PESSIMISTS SEEM LIKE they’re clever and sophisticated, but—if you want to make money—take my advice: Invest like an optimist.
I’m not talking wild-eyed optimists who are over-enthused about meme stocks and nonfungible tokens. Instead, I’m talking about a fundamental belief that economic setbacks are temporary and the future will be better than the past. Struggling to stay cheery amid 2022’s rotten financial markets? Here are five reasons for optimism.
1. The news is terrible. Whether it’s the war in Ukraine, high inflation, sluggish economic growth or depressed financial markets, there’s plenty to despair about. While October’s inflation report and the stock market’s modest bounce back have offered glimmers of hope, the mood remains grim.
I see it in HumbleDollar’s website traffic. Do you avoid looking at your portfolio when share prices are down sharply? It seems the same phenomenon afflicts folks’ appetite for investing and personal finance articles. HumbleDollar’s traffic slipped during the early 2020 bear market and I’ve seen it dip again this year.
This disinterest, bordering on despair, is no doubt helping to further depress today’s stock and bond prices. Investors may not be dumping securities in disgust. But there’s certainly none of the rampant enthusiasm for stocks that we saw last year. That’s good news for those who are courageous and have cash to invest.
2. Expected returns are rising. As stock and bond prices fall, the outlook for future returns grows brighter. The clearest example: Check out what’s happened to the yields on 10-year Treasury Inflation-Protected Securities, or TIPS.
Today’s buyers of 10-year TIPS are getting 1.6% plus an adjustment to reflect inflation, while a year ago they were getting an adjustment for inflation minus 1.1%. I currently have my bond portfolio split between short-term conventional and inflation-indexed government bond funds, but the rise in TIPS yields has me pondering a move into intermediate-term inflation-indexed Treasurys.
Whatever bonds return, stocks should be priced to return even more. After all, why else would investors take the extra risk involved? With the S&P 500 stocks at 21 times trailing 12-month reported earnings and yielding 1.7%, versus 24 times earnings and a 1.3% yield a year ago, we’re looking today at the prospect of higher long-run returns. Again, these improved valuations have put me in a mood to buy, which I wrote about a month ago.
3. Wall Street charges less. Whatever the financial markets deliver, investors should be able to pocket more of that return. Discount brokerage firms are waiving stock-trading commissions. The bid-ask spread on blue-chip stocks is tiny. The competition among index funds is fierce—some have no expense ratio—and the variety of offerings is huge. (But note to Vanguard Group: I would love to see an emerging markets fund with limited or zero China exposure.) Today, you can build a great index-fund portfolio and easily pay less than 10 cents a year for every $100 invested.
4. Investment taxes are modest. The tax code is stacked in favor of investors. For those investing through a regular taxable account, both qualifying dividends and long-term capital gains are taxed at barely half the federal income-tax rate, plus any capital-gains tax bill can be deferred until you realize your gains. Meanwhile, tax-favored investment accounts abound, including tax-free Roth and 529 college accounts. And let’s not forget health savings accounts, which can potentially offer both an initial tax deduction and tax-free withdrawals.
5. We all want better. This final point is the most nebulous—but it’s also the most important. Every day, folks around the world wake up, trying to figure out how to make life better for themselves and those they love. We all benefit from the energy that’s unleashed.
For proof, look no further than the effort put forth in 2020 to escape the grip of the pandemic. It wasn’t just the scientists who created vaccines within months. It was all the businesses—large and small—that figured out how to continue operating in such a strange time.
Are we seeing the same effort today? You can count on it. Shoppers are figuring out how to reduce inflation’s bite. Workers are hunting for jobs that’ll pay them more. Businesses are fighting to stand out in their battle with competitors who are complacently passing along higher costs. And once again, we will all benefit.