Podcast Summary
Focusing on long-term potential despite short-term uncertainties: Historically, equities have outperformed other asset classes over the long term, making an optimistic perspective a rational approach to investing, even during times of war, pandemics, and economic instability. Avoid short-term market timing and large contrarian bets.
Maintaining an optimistic perspective is a rational approach to investing, despite the constant presence of worries and uncertainties in financial markets. Historically, equities have outperformed bonds and other asset classes, generating higher returns over the long term, even during periods of war, pandemics, and economic instability. Being an optimist doesn't mean ignoring risks or being complacent, but rather focusing on the long-term potential of investments and avoiding the temptation to time the market or make large contrarian bets based on short-term concerns. As Nat Friedman, CEO of GitHub, put it, "pessimists sound smart, optimists make money."
Costs of being bearish, optimists outperform over long term: Being bearish comes with significant costs, optimists historically outperform, focus on facts, long-term perspective.
Being bearish, or pessimistic about the markets, comes with significant costs and generally isn't worth it. Optimists have historically outperformed over the long term. Many famous "perma bears," or consistently bearish investors, hold more long positions than short ones to avoid catastrophic losses. People's negative predictions about the future often get more attention than positive ones, creating a culture where pessimism can be more fashionable and profitable, even if it's less accurate. Despite the appeal of declinism and the belief that things were better in the past, statistics show that violence and overall well-being have improved significantly over time. It's essential to consider the long-term perspective and focus on facts rather than succumbing to the inner pessimist or the allure of doom porn.
Perception of the past and present influenced by biases: People tend to view the past fondly and overlook present improvements due to cognitive biases. Rich countries often overlook global progress, leading to political exploitation.
Our perception of the past and present can be influenced by selective memory and cognitive biases. The past often appears rosy in comparison to the present due to the prominence of early adulthood memories. This idea of a golden age may have contributed to the rise of declinism, or the belief that things were better in the past. However, data shows that the world has been getting wealthier and healthier, particularly in emerging markets. This shift is often not recognized by people in rich countries, who are more likely to be local optimists but far more pessimistic about distant places. These cognitive biases can be exploited by politicians for political gain. It's essential to be grounded in data to counteract these biases and gain a more accurate understanding of the world. Websites like the Gapminder Institute and Our World in Data provide valuable resources for doing so.
Biases impact investment decisions: Biases like fear of losses and attraction to lottery ticket payoffs can lead to suboptimal investment decisions, underestimating steady investments and overestimating extreme events or high-risk options. Recognizing these biases and basing decisions on data and historical returns can lead to better outcomes.
Our biases, particularly fear of losses and attraction to lottery ticket payoffs, can significantly impact our investing attitudes and expectations for future returns. These biases can lead us to underestimate the potential of long-term, steady investments and overestimate the likelihood and impact of extreme events or high-risk, high-reward investments. This can result in suboptimal investment decisions and missed opportunities for growth. It's important to recognize these biases and ground our beliefs in data and historical returns to make informed investment decisions. Additionally, it's crucial to be aware of the incentives of financial product sellers, who may market high-risk, high-fee products to capitalize on our biases and result in overall losses for investors. Instead, focusing on long-term, diversified investments with reasonable returns can lead to better investment outcomes.
Lower returns expected due to various factors: Analysts forecast lower returns over the next 10 years due to low interest rates, low growth, high equity valuations, and demographic shifts. This may require people to save more and work longer, but optimism can help investors stick to their plans during market downturns.
Many analysts and institutions are forecasting lower returns over the next 10 years due to a combination of factors including low interest rates, low growth, high equity valuations, and demographic shifts leading to an aging population. These factors are causing concerns for lower yields and equity returns in the long term. While it's impossible to know for certain, good forecasters use historical returns as a base and modify them based on current conditions. The lower returns expected are not expected to be catastrophic, but may require people to save more and work longer. Optimism, according to financial researcher Larry Siegel, can be a secret weapon in investing as it helps investors stick to their plans during market downturns. The equity risk premium, or the additional return investors expect for taking on the risk of investing in stocks, is compensation for the uncertainty and unknowability of the future.
Risks from incorrect assumptions about future returns: Financial planning based on overly optimistic return expectations could lead to financial troubles. Focus on goals, remain optimistic about new technologies, and adjust expectations as needed.
