The Seduction of Pessimism

September 16, 2022
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Happy Friday!  Lower inflation hopes lifted the markets up over several days last week, only to be shaken back down this week by the data. 

I would like to present another idea from the book “The Psychology of Money” by Morgan Housel for your consideration this week. 

It comes from a chapter called “The Seduction of Pessimism” and it begins “Optimism sounds like a sales pitch.  Pessimism sounds like someone trying to help you.”

Our aversion to loss as self-preservation is a universal instinct.  Mr. Housel’s book provides many examples of doomsday predictions that got everyone’s attention, but failed to play out in a worst-case scenario way, and often were non-events altogether. 

Our money and our health are two areas of existential importance, so it follows that we are the most vigilant around news affecting them.

The recent Covid crisis was a terrifying conflation of these two concerns.  In March of 2020, it seemed some of our most apocalyptic fears were coming true.  Many of us would have viewed too much optimism about the problem with suspicion. 

Morgan Housel says “..Pessimism holds a special place in our hearts.  Pessimism isn’t just more common than optimism.  It also sounds smarter.  It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.” 

There was a tragic loss of life worldwide, but over a short span of time we responded and adapted, and two years later I would say that many of the immediate fears that consumed us have faded substantially.  We also learned a lot about what worked and what didn’t to shape future responses.

Setbacks and overnight tragedies get our attention, but progress moves slowly. Destruction happens fast, growth takes time.  Reputations take a lifetime to build, and a single moment to destroy- you get the picture.  Because of the speed with which it comes, our attention is disproportionately captivated by bad news. 

Mr. Housel points out that pessimists often extrapolate present trends (like inflation, rising interest rates, slowing growth) into the future without considering how markets adapt. 

Awareness of pessimism’s role in our psychology can be the first step to putting things in perspective.  Markets have gone up, most of the time.  Most of us need to grow our assets over time to build net worth and maintain purchasing power over a 2-3 decade retirement. 

Over time frames like this, a diversified portfolio of stocks and bonds have reliably provided this growth.  However, in the short-term the equity markets are and always have been unpredictable.  Reacting or trying to time the market backfires. 

Barry Bannister of Stifel said “The stock market will find your own weakest personal trait, then do everything in its power to use it against you.” Needless to say, pessimism does not lead to good investment decisions.

Keeping pessimism in check and exploring how optimism is actually a realistic perspective can keep you committed to your long-term plans for financial success.  Providing some tools to help is my commitment to you.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing involves risk, including possible loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.

Securities and Retirement Plan Consulting Program services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Investment Advice offered through Western Wealth Management LLC, a Registered Investment Advisor. LPL Financial, Kennebec Wealth Management LLC and Western Wealth Management LLC are separate entities.