While optimism can serve you on your path to gaining wealth, "sensible optimism" can help you stay wealthy, writes behavioral finance expert Morgan Housel in his new book "The Psychology of Money."
"Sensible optimism is the belief that odds are in your favor, and that over time things will balance out to a good outcome even if what happens in between is filled with misery," he wrote. This is especially helpful advice if you want to become a successful investor, in which case it helps to remember, Housel points out, that there is often "growth amid loss."
For example, Housel wrote in his book, the national real GDP has trended up for the last 170 years, but during that time there were many dips, including 33 recessions. Investing is a great way to grow your wealth. To be successful, though, you must understand that, in the short term, the market has contracted, but in the long term it has always recovered and continued trending up. That's why legendary investor Warren Buffett has said that his favorite holding period is "forever."
Maintaining that kind of sensible optimism can be hard during economically turbulent times, though. Here are two ways other experts say you can do that.
One way to sustain sensible optimism while investing is to educate yourself on long-term market trends, Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors, told Grow.
To educate first-time investors who might be fearful of market volatility, La Spisa shows them an Ibbotson chart, which shows the hypothetical value of a dollar invested in the market since 1926. Investors can see bumps and drops, along with subsequent market recoveries — and a steady upward trend.
Video by Helen Zhao
"They will usually find that the market over the last 90 to 100 years has performed in a negative way 25% of the time and positive 75% of the time," he told Grow.
Seeing this chart can help prepare clients for market fluctuations — and especially those times when the market does drop.
During your time as an investor, as the Ibbotson chart shows, the markets will get bumpy sometimes. That's why it's important to create a plan of what to do during market downturns.
For example, while it might be tempting to sell stocks after a big drop, it's often actually smart to do the opposite. You might even want to snap up more stocks as rough markets can create buying opportunity. It can help to mentally reframe a down market as a sale, or a chance to scoop up deals.
As Tori Dunlap, founder of Her First 100K recently tweeted, "with the prices lower, I get to go buy more!"
Another counterintuitive tip is to not look at your investment accounts too often. Experts say the ideal strategy is to check in on your portfolio once per quarter. Checking on your balances frequently might result in you making an emotional short-term decision that doesn't fit with your long-term plan.
These little steps can help you with long-term investing and maintaining sensible optimism.
"You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with land mines, and always will be," Housel wrote. "The two are not mutually exclusive."
More from Grow:
- Young investors have gone from 'risk averse' to 'the opposite extreme,' expert says: Here's the better way
- Getting your investment advice from Reddit, TikTok, and Twitter? Be skeptical, experts say
- Are stocks in a bubble? Why experts say you don't need to worry about signs of 'irrational exuberance' in the market