By Dr. Jim Dahle, WCI Founder

I was perusing some investment returns recently.

US Stocks (VTI):

  • 2019: 30.67%
  • 2020: 21.03%
  • 2021: 25.67%
  • 2022: -19.51%
  • 2023: 26.05%
  • 2024 YTD: 21.74%
  • Annualized last five years: 15.18%

International Stocks (VXUS):

  • 2019: 21.75%
  • 2020: 10.69%
  • 2021: 9.00%
  • 2022: -16.09%
  • 2023: 15.88%
  • 2024: 12.41%
  • Annualized last five years: 7.74%

US REITs (VNQ):

  • 2019: 28.87%
  • 2020: -4.68%
  • 2021: 40.52%
  • 2022: -26.24%
  • 2023: 11.79%
  • 2024 YTD: 10.47%
  • Annualized last five years: 4.74%

They're pretty darn spectacular, aren't they?

Now, consider all of the doom and gloom you have heard in the last five years. Remember in 2020 when nobody went to work for a couple of months, the national GDP dropped by like 25%, and you couldn't buy toilet paper? And then we had a pandemic for several years? And then rates rose faster than they ever have before, giving bonds their worst annual return ever in 2022? Here are some examples of what investors and economic consultants were saying during the last few years:

Jeremy Grantham (Jan 5, 2021):

“I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”

Nope.

Nouriel Roubini: August 22, 2019

“There are three negative supply shocks that could trigger a recession by 2020. All of them reflect political factors affecting international relations, two involve China, and the United States is at the center of each.”

Well . . . I guess COVID-19 did originate in China, but he didn't mention that one.

Doug Carey: Oct 30, 2022

“A recession through the summer of 2023 is likely, which means the stock market will experience further declines for a bit longer.”

Hmmmm . . .

vti chart

Survey: March 30, 2023

“The American public continues to rate the US economy in mostly negative terms in March, with 83% describing current economic conditions as ‘only fair' or ‘poor.' Just 16% consider them ‘excellent' or ‘good.' Furthermore, 72% think conditions are getting worse, while 23% say they are improving.

Hmmmm . . . let's look at the numbers

  • Second quarter real GDP increased by 3.0% in 2024
  • Unemployment at 4.1%
  • CPI-U is at 2.4%
  • Stock market is up 20.55% YTD in 2024
  • Price of gas is down from $3.98 (2022 average) to $3.52 (2023 average) to $3.21 (through October 2024)
  • Salaries are up 4.1% on average in 2024
  • Median net worth up 37% from 2019-2022 (up 142% for those under 35)

I'm curious what these survey respondents think a good economy would look like.

Bill Bernstein: March 12, 2015

“Well, I would say that the expected return of a balanced portfolio is the lowest it’s been in financial history. We’re looking at 3%-4% on stocks, and we’re looking at 0% on bonds. Those are real inflation-adjusted figures.”

Bill's a smart guy, but he'll be the first to tell you his crystal ball is as cloudy as the rest of ours and that expected returns aren't always the returns we get. Incidentally, that bond prediction was actually overly optimistic. When I originally wrote this in December 2023, nominal returns of the Vanguard Total Bond Market Fund for the last five- and 10-year periods were 0.13% and 1.11%, significantly below inflation. But the stock prediction was way off, and I'm sure Bill is personally grateful that these last nine years didn't turn out like he thought they would.

 

The Seduction of Pessimism

What is going on? Why do optimists sound so Pollyannaish while pessimists sound so smart? Time and time again, the optimists turn out to be right.

Morgan Housel has said:

“Pessimism is intellectually seductive in a way optimism only wishes it could be. Hearing that the world is going to hell is more interesting than forecasting that things will gradually get better over time, even if the latter is accurate for most people most of the time. Pessimism can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness. We don’t just respond faster to pessimism. We coddle it for longer than is necessary. Optimism demands facts and is ditched at the first sign of trouble. Pessimism can be grown from a crazy thought and clutched indefinitely.

