If you’ve been in my office, you’ve heard me say that we can’t time the market or control the market or beat the market. What we must do is participate in the market and get our fair share of the returns.
Some people think that most of what I do as a CERTIFIED FINANCIAL PLANNER is stuff related to “the market.” Thinking about the market, discussing the market, reacting to the market.
That’s not how I spend my time. Because that’s not what helps my clients reach their goals.
Too much focus on the market is not helpful for achieving higher investment returns. We can’t control it, so why would we spend so much time thinking about it? What we should focus on are the things we can control and that have the biggest effect on real-life investment returns.
When I say “real-life returns” I mean what you actually earned by investing smartly and staying invested through ups and downs. Not what an index or some other benchmark earned.
If paying close attention to the market doesn’t help us get higher real-life returns on our investments, what does?
The Answer: Optimism
Yes, that’s right. Optimism is the first and most important tenet of your investment belief system.
Optimism simply means you believe the future will be better.
We all have some amount of struggle in our unconscious minds between faith in the future and fear of the future. I believe successful investors let positivity win.
More than that, from an investor’s perspective, optimism about the future is the only worldview that fits with the facts of the economic historical record. The curve of human progress continues to rise sharply, and in some areas like technology, it’s exponential.
Optimism about human progress
So many medical, scientific, technological and economic breakthroughs have happened in our lifetimes. Once-common killer diseases are eradicated, life expectancies continue to jump, computer chips exponentially shrinking in size and cost.
But with so much progress happening so fast all around us, it can be difficult to stay emotionally tuned-in. We become desensitized. And what starts as a “miracle” breakthrough often quickly becomes commonplace and we begin to take it for granted. Think about railroads, automobiles, airplanes, radio, TV, fax machines, PCs, cell phones, the internet — once unbelievable, now normal.
When we do take a moment to think about progress, we can recapture our optimism.
Optimism about the stock market
Let’s talk about the market itself. All this progress shows itself in the equity values of companies working hard to make technological breakthroughs and profits.
The S&P 500 measures the stock performance of 500 large US companies and is a good representation of the US stock market. Fifty years ago, the S&P 500 was valued at less than 100. Ten years ago it was about 1200. Today, it’s 3200. A long-term, big-picture focus shows us the ongoing upward trend.
I don’t want to leave out the fact that during that period, there were several years where the market declined over 30%. However, after each decline, economic expansion resumed, along with the long-term upward trend in equity values.
It is a certainty that we will continue to have, on a regular basis, market corrections and cyclical downturns. But when you review the values above, you must reasonably conclude that the advancement is permanent, while the downturns are temporary.
Optimism, faith in the future, is what keeps you invested during those downturns so you may continue to participate in the big-picture, long-term advance.
Conclusion: Optimism makes great long-term investors
Pessimism and fear don’t actually square with the historical record. Remaining optimistic about the future allows you to remain invested and continue to participate in the market even during difficult moments. So when there’s an economic downturn, keep the long-term big picture in mind and don’t think “this time is different.”
We need to focus on what we can control: our attitudes and behaviors. Your attitude about the future is something you can decide for yourself.
Optimism is the #1 principle that can help you affect your investment returns in a positive way. When you combine optimism with other attitudes and behaviors under your control, you can become a great long-term investor.
About the Author
Gretchen Behnke, CFP®, RLP®
Gretchen Behnke is a fiduciary financial planner in Plano, TX. Pearl Financial Planning is a fee-only firm providing full financial planning and investment management services to independent professional women and couples. Serving local clients in-person or virtually, and virtual meetings for clients across the country.