Advice matters
Investing between caution and optimism

Investing can be an interplay of two contrasting emotions: optimism and caution. Each has its place in your investment strategy, and it’s important to find the balance between them that’s right for you. Here are some pointers to help you take just the right amount of risk – suitable for your risk tolerance, investment timeframe and investment goals.

It’s natural to feel pessimistic at times

Bill Gates, famously, once said: “Save like a pessimist, invest like an optimist.” But there are times when this can seem easier said than done.

While there’s no denying that there are factors to be concerned about at present – such as inflation and geopolitical tensions – it’s also true that greater access to information and social media can amplify perceptions. Investors can suffer from information overload and struggle to filter news and noise.

What’s more, studies have shown that our brains tend to register, store, and recall bad news much more readily than positive ones. Experts call it ‘negativity bias’. As psychologist Rick Hanson put it, “The mind is like Velcro for negative experiences and Teflon for positive ones.”

Remember, the combination of information overload and our natural tendency to remember bad news can lead to emotional decisions and too much attention to the short term.

What’s investing without a degree of optimism?

As an investor, maintaining a degree of optimism is crucial. What would be the point of investing, without a reasonably favourable view of the future?

And there are reasons to be optimistic. While in the short term markets go through periods of volatility and weakness, so far the long-run trend has always been up. This means that, historically, the share market has rewarded people who were patient and optimistic about long-term returns.

What can help your investment decisions is measured and informed optimism, rooted in data, experience, and an understanding of market dynamics.

Optimism and pessimism can coexist

Winston Churchill is often quoted as saying: “The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty”.

The middle ground? Cautious optimism. You can strike this delicate balance by being optimistic about what you can control, and cautious about what you can’t. Here are some examples of things you have control on:

  • The diversification of your portfolio: In a way, diversifying is based on the optimistic belief that different asset classes and sectors will grow at some point, even when others will be underperforming.
  • What you do with your investments: As the adage goes, time in the market is better than timing the market. If you’re optimistic about your long-term plan and stick to it, your investments will likely do better than if you pull them out when the value starts to drop.
  • Your market knowledge: Finding the balance between caution and optimism requires confidence. And you can gain confidence by educating yourself and staying up to date on investment trends, looking at a variety of reliable sources.

On the other hand, there are factors over which you have no control, and that’s where caution is important. For example:

  • Economic trends: Not only can you not control how the economy is performing, but no one – not even seasoned economists – can really predict where it’s going next. Rather than trying to time the market, the key is to remain informed and diversify, so that your portfolio is not overly vulnerable to macroeconomic factors in any one sector or asset class.
  • Investment fads: Investment fads usually promise quick, outsized returns, but as quickly as they rise, they can plummet. So, it’s crucial to exercise caution. With quality advice and independent research, you can differentiate between a genuinely transformative trend and short-lived fads.
  • Unreliable advice: The Internet is full of self-proclaimed experts ready to share the next big tip. So, make sure you approach what you hear with a healthy dose of scepticism. Always check its source is reputable, certified, and has a track record of credibility. When in doubt, don’t hesitate to contact us: you can use us as a sounding board.

The importance of a long-term perspective

One thing is clear: if you’re trying to balance optimism and caution as an investor, you need to maintain a long-term perspective. Taking a step back from the noise allows you to reconsider short-term turbulence as an inherent part of investing, and understand that wealth is shaped by your long-term strategies.

As always, we’re here to help. If you’d like to discuss your investment strategy, get in touch.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.