Optimism is the only realism

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“I’ve had a lot of worries in my life, most of which never happened.”

– Mark Twain

Few behaviors (if any) are more destructive to wealth accumulation than acting based on emotions. Whether the emotions are euphoric or pessimistic in nature, investors don’t want to miss out on potential earnings or participate in potential losses. In my experience, pessimism is the most common attitude, and it creates one of the most destructive emotions: fear. Whether it is fear of the next stock market decline, pandemic, presidential election, economic downturn, natural disaster… the list goes on and on. In today’s age, and any age for that matter, there are no shortage of reasons for one to be fearful.

However, despite all the headlines and reasons to be fearful, it is our view that optimism is the only realism. The following is why we choose to be optimistic about the future instead of pessimistic.

When you invest money in your 401k or your IRA, what are you investing in? Perhaps you are invested in mutual funds or stocks. But what do these investments really represent? They represent ownership in companies all over the world. These companies collectively have been able to grow despite experiencing economic hardships and setbacks along the way. At the time of this writing, the S&P 500 sits at 4,528.46. Forty years ago, on September 1st, 1981, the S&P 500 was 118.30.1 That equates to a 9.5% annualized rate of return, not including reinvested dividends. With reinvested dividends, a $10,000 investment in the S&P 500 at the beginning of 1981 would have grown to just shy of $800,000 at the end of 2020.2

Now, consider all the traumatic events that took place over the last 40 years. To name just a few: the Cold War, the stock market crash of ’87, the Persian Gulf War, Y2K, the internet bubble, the terror attacks of 9/11, corporate accounting scandals, the global war on terror, hurricane Katrina, the financial crisis of ’08-’09, Brexit, and the Coronavirus pandemic. A person living through each of those events may have felt like the sky was falling and may have been tempted to pull their long-term investments out of the market. In fact, many people did just that.

Despite these events (and others not mentioned), most companies found ways to grow collectively. As is oft repeated, there is more computing power in your smart phone than NASA had when they sent the astronauts to the moon. Yes, there were significant setbacks. But the economy managed to grow and investors who did not abandon ship when things seemed gloomy were rewarded.

It is also worth mentioning that the media’s main goal is to drive viewers. Negative headlines usually garner more viewers than positive ones. For example, which of the following headlines grabs your attention the most? “US is net exporter of oil for first time in decades” or “Jobless rate spikes to 14.7%, highest since the great depression.” Both were real headlines, yet it is human nature to focus on the latter headline because of fear. It takes discipline to see the larger picture, not just what the media reports.

Finally, it is our experience that attempting to predict future events (and investing based on that prediction) is not a recipe for success. Take 2020 for example. Who predicted the events of 2020? Furthermore, who would have predicted that the stock market would have finished at positive 16% despite those events? 2020 is one of many years that demonstrates that we are not good at predicting the future. As such, you should not invest based on your short-term predictions of future economic events. Rather, it is best to develop a long-term plan and stick to it. As famed economist JK Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.”

Our aim is not to trivialize economic events and setbacks. Terrible things do happen from time to time. Markets have had significant drops in the past and will have significant drops in the future. However, our belief is that human advancement will continue to march onward as it has in the past. Investors who invest with discipline instead of emotion are likely to fare better in the long run.

Logan Jones
Partner & Wealth Manager CFP®, CIMA®, CPWA®, CEPA


2Dimensional Matrix Book 2021