Why Investors Should Avoid the Pitfall of Pessimism

Imagine you are sitting in your favorite chair, sipping a coffee, reading the newspaper, or browsing the day’s top stories on your phone. You come across two headlines:

Stock Market Closes Q3 on Tumultuous Note: Experts Advise Selling Before Crash


Stock Market Closes Q3 on Tumultuous Note: Experts Advise Staying the Course

Which story do you read?

The allure of pessimism

If your gut reaction told you to read the first article, you’re not alone. Despite the fact that when it comes to the market a more optimistic viewpoint proves, over time, to be overwhelmingly more accurate than a pessimistic one, human nature gravitates towards doomsday headlines.

Why are we so wired to react to “the world is going to hell” storylines? For starters, they are a lot more exciting. “Sell now!” gets the blood pumping much faster than “Stay the course.”

But there’s another dynamic at work here; namely, pessimism and negativity just sound smarter – an observation borne out by a recent Harvard study that found that negative book reviews are perceived as more profound and incisive than positive ones.

In the world of wealth management, we see this when the pessimist comes across as the sharp-minded expert who foresees a dire future and can impart timely wisdom to help investors take action and avoid calamity. In contrast, the optimist’s adherence to a long-term plan that stays the course seems almost naïve.

Apocalypses are a dime a dozen

In reality, however, the optimist is not oblivious to risk at all. He’s simply not lured by it to make rash, emotional decisions that react to short-term fluctuations with panic-driven action. The pessimist’s view is a limited one. Faced with an actual or possible challenge – like Y2K, or the recession of 2008, or the pandemic – he sees only one outcome and warns of the end of the world. Presented with those same realities, the optimist takes the broader view that even if calamity strikes, it will in time pass, and the market will adapt.

After all, there is a reason our calamities have names: The Tech Crash (2000 – 2002), The Great Recession (2008 – 2009), and the COVID Bear Market (2020). It’s because, while they do happen periodically, these short-term downtrends are actually news. There are no names assigned for long-term uptrends because that is simply what is happening most of the time. It’s not newsworthy; it’s the norm if we stick around long enough to experience it.

Endurance makes the difference

In the end, the difference between the optimist and the pessimist is endurance. The pessimist’s story ends with the problem of the day, and investors who are lured by the flashy headlines and dire warnings may find their progress toward their long-term financial goals stunted by quick decisions with lasting impact.

The optimist’s story doesn’t end. It endures, past challenges real and imagined. It stays the course, which does not have the seductive appeal of fast action, but has the far more satisfying result of being more likely to help you realize your goals of financial independence.

It would be easy to jump on the pessimistic bandwagon and echo the adrenaline-spiked advice of those who advocate reaction over endurance. But our commitment to our clients and their long-term goals means following the less glamorous but more prudent strategy of staying true to the plan we’ve crafted together.

N1 Advisors believes in supporting our clients not just for a quarter or a news cycle, but for all of the financial goals they have set for themselves and their loved ones. Give us a call today to talk about planning for your financial future.