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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.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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An optimistic way to view investing in the stock market is to think in term of 20+ year periods. Come Dec 31st, the market will have achieved eighty-five consecutive rolling 20 year periods resulting in positive returns starting 1919 – these over the roaring 20s, Depressions, WWII, inflationary / deflationary periods, financial and banking crisis, Fed rate increase and decrease campaigns, etc. And there is always some sort of “narrative” in play over the short term.
Sorting 20 year returns by Presidential election years, starting from 3rd Presidential years, “value” stocks have done the best, especially during bouts of moderate / high inflation https://imgur.com/a/FoE40mB
Regarding investing in China’s economy, one may wish to consider the broader geopolitical context. https://www.brookings.edu/research/a-course-correction-in-americas-china-policy/
Item 1 is sad and surprising. Markets are down, so people not only avoid checking portfolio balances, but also avoid Humble Dollar? Just when it’s needed…
Not looking at your investments during a bear market is a good thing. Too many sell after it goes down, and never make it back
Amen to Vanguard making an Emerging Market fund someday with zero exposure to China. I recently got out of VXUS and went into VEA because I want none of my money in China.
I am optimistic about my financial situation and continue to invest in stocks.
However, I have pessimism regarding pay raises and inflation. For instance, corporations doing well continue to give upper management outsized raises or bonuses for hitting or exceeding targets while people doing most of the work don’t get raises that even begin to approach the rate of inflation. What will this do for morale and what does this mean regarding people wanting to always do better?
Also, reports of mass firings at Amazon and in tech remind me of late 2007 when I was looking for a job in any field and was told throughout my network that it was the worst time since tech crash to look for a job.
So I feel ok for me and my family relative to most people, but there are bigger problems.
I am also concerned about international investing because of the significant exposures to China. Are there any international index funds with little or no exposure to China?
You can index international developed (no emerging, inc. China) markets exposure inexpensively via Vanguard FTSE Developed Markets ETF (VEA). But you may wish to add a small allocation to emerging markets with Vanguard FTSE Emerging Markets ETF VWO. I split my emerging markets allocation between VWO (w/ China) and EMXC (no China), as I want to limit China exposure but not exclude it entirely.
For emerging market exposure, I know of two choices — but neither is cheap:
https://www.ishares.com/us/products/288504/ishares-msci-emerging-markets-ex-china-etf
https://freedometfs.com/frdm/
I think about this old quote from time to time:
Many an optimist has become rich by buying out a pessimist.
Robert G. Allen
I try to instill in my kids, as Morgan Housel has said, “save like a pessimist, invest like an optimist”
I usually read the Humble Dollar articles twice. My first read is straight through and the accumulated comments. On my second read I hit the embedded links and then focus on the article’s conclusion and think how the thoughts expressed compare with my own thoughts and actions. When my experiences and knowledge I have gained during life seem relevant to the topic I comment.
I join in your conclusion that in investing, and life in general, we are better served by a optimist perspective. I believe I get my best results when a optimist perspective is paired with knowledge, informed expectations and prudent decisions.
Thanks for this forum.
Best, Bill
I personally choose to not financially support China in any capacity…ever.
Major US corporations moved their manufacturing to China. You will need to sell them too
Then don’t support US corporations.
US corporations love communist China.
They can exploit their workers in sweatshops, dump toxic waste to their heart’s content, and count on brutal crackdowns on anyone who dares to protest.
I know right.
Agree with your patriotic sentiments, but almost everything we need/buy/use is manufactured in China and now we learn they are buying our farms and food supply, so practically speaking how does one avoid them?
You’re correct…doing something is better than nothing.
Hi Jonathan, this is Chris. Just wanted to say, great article, and I was really moved by what you wrote in point 5.
Thanks!
Excellent advice. I have the flu,and your optimism is making me feel a little better this morning! Thank you
Love this Buffett quote: “The world does not belong to the pessimist, believe me.” Re: emerging markets ex-China, check out EMXC.
Great quote. The problem with EMXC is the 0.25% expense ratio — too rich for my taste:
https://www.ishares.com/us/products/288504/ishares-msci-emerging-markets-ex-china-etf
When I need a bond fund, I’ll be sticking with 3-10 year nominal Treasury bonds. In 2013 intermediate TIPS (VIPSX) fell 9.5%, when nominal bonds only fell 4.0%. 2012 saw a sharp rise in TIPS return just before the 2013 drop. 2022 reminds me of 2012, high inflation expectations, which may not live up to the hype. For buy and hold, intermediate TIPS may be fine (as shown by the David Swenson model portfolio) but for me it’s not something to jump into, especially now.
While I do believe the future is bright it is hard to believe stocks priced at 20x earnings is any kind of bargain. That’s still way overvalued by historical metrics. I think it’s more likely they do very little positive for the next handful of years. Or drop 25-30% from current values and then resume some modest growth. But either of those is perfectly acceptable and should pose no problem for disciplined investors. I do not see that as pessimistic at all, it’s just a logical outlook based on past performance.
Exactly! The high multiplies have been justified with low/zero rates which are now gone and rising. Wait for the downward earnings revisions starting Q1 and higher debt servicing, higher labor costs that are now baked in, which will erode margins. I am an optimist but on treasuries!
The CAPE ratio is just over 29 as of yesterday, which is basically Black Tuesday levels of valuation, so I have no idea why people are down voting your comment. It’s not like you told people to market time based on these valuations. It must be a purely emotional reaction, because nothing you said is incorrect.