‘Unsustainable' is the most common state that businesses and markets reside in. If you underestimate our ability to adapt to unsustainable situations, you’ll find all kinds of things that currently look bad and can be extrapolated into disastrous. Extrapolate college tuition increases and it’ll be prohibitively expensive in 10 years. Extrapolate government deficits and we’ll be bankrupt in 30 years. Extrapolate a recession and we’ll be broke before long. All of these could be reasons for pessimism if you assume no future change or adaptation. Which is crazy, given our long history of changing and adapting. But convincing ourselves of future change is hard to do, so pessimism is easy to latch onto.”

Manish Gvalani said it like this:

“Imagine that you’re sitting in Starbucks sipping your favorite coffee and you have your financial planner across the table, having an animated conversation with you about long-term investing. This is happening during the pandemic, in March 2020, while fear has gripped the whole world. He could make one of the two statements below:

  • ‘Things will get better, so keep investing.'
  • ‘COVID has been declared a pandemic and this could stunt economic growth across countries, shutting borders, and crippling supply chains, all of which could lead to chaos. The most sensible thing would be to cut risk from your portfolio, sell everything, and wait on the sidelines [until] things normalize. If I were you, I’d make this move with my money.'

Which one sounds intellectually right?

If you are like me, then odds are high that you would find the second statement intellectually right, projecting the messenger as a brilliant financial planner, gifted with skills and insights that could come to your rescue like Superman does for residents of Metropolis.

And just maybe, the messenger making the first statement may come across as a lazy optimist, not in touch with ground realities, and hence to be avoided at all costs . . .

Historically, markets have witnessed umpteen events such as wars, recessions, riots, WTC bombing, housing crashes, European debt crisis, and in spite of all this chaos, markets still went up 250x from 1950 to 2023. And all of these smart-sounding reasons would have nudged or even forced you out of the markets because that seemed a wiser bet.

What seems wise may have been a very unprofitable bet to make. Staying invested or continuous accumulation of an index can lead to multiples of your money . . . This is life-changing in so many ways but it doesn’t sound smart, nor does it sound exciting. Add to this the churn in your stomach that stock market movements bring about. No wonder most investors keep jumping in and out of markets, never reaping the gains available to them only if they believed in human ingenuity to find solutions to problems and stayed put for the markets to recover.”

Ask yourself, why do you believe negative hotel or restaurant reviews more than positive ones? Why is the news filled with negative events? Be an optimist. Stop dwelling on things outside of your control.

Jason Crawford said it like this:

“I’ve realized a new reason why pessimism sounds smart: optimism often requires believing in unknown, unspecified future breakthroughs—which seems fanciful and naive. If you very soberly, wisely, prudently stick to the known and the proven, you will necessarily be pessimistic. No proven resources or technologies can sustain economic growth. The status quo will plateau. To expect growth is to believe in future technologies. To expect very long-term growth is to believe in science fiction.

No known solutions can solve our hardest problems—that’s why they’re the hardest ones. And by the nature of problem-solving, we are aware of many problems before we are aware of their solutions. So there will always be a frontier of problems we don’t yet know how to solve. Fears of Peak Oil and other resource shortages follow this pattern. Predictions of shortages are typically based on ‘proven reserves.' We are saved from shortage by the unproven and even the unknown reserves and the new technologies that make them profitable to extract. Or, when certain resources really do run out, we are saved economically by new technologies that use different resources: Haber-Bosch saved us from the guano shortage; kerosene saved the sperm whales from extinction; plastic saved the elephants by replacing ivory.

More information here:

Why People Mistakenly Think the US Economy Is Terrible

Some Surprising Things I’ve Learned in 20 Years of Investing

 

Stop Listening to Pessimists

Somehow, we forget about all the pessimistic things we heard in the past when they turn out not to be true. Yet we pay all kinds of attention to pessimists in the present. Quit doing that. They're the same people. Their crystal ball now is just as cloudy as it was a year ago or five years ago. If you feel you must do something for your future due to a pessimistic outlook, I would suggest you do the following:

“Invest like an optimist, but work and save like a pessimist.”

There's a classic 2002 book called The Triumph of the Optimists: 101 Years of Global Investment Returns. That should really be the definition of investing, a triumph for optimists. In the long run, the optimists win. As Nat Friedman said, “Pessimists sound smart. Optimists make money.”

What do you think? How do you maintain enough optimism to stay the course with so much negative talk out there in media and real life?