Are You a Pessimist or Just Worried?

In 1989, Billy Joel wrote the song “We Didn’t Start the Fire”:

“Wheel of Fortune, Sally Ride, heavy metal suicide,

Foreign debts, homeless vets, AIDS, crack, Bernie Goetz,

Hypodermics on the shore, China’s under martial law,

Rock and roller, cola wars, I can’t take it anymore.”

If you are around 50 years old, you can already hear the tune; if you are under 30 years old, you should do an internet search for Sally Ride and Bernie Goetz.

The lyrics remind us that while there is always a mix of good and bad news in the world (the earlier verses have similar lists from the 1950s, ’60s, and ’70s), we somehow manage to work through the challenges and come out on top. When listening to the song these days, we may ask ourselves what lyrics we would use to describe the state of the world in the early 2020s. The list would probably include COVID-19, rising inflation, recession, the US Capitol insurrection, Brexit, the war in Ukraine, regional bank failures, and, on the positive side—at least for some of us—Tampa Bay professional sports.

A time for optimism?

With the constant stream of bad news coming from all forms of media, it might seem difficult or even naïve to take an optimistic view of global events or of our own personal lives. Yet, history has shown that optimists usually win. Rather than thinking we have to make a choice between optimism and pessimism, we believe that Mr. Joel was showing us a better way: be an optimist who worries a lot.

“Worrying does not make you a pessimist; it simply means you are aware of the dangers around you.”

For example, we expect global economies to return to pre-pandemic norms now that the immediate danger of the coronavirus has faded, but what if they don’t? Acting as an optimist, you should make reservations for future vacations and plan to interact with family and friends in person as you did in pre-pandemic days. But since the risk of further outbreaks still exists, you should continue to wash your hands frequently, cover your mouth when you cough, buy some at-home COVID tests, and be prepared for supply chain shortages if things do not go as planned.

The same principle applies to your investment portfolio. We expect stock markets to increase over time and to generate higher returns than safer assets such as cash and Treasury bonds, but what if they don’t? As an optimist, you would allocate a portion of your wealth to equities so you can profit from the resilience that capitalism has demonstrated over the years. But as a worrier, you should also allocate a portion of your wealth to more secure assets such as shorter-term bonds, in case the future of the stock market is not as rosy as its past.

Is it different this time?

But what if the current situation has you really worried? What if you feel that the crises of the past were not as daunting as are those of today? The fact is there always have been, and always will be, valid reasons to be concerned about the higher risk in assets such as equities. This year’s list of concerns will include the war in Ukraine, the US debt ceiling, inflation, regional bank failures, and the risk of recession. However, as you worry about these things, you must realize that on every single day in the history of the stock market there has been a long list of equally valid reasons to worry. In this century alone the list would include the bursting of a stock market bubble (2000), terrorism (2001), the Iraq War (2003), a subprime mortgage crisis (2008), a debt crisis in Europe (2010), the downgrade of US Treasuries (2011), US government shutdowns (2013 and 2018), Brexit (2016), rapidly rising interest rates (2018 and 2022), and the onset of the COVID pandemic (2020).

“…while there is always a mix of good and bad news in the world…we somehow manage to work through the challenges and come out on top.”

Were you worried about these events while they were occurring? The answer is likely yes. Should your worry have kept you out of the stock market? Certainly not. Despite all these negative events, the global stock market has remained long-term optimistic, climbed the “wall of worry,” overcome the negativity, and regularly reached new all-time highs along the way. The reasons for the worry may be different this time, but the presence of worry itself is not. As optimists, we believe the market will continue to climb the wall of worry, but we also recommend owning some bonds just in case it does not.

Worrying does not make you a pessimist; it simply means you are aware of the dangers around you. In that respect, worry provides a healthy counterbalance to any tendency you may have toward extreme optimism. Being a worried optimist allows you to have a positive outlook on life in general and a healthy allocation to risky assets in your financial life, while maintaining protection in case things do not go as planned. And anytime the news has you worried, Billy Joel’s lyrical retrospective is helpful: We didn’t start the fire.

Heritage Investment Group provides wealth management and investment guidance to high-net-worth individuals, families, charitable foundations, and qualified plans. We provide seasoned financial guidance backed by a disciplined investment process. For over 25 years, we have built our firm on a strong foundation of family and friendships with guiding principles of ethics and integrity.

 We would like to acknowledge the Summer 2020 edition of the Financial Architects, LLC newsletter for the idea of the worried optimist.