fear and doubt cripple you and force you into making poor investment decisions.
One of the most insightful market commentaries is J.P. Morgan’s Guide to the Markets. The guide is filled with market and economic data, presented in an easily digestible form, with clear charts and graphs. My favorite slide in the guide (yeah, I’m a poet), is the annual returns and intra-year declines chart, shown above.
The red dots and negative numbers on the chart show the worst peak to trough intra-year declines in the stock market (represented by the S&P 500). The bar graph shows the stock market’s annual return in each given year. The big takeaway here is, even though market downturns are very common, the stock market has produced positive returns in 27 of the last 36 years.
Some of the red, negative numbers are very scary. It is no doubt difficult to go through those swift and violent pullbacks, but investors focused on the long-term have been rewarded by staying the course.
During the Great Recession in 2009, the stock market was down, peak to trough, 28% at one point in the year. However, if you were a fairly oblivious (or should I say smart?) investor, who, only checked your balance at the end of each year, you would have seen a 23% gain, not realizing how bleak things looked in March of 2009. Albeit, 2008 was a very tough year to stomach, and the gains in 2009 weren’t enough to get the market back to pre-crisis levels. Nonetheless, in the years since, not only has the market recovered, it's soared to all-time highs.
I’m as surprised as anyone that we haven’t seen a 20% pullback in the market since 2009. I realize the more the market goes up, the more room it has to fall, if we do see a pullback. There are, and will be challenges ahead. Investing in the stock market is not a smooth ride, but over the long-run, if you stick to it, it’s been a very enjoyable one.
I definitely don’t have all (or maybe even any of) the solutions to all the problems that plague the world today. What I do know is, economies are incredibly resilient and find ways to adapt to and overcome the various hazards along the way.
I feel for the investors who went to cash during the downturn and have been sitting there ever since, earning next to nothing. It’s easy to say in hindsight it was a dumb move, but I can’t imagine the fear retired investors heavily invested in stocks felt at the time, and I get the panic.
It’d be great if we could time the market and get in at troughs and sell out at peaks, but we (should) know we can’t. Sure, you or someone you know, may call a top or bottom in the market once or twice, but the cost of being wrong and missing out on gains is an area in which most investors can’t afford to be wrong. Depending on your situation, you may have no choice but to take on risk.
Don’t let fear and doubt overcome your thinking. I realize I’m taking a risk writing this post with the stock market at all-time highs, but that’s exactly why I’m writing it. If the market collapses as soon as I post this, it doesn’t change my message. The reason a lot of money can be made in stocks is because stocks are risky assets, and we don’t know the future. Pessimists (myself included) need to be reminded the future can be great, even if there are some bumps along the way. If you are constantly considering all the things that could go wrong, stop to think about all the things that could go right. The future may be better than you think.