MoneyLife

Here’s some chicken soup for the investor’s soul

By MoneyLion

Investors often find it more natural to be pessimistic. But there’s reason to be optimistic — if you put a measured, consistent investing approach to work for your future.

Don’t let short-term pessimism drive you off track

These days, it can feel like every day brings more troubling events and worrying headlines. And with your hard-earned savings and investments on the line, it’s hard to not focus on what could go wrong. But there’s reason for long-term optimism. After all, real progress tends to happen at a snail’s pace. The daily market ups-and-downs can mask an important historical fact. And it’s just this: Even slow progress is often enough to drive the stock market higher over the course of years and decades. 

A smart mix of investments is key to long-term success

For more than a century, well-constructed portfolios have created wealth for those who have stuck to their plans despite global wars, policy blunders, recessions and yes, even pandemics. Ensuring that short-term pessimism is not at the expense of long-term optimism is the key to investing successfully.

Keep the good and bad news in perspective

This balancing act is perhaps trickier than ever. On the one hand, the economy and stock market have rebounded since last March, COVID-19 vaccines are being distributed and additional stimulus measures are in the works. On the other hand, the recovery has decelerated, valuations are near all-time highs and many hard-hit businesses are still suffering. These are challenging times for policymakers, corporate leaders, small business owners, and individuals. From an investment standpoint, however, it’s important to balance the good and bad news.

Case in point: Unemployment indicators are a mixed bag 

Let’s take an example. Last week’s jobs report for January provided a mixed view of the economy that could be interpreted as either glass-half-empty or half-full. Only 49,000 jobs were created in the first month of the year when 105,000 were expected by economists. Last November and December’s numbers were also revised down by 159,000 jobs based on new data. This suggests that the economic deceleration at the end of 2020 was perhaps worse than originally believed.

At the same time, the unemployment rate improved to just 6.3%, very near its historical average. Even the “under-employment” rate, which takes into account those who have given up on finding jobs, has plummeted to only 11.1%. While much of the sudden month-over-month decline is due to data adjustments, this doesn’t change the fact that unemployment has fallen sharply since the economic lockdown began last year.

Glass half empty or half full? Long term unemployment spiked
in 2020 while shorter-term unemployment remained steady.

image1 3
The number of Americans who have been unemployed for 27 weeks or longer has been growing since the pandemic began. In contrast, shorter-term unemployment has remained relatively steady. Sources: Clearnomics, Bureau of Labor Statistics, January 2021.

Perhaps more important, the labor force participation rate, which measures the percentage of the working-age population that is employed or looking for work, remains steady. This highlights the unequal distribution of unemployment across the economy since a growing fraction have been without work for 27 weeks or longer. This is also consistent with our everyday experience of pandemic-related lockdowns and restrictions affecting some businesses and individuals more than others.

Don’t let short-term pessimism cancel out long-term optimism

A short-term pessimistic view might focus on the fact that the economy cannot recover until it is safe for retailers, restaurants, hotels, airlines, service workers, and more to fully return to work. In the worst case, life may never fully “return to normal” as many might hope.

A longer-term view doesn’t dismiss these challenges but recognizes that this will eventually pass. It also recognizes the fact that many businesses large and small have been able to maintain and expand their workforces over the past year.

The lesson for investors? Make a plan to stay on track.

Longer-term trends are likely to matter more than day-to-day ups and downs. In the end, achieving your financial goals isn’t about avoiding risk from day to day, but about managing it through an appropriate investment mix that helps you preserve and create wealth for many years to come. Staying consistent and continuing to make contributions when possible allows you to take advantage of compounding and dollar cost averaging.

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