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Why negativity sounds smart

Investment expert Alan MacDonald of RBC Dominion

You can’t open the financial news today without being bombarded by a steady stream of negative headlines. Among the most cherished topics are runaway inflation, sovereign debt default, over stretched consumers, impending recession, war, and, of course, the impending Armageddon in the stock market.

You could be forgiven for thinking that the end is near. Yet time and time again we’ve seen crises give way to brighter times. When it comes to markets; bear markets (such as the one we are in now) turn out to be brief, whereas bull markets tend to be many years longer. In fact, whatever increment of time you measure in the market  days, months or years  75 per cent of the periods are up and 25 per cent of them are down.

So why does the 25 per cent dominate the news cycle? And why do we generally feel pessimistic when it’s clear that a long term disciplined approach to investing is the closest thing any of us can get to a sure thing?

Part of it comes down to the primitive parts of our brain. Our ancestors are those who feared attack while huddled in their caves. The ones who were a bit more relaxed probably weren’t around very long. You might say that we have evolved to be hard wired for pessimism, while being an optimist is something that needs to be chased.

The financial news tends to be oriented to negative events. There is no doubt the folks writing the stories are doing their best to provide the truth, but they also know that readers will click on catastrophe, not on sunny optimism.

And don’t get me wrong, there is plenty to be pessimistic about. But that’s not just today. Pretty much every day for the thirty years I’ve been in this business the market has been about to fall, consumers are about to cave and our retirements have been in jeopardy.

Pessimism also sounds smarter than optimism. An optimist has to believe something along the lines of “things are pretty bad right now, but over and over again we seen businesses adapt and grow, and the shares prices follow right along with this growth”. In other words, an optimist has to rely on something that hasn’t already happened. A pessimistic view sounds more like “if this trend continues, you can see that in the next five years we’re all done for: here’s a chart”.

The pessimistic chart sounds and feels more real because it’s based on recent, actual events. Yet such analysis is like thinking that if you get in your car and start to drive south west it’s inevitable you fall into the Grand Canyon. You could argue there’s a Grand Canyon trend, but a more optimistic view is that you turn the wheel at some point.

The drum of negativity continues past our investments so those of us in the financial markets shouldn’t feel special. Consider the question “How much do you think the forest cover of our planet has shrunk since 1990?” Most people will answer minus 10 per cent or even minus 30 per cent. The truth is that it’s a trick question. The forest cover has actually grown substantially. In the U.S. by 34 per cent, China by 15 per cent. Worldwide, a gain of some 3 million square kilometres.

You can find similar great news about poverty, famine, financial enrichment of poor nations, population growth, food supply, crime, and so on. You just won’t find it on the front page.

My point is this  before you lose too much sleep over your broad, diversified portfolio, remember what is eventually going to happen. Markets will adapt to the changing circumstances, businesses will find a way to grow, and portfolios will recover much faster than you might think. One caveat, don’t go looking for this point of view in the headlines, you won’t find it there.

This article is supplied by Alan MacDonald, an investment advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund.