Originally developed by Dr. Martin P. Seligman, Learned Optimism is a foundational piece of Positive Psychology. The concept of Learned Optimism is an important one for investing positively. Thinking like an optimist reminds us that defeats are temporary and bad situations aren’t always your fault. Optimism helps us live a happier life.
Many claim optimists are naïve. That they see the world through rose colored glasses. When Warren Buffett tells us to bet on America, it feels too simplistic. Hasn’t he been watching the news?! It’s no wonder doom and gloom get all the headlines.
Needless to say, it’s been a tough year for everyone. No matter where you are, you’re feeling the effects of a global pandemic. A novel coronavirus, spread globally, is a first for nearly all of us.
Covid-19 cases are back on the rise. So is stock market volatility. Fortunately, a vaccine is on the horizon. So are awkward holiday celebrations. Learned Optimism encourages us to stay positive, to stay productive, to stay invested. In the long-term, this too shall pass.
What’s your hopefulness score?
Find out before reading more. Go take the test here. Create a username and password. Scroll to the “Optimism Test”. It only takes 5 minutes. It’s worth it.
If your score is:
10 to 16, you are extraordinarily hopeful;
6 to 9, moderately hopeful;
1 to 5, average;
minus 5 to 0, moderately hopeless;
below minus 5, severely hopeless.
According to the research, optimism beats pessimism by a long-shot. An optimist pushes through when times are tough. When the world knocks a pessimist down, they’re slow to get up.
Optimists don’t pull their money when stocks drop. They stay invested and earn good returns. If a pessimist makes a bad investment, it can be hard to get back in the market. Opportunities are lost.
I took the quiz outlined in the book. My score was a minus 4. I’m moderately hopeless. A pessimist. I was surprised.
Here’s the thing: that’s OK. Your style can be changed.
Learning to be an optimist
An optimistic style is high on hope. You can learn to be an optimist. The key is your explanatory style. As setbacks occur, and they happen to everyone, how you explain hardship goes a long way in determining future successes.
Your explanatory style is the way you explain why things happened. An explanatory style is like a form of self-talk. It happens after an experience.
It matters a great deal if your style is pessimistic or optimistic.
There are three key dimensions to your explanatory style: permanence, pervasiveness, and personalization.
The pessimist says things like, “Investing is too hard” or “I’m incompetent at budgeting.” Pessimists explain things as permanent, pervasive, and personal. They believe negative conditions will exist for a long-time, the conditions are universal, and they’re the ones to blame. They learn to be hopeless and do little to positively change their lives. Setbacks can turn into disasters.
Don’t be a pessimist. Be an optimist. Optimists say things like, “The market was just having a bad day”, or “My portfolio is volatile because of a pandemic”, or “I won’t have that same medical expense next month”. The optimist sees things as temporary, specific, and external.
Optimism is not a hollow sentiment, either. It is a catalyst to stir persistence, steady us during challenges, and increase confidence. It’s not just wearing rose colored glasses. It gives you resilience, which is a necessary component for dealing with the setback’s life throws at us… all the time.
Learning to be an optimist also applies beautifully to investing.
The optimist earns the returns
As investors, we experience setbacks. Remember March? Since the vast majority of us need to be invested to meet our goals, we should view portfolio fluctuations like an optimist.
For instance, the stock market is like a crazy person. Let’s call him Mr. Market. You cannot control Mr. Market. He is going to do whatever he wants. It’s not personal, it’s external, and it is certainly outside of your control.
In a diversified portfolio (time spreads risk too!), drops in value have been temporary. History has shown that when the market drops, it recovers. Eventually investments reach new all-time highs again, and continue to grow.
There is always a reason to sell stocks. Most appear to be very good reasons. Thinking like an optimist and understanding that reasons to sell are also temporary can lead you to stay the course in your investments. Staying the course has produced very good returns. See below from BlackRock.
The past is littered with wars, crises, and panics. I’d wager the future will be too. Count the yellow bars. That’s 15 recessions. We made it through all of it. So, just remember, these issues will be temporary, specific and external. Channel the optimist in you. That way you’ll be better equipped to stay the course and earn the returns you want.
There are dangers to being an unrepentant optimist. Sometimes bad outcomes are our fault. When they are, we have to accept personal responsibility. Owning your mistakes and learning from them is important for growth.
So, while we all want to bounce back quickly, we can’t let our explanatory style erode personal responsibility.
Having personal responsibility, in addition to an optimistic explanatory style, will encourage introspection and improvement. Yes, try to see setbacks as temporary, specific and external. We have bad times, but by no means use that as an excuse not to get better too.
Covid-19, market volatility, and a host of other issues has made 2020 a tough year. It’s easy to have a catastrophic global pandemic get us down. This too shall pass. It’s only one year. As advisers, investors, business managers, salespeople, and leaders we face setbacks. Being able to survive, grow and learn from hardship, is important for long-term success.
It’s the same with investing and planning for your future! Life doesn’t move in a straight line. There are ups and there are downs. Staying aware of volatility and the short-term nature of it, helps us stay the course. Identifying bad events as temporary, external, and specific can lead us to have more positive thinking. We can all be optimists.
Here’s to staying positive!
Adam K. Wright, CFA, CFP®
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