Why being optimistic about the future could pay off when managing your investments

Are you an optimist or a pessimist?

Though you may like to think of yourself as being a “glass-half-full” sort of person, the truth is that many of us tend to take a pessimistic approach to life. That’s because, as humans, we’re wired to look out for bad news or threats so that we can keep ourselves safe.

While this is often helpful when it comes to personal safety, a pessimistic outlook might actually be detrimental when it comes to managing your investments. Read on to find out why optimism may be a key factor in navigating market volatility and growing your wealth.

When markets become volatile, it’s natural to feel nervous about your investments

Volatility on the stock market can be nerve-wracking, especially if you are investing to help you achieve long-term goals like your retirement.

In extreme cases, volatility can lead investors to remove their wealth from the stock market in an attempt to prevent financial loss, believing cash savings to be “safer”. This is usually based on a pessimistic belief that shares will continue to fall in value or that they won’t recover.

By moving your money to cash, you might feel as though you’re making a sensible decision and avoiding short-term potential losses. But over the long term, this can be damaging to your wealth and may even hinder your progress towards your goals.

A pessimistic outlook on the stock market’s ability to recover from volatility could cost you in the long run

While cash savings can’t lose money in the same way as on the stock market, they are subject to a different risk: inflation. Interest rates on cash savings rarely keep pace with the rising cost of living. Over time, this can mean that your money loses spending power, even if you’re earning interest.

Schroders shares some fascinating data that shows how long it would have taken investors to recover their losses if they had moved investments into cash during historic market downturns.

Source: Schroders

As you can see, if you moved your investments to cash after a market fall of 25%, it usually took far longer to recoup the losses than if you had stayed the course with your investments.

Indeed, if you’d “dashed for cash” during the 2008 financial crash, you would still be waiting for your savings to recover in 2024. If you’d held on to your investments, though, you may have recouped the losses in less than five years.

Despite experiencing significant volatility at certain points in history, when you look at its average annual returns, you can see that the stock market has continued to grow. This is shown in the graph below.

Source: Schroders personal wealth

Remember, past performance does not guarantee future performance. But this historical data makes a compelling case for placing your trust in the stock market’s ability to recover from setbacks.

Your planner can help you to remain optimistic and make sensible investing decisions during market volatility

Of course, remaining optimistic when your portfolio is underperforming is often easier said than done. After all, our emotions are powerful drivers, and it can be tough to ignore the impulse to sell your investments even when you know it’s not the most sensible action to take.

This is where working with a financial planner can help. I can support you during periods of market volatility, helping you to manage the nerves you might be feeling and reassuring you of your portfolio’s ability to mitigate risk. Together, we can assess the market and decide on the most effective way to respond in order to help your investments continue to grow.

With a trusted partner to rely on, you can feel more confident in your ability to grow your wealth even if stock markets underperform.

Get in touch

To find out more about how I can help you to build a balanced portfolio that supports you in achieving your long-term goals, please get in touch.

Email Marnel.Stafford@fosterdenovo.com or call 07305 970959 or 0207 469 2800 to find out more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Investments do not include the same security of capital which is afforded with a deposit account.