Think back to the beginning of 2021. Do you remember what was happening? Do you remember how you were feeling? The odds are that you would not remember because of recency bias. Recency bias means that you are more likely to remember things that happened in the immediate past. You might have made some predictions at the beginning of 2021, right? But no one thought the S&P 500 would go up over 25%. Did you? So in this episode of Best in Wealth, I will share why your best plan of action is to remain optimistic.
Outline of This Episode
- [1:11] Think back to the beginning of 2021
- [4:30] Why you should be optimistic about the market
The economy has us worried—how can we be optimistic?
An article by MarketWatch, “U.S. Consumer Sentiment Falls Close to 10-Year Low on Inflation and Omicron Worries,” said that “Consumer sentiment index drops to 68.8 from 70.6, the second lowest reading in a decade.” The decline was not only due to Omicron worries but also increasing inflation rates. It goes on to say, “Economists predict the U.S. will bounce back quickly if the coronavirus surge fades soon and supply chain bottlenecks begin to ease.” But if inflation does not ease, there may be a pullback in spending that will impact the economy.
I feel that people are worried about the economy in 2022. Will the stock market overcome these fears? Will we get control of the Covid virus and inflation? What is your prediction?
The stock market has no memory
In an article by David Booth, “Why I’ll Always Be Optimistic about the Market,” he reminds people to not make forecasts about the future of the market. Why? Because the market has no memory. We cannot make guesses or assumptions about the future.
The stock market rarely ends the year up 8–10%. Over the last 95 years, it has landed there 6 times. Yet we expect a good return. If we did not, we would never invest in the stock market. Why does David always bet with the market? Because you can bank on human ingenuity and finding paths through the crisis. Markets are forward-looking and reflect optimism innate to humanity.
However, if you always expect a positive return you are in for disappointment because the market cannot be forecasted or predicted. We saw about a 70% return in small value that was completely unexpected. But if you were shifting money around you likely did not see that return. Only 25% of actively managed mutual funds beat the market. But when you begin to understand how markets work, the game changes.
The surprising reason David Booth maintains optimism
No one knows what will happen in the market. David Booth firmly believes—based on 50+ years of experience—that the market responds to new information based on fairness. Market transactions can only happen if both sides of a trade agree they are getting a fair price, right?
In the article, David goes on to say:
“I wake up every morning believing the market will go up a little but prepared for if it drops. And you should too. Markets will go up and down, but you should expect them to be positive, and that is what history has also shown. If you can hold this in your heart, you can be optimistic and resilient, you can manage the central challenge of human existence. It’s hard to do. But it’s worth it.”
While it pays to be optimistic, it is essential to have a plan in place that prepares you for the bad times to feel secure. Once you have confidence in your retirement plan, you have a great reason to be optimistic.
- U.S. Consumer Sentiment Falls Close to 10-Year Low on Inflation and Omicron Worries
- Why I’ll Always Be Optimistic about the Market by David Booth
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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.