It pays to be an optimist
Two questions. When if ever should investors make decisions based on the headlines? Do the current events actually relate to the average investor? Here are just some of the headline grabbing topics from 2012: The election, Superstorm Sandy, Obamacare, the impending demise of Medicare and Social Security, fiscal cliff, high unemployment, Greece, Spain, and of course, the deficit.
Many folks took these events as signals to stay out of the market and sit safely on the sidelines in CD’s or Treasury bonds until the danger had passed. To them, the events of 2012 were somehow unique and finite. They think that at some point it will be “safe” to re-enter the market, a time when all is well and no one is predicting the demise of modern capitalism or the devastation of our economy. Historically, of course, this is never the case. There is always some challenge, some alarming headline.
So as an investor, maybe it’s best to just wait a little while longer, right? Well, in 2012 the S&P 500 ended the year with very respectable returns near 16 percent. Didn’t the markets get the memo? Did someone forget to tell the markets about all the problems? Regardless of the negative reporting by the pessimistic pundits, businesses did ok, and the markets rose and investors benefited. And if history is any guide (and lets face it, history is all we really have to go on) the future is bright. Investment returns will continue marching forward over the long term. To assume otherwise is simply to ignore the historical reality.
But you know, pessimists just can’t stop themselves. They set the bar low, convinced every problem, potential challenge and congressional argument will sink the economy. And when the end doesn’t come, well no harm done — the year was better than the pessimist believed, so expectations were exceeded. Everyone’s happy, well, except maybe the folks that missed out on another year of gains. But if you’re an optimist, you’re virtually an anomaly. Believe in the ability of the great companies of America and abroad to find solutions and develop alternatives to continue to grow and prosper, and you’re a fool.
History, though, tells us the optimist is correct. The optimists, those who stay in the market and continue to invest have been rewarded, while the pessimists are continually left on the sideline awaiting a better day.
Why should you care? Does it really matter if you’re invested or sitting on the sideline? Yes, actually being a pessimist has terrible long-term consequences that many ignore. Most investors are positioned far too conservatively, which creates personal exposure to the greatest risk of all.
Investing takes a certain amount of fortitude and a certain faith in the future. Not all investments pay off, but well-diversified investors can expect to grow their capital over the long term in spite of the normal market fluctuations and greater economic challenges. (Look at a chart of the S&P 500 from the 1950’s to today and you’ll see just what I mean.) The markets almost always tend, metaphorically, to take two steps forward and one step back. The challenge for investors is to realize that the real risk is inflation and the subsequent loss of purchasing power, not the potential for short-term losses of principle. Yet, many investors allow their fear of principle loss drive their investment decisions, as they drive off the cliff.
One solution is to understand the real risks associated in our efforts to create wealth. Defining risk as loss of principle only serves to confuse the investor and leads to poor investment decisions and bad investment behavior, like market timing. Unfortunately, the results of bad behavior may not be fully understood for many years to come. And then it may be too late. Proper planning can address these challenges, offer opportunities and help mitigate real risk. Investors should know just how inflation would impact their future.
If you’re unhappy with your current investment results or you pulled out of the markets in 2009 and have been sitting on the sidelines ever since, it’s time to take action. Every year those dollars are sitting idle, every year you allow the pessimists to scare you away, you’re losing an opportunity to build the wealth you’ll need for financial freedom.
Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma. He works with individuals in the creation of their long-term financial plans and provides low cost investment management services. To learn more call 707.996.9664 or visit Magnum-financial.com