It’s Not as Bad as We Are Told
The news is full of gloom and doom. Some people have vowed not to read or watch news reports because it’s too overwhelmingly depressing. Every day, we are barraged with announcements about terrorist attacks, school shootings, hate crimes, social unrest, drug-fueled violence, stock-market downturns, declines in housing starts…and on and on.
This feeling of despair isn’t isolated to the United States, though. In a recent survey, researchers from Our World in Data asked 18,235 adults in nine countries, “All things considered, do you think the world is getting better or worse, or neither getting better or worse?” The responses were consolidated by country. The French were the least optimistic, with only 3 percent of the respondents there saying they think the world is getting better. The most optimistic were the Swedes, at 10 percent. Americans were in the middle, at 6 percent.
Our Quality of Life Is Improving
But if we look at the bigger picture, things are not as bad as we think. The world has made great strides in key areas:
- The economy — Over the past 200 years, the world’s gross domestic product (GDP) has increased 100-fold. Humankind has never been more prosperous and productive. Technology has driven much of this growth.
- Life span — Mortality rates have dropped significantly over the past 300 years, and in some countries, life expectancy has tripled.
- Teen births — In the United States, teen births dropped 67 percent from 1991 to 2015.
- Nutrition — Worldwide, food scarcity and hunger are decreasing. In 1991, 18.6 percent of the world’s population was undernourished. By 2015, that number dropped to 10.8 percent.
- Energy — As renewable energy sources have become cheaper and more accessible, more of the world now has electricity than ever before. For example, in 2000, only 0.16 of the population in Afghanistan had electricity, and by 2014, that number skyrocketed to 89.5 percent of the population.
- Technology — Evolution in technology is enabling us to make huge improvements in health care, automation, farming, travel, communications and other areas through phenomenal innovations like 3-D printing, drones, virtual reality and gene editing.
When you begin to feel dismayed about the daily onslaught of bad news, focus on all these reasons to be optimistic. The quality of life is improving for people worldwide.
Our Brains Are Hardwired to Focus on the Negative
We would feel better about our reality if we were to focus on the positive instead of the negative. So why do we let the negative news affect us? Some researchers say we pay 10 times more attention to bad news than we do to good news. This is because we are hard-wired to react more readily to negative news. The human brain actually has a “negativity bias” — our brains are built with a greater sensitivity to unpleasant news. This has served humanity as a form of protection against danger.
One practical indication that this is true is that in 2014, the Russian news site City Reporter reported only good news to its readers for an entire day. The site lost two-thirds of its normal readership that day. Few people were interested in reading good news.
Consider the Facts, Not the Extremes or Averages
In his best-selling book Factfulness: Ten Reasons We’re Wrong About the World — And Why Things Are Better than You Think, Hans Rosling says that most of what we think about the world today is based on emotions, and we still carry a worldview that dates back as far as 1965. Rosling says the key to changing our worldview is to embrace facts and avoid seeing issues in terms of averages and extremes. We need to see “the world through the clear lens of facts…Then we can stop living stressful, misguided lives because we think the world is getting worse, and we can channel our energies to making it an even better place.”
In chapter 10, “The Urgency Instinct,” Rosling says our natural urgency instinct makes rational thought impossible. But he offers a solution: we should worry only about what is important.
Don’t Let Fear Drive Your Financial Decisions
This entire discussion about focusing on facts and avoiding the temptation to dwell on the negative applies to financial planning.
We strongly advise you to leave emotions out of your financial decisions. Making decisions based on emotions has led to significantly reduced returns for many people. This is why the average equity mutual fund investor under performs the average fund by about 40 percent over 20-year periods, according to Nick Murray, a leading speaker and author in the financial services industry for decades.
Research from Mackenzie Investments shows that the average duration of a bear market is less than one-fifth of the average bull market. Also, the average decline of a bear market is 28 percent, but the average gain of a bull market is more than 128 percent. It’s important to recognize that a bear market is only temporary, and the next bull market will erase its declines, which then extends the gains of the previous bull market. The bigger risk for investors is not the next 28 percent decline in the market, but missing out on the next 100 percent gain in the market.
Investopedia defines a bear market as a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increases. A downturn of 20 percent or more from a peak in multiple broad market indexes, such as the Dow Jones Industrial Average or Standard & Poor’s 500 Index (S&P 500) over a two-month period is considered an entry into a bear market. A bull market, on the other hand, is a group of securities in which prices are rising or are expected to rise.
No one can time the market. Even when we see signs that there is about to be an economic downturn, that may or may not happen, and we can’t predict when it will happen. According to JP Morgan’s Guide to Retirement 2016, an investor with $10,000 in the S&P 500 index who stayed fully invested between Jan. 2, 1996, and Dec. 31, 2015, would have more than $48,000. An investor who missed 10 of the best days in the market each year would have only $24,070. A very skittish investor who missed 30 of the best days would have less than what he or she started with: $9,907, to be exact.
Here is another example of how costly it can be to let your reaction to bad news affect your financial decisions. On October 15, 2014, the stock market dipped 460 points, close to “correction” status. A late-day rally saw stocks rebound, ending the day down 173 points at 16,142. Some investors decided to weather their losses, betting that the market turbulence would eventually settle. Others panicked and dumped stocks.
SigFig, an investment planning and tracking firm, looked at how investor behavior that volatile day affected their long-term performance. They found that about 20 percent of investors decided to reduce their exposure to equities, mutual funds and ETFs, with some selling 90 percent or more. Those were the investors who experienced the worst performance. SigFig researchers wrote, “Those who appeared to panic the most — for example, those who trimmed their holdings by 90 percent or more — had the worst 12-month-trailing performance of all groups. Their portfolios delivered a trailing 12-month return of –19.3 percent as of Aug. 21, compared with –3.7 percent for the people who did nothing during that October correction.”
Likewise, investors who pulled out of the stock market during the economic downturn of 2008 lost more money than they would have if they had kept their investments intact. University of Missouri professor Rui Yao examined the behavior of investors during the economic downturn of 2008 in detail. She found that the more vulnerable investors were, the more they tended to panic, and the more they tended ultimately to lose. “Vulnerable” investors included those who had recently been laid off from their jobs and those who had no emergency savings fund.
Professor Rao also found that losses usually resulted when investors made the common investment mistake of selling off stocks and placing the cash into bank accounts until the market bounces back. She found that males, Asian Americans, those who are wealthy, those who are overconfident in their investment abilities and those who have an aversion to loss were more likely to commit this common mistake.
Keep Your Eye on Your Goals
In the past, I have written about the importance of using your own personal financial goals as a benchmark instead of comparing your portfolio’s performance to an index like the S&P 500 or to how well your brother-in-law or neighbor is doing in stocks.
Here are some guidelines for keeping your focus on the positive aspects of your financial position and continuing to make wise financial decisions for your future.
- Define your financial goals.
- Be patient.
- Avoid making emotional decisions when you hear negative news.
- Have an accountability partner — such as your financial advisor — whom you can talk with when your fears about losing money are tempting you to made drastic changes in your investments.
- Consider the historical facts — that you are more likely to benefit by staying put during an economic downturn than by pulling your money out of the stock market.
We are committed to helping you achieve your goals, despite what is happening in the news. We take a very proactive approach to providing the highest net return to you based on your personal income needs, tax situation and overall goals. Our advisors will partner with you to take the guesswork and emotion out of the best investing approach for your unique situation.
Please contact us to discuss your Personal Vision Planning®, to get a second opinion on your current plan or if we can otherwise be of service. Randy.email@example.com or (440) 974-0808.