While market fluctuations and asset price risks are a known factor, the more profound risk lies in potentially incorrect assumptions about future asset returns. Historically, returns have been around 7%, but they may be lower going forward. This could lead to financial troubles for those planning their retirement based on overly optimistic returns. The focus should be on financial goals rather than return expectations. Additionally, productivity growth, a major driver of economic output and corporate profits, has stagnated in many countries, which could impact future returns. While it's uncertain if new technologies will be as revolutionary as past innovations, it's important to remain optimistic and continue investing in potential game-changers. Despite the challenges, the key is to adapt and adjust expectations accordingly.
The Debate on Productivity Growth: Will it Continue or Accelerate?: The debate on productivity growth centers around the impact of new technologies like AI on future growth. While some argue it will continue to grow slowly, others believe it will significantly accelerate. Regardless of the outcome, maintaining an optimistic perspective and adapting to change is crucial.
The debate surrounding productivity growth revolves around the belief that new technologies, such as AI, will either continue to contribute to productivity growth at a slower rate or will significantly accelerate it in the future. Robert Gordon argues that productivity growth has been poor in recent decades and will likely continue to be so, while Eric Brynjolfsson believes that AI and automation will drive a productivity boom. The long-term bet between these two economists illustrates this ongoing debate. While it's impossible to predict the exact outcome, it's essential to maintain an optimistic perspective and continue innovating to improve people's lives and meet their evolving needs. As history has shown, jobs and industries that seem unimaginable today will emerge, making it essential to adapt and embrace change.
Signs of Regression in Society: Stay informed of potential societal regression, such as trade breakdowns or political polarization, but maintain a long-term optimistic outlook as progress eventually resumes.
While progress and improvements in various aspects of life have been the trend for a long time, there have been signs of regression, such as pushback against globalization and increasing polarization in politics. As an investor, staying optimistic is crucial, but it's essential to be aware of potential signs of a step backwards, such as a breakdown in trade, a decline in education, or societal breakdown. These concerns may cause temporary instability, but investing relies on a certain level of stability. History shows that even during periods of significant conflict and instability, progress has eventually resumed. However, it's important not to take progress for granted and to remain vigilant for any signs of regression.
Despite challenges, financial markets and economy are more stable and resilient: Central banks maintain stability, quick tech development, global collaboration, diversification crucial for investment success
Despite the challenges of financial instability, inflation, and even global crises like the pandemic, the current state of financial markets and the world economy is more stable and resilient than in the past. Central banks play a crucial role in maintaining financial stability, and the ability to develop technologies quickly and collaborate globally during crises is a testament to our progress. However, having a well-diversified portfolio, including bonds, is essential for managing risk and ensuring a sustainable investment horizon. The sequence of returns and potential market crashes can significantly impact the longevity of an investment, making diversification a crucial aspect of a successful investment strategy.
Diversify to reduce risk and maintain a consistent risk profile: Diversify portfolio with assets like small cap value, bonds, and gold to reduce risk and meet financial goals with an acceptable level of risk
While gold may seem attractive due to its high allocation and potential for high returns, diversification is key for achieving sustainable wealth and meeting financial goals. Diversifying a portfolio with assets like small cap value, bonds, and even gold can help reduce risk and maintain a consistent risk profile. However, rebalancing is necessary to earn the diversification return and keep the risk under control. If one could perfectly time the market and never rebalance, the performance might be better numerically, but the risk would increase significantly. Ultimately, the goal of investing is to meet financial goals with an acceptable level of risk and a reasonable quality of life, not just for the highest possible return. As Scott Willenbrock put it, diversification is the only free lunch in finance, but rebalancing is the free dessert – the incremental return earned while maintaining a constant risk profile.
Ask your pension questions on Many Happy Returns: Listeners can submit pension-related queries for future episodes of the podcast and should consult independent financial advisors before making investment decisions.
Listeners are encouraged to send in their pension-related questions to be addressed in future episodes of "Many Happy Returns," a production by Pension Craft. The podcast, co-hosted and executive produced by Romy Nkiza and Michael Pugh, offers a wealth of information but does not provide financial advice or recommendations. Listeners are advised to seek independent financial advice before making any investment decisions. Additionally, Pension Craft offers membership, courses, and investment coaching options on their website, pensioncraft.com. So, keep the questions coming, and stay tuned for more informative and entertaining episodes.
