Today I would like to return to one of the concepts in the book that caught my attention. According to the author, “The best financial plan is to save like a pessimist and invest like an optimist”.
What does he mean by this sentence? “That idea – the belief that things will get better mixed with the reality that the path between now and then will be a continuous chain of setback, disappointment, surprise, and shock – shows up all over history, in all areas of life.”
I therefore see two fundamental aspects for the long-term stock market investor.
On the one hand, you have to trust that things will continue to improve in the long run. The stock market is not the right place for pessimists. One must have almost unshakeable confidence that the economy and quality of life will continue to improve long term.
On the other hand, you have to be realistic. Conditions will not improve every day, every month, every year. The path will rather be strewn with pitfalls. Think about it: over the last 10 years, we’ve had many corrections (I count six of them, including a bear market), a pandemic, a sharp rise in interest rates and others.
That hasn’t stopped the S&P 500 from achieving a compound annual return of 10.0% (including dividends) over the past 10 years.
I like the idea that you have to save like a pessimist. I believe that the ability to save and invest is too often forgotten by investors – in my opinion they rely too much on the returns of their portfolio to ensure their retirement and not enough on their savings. However, we have much more control over our savings than over our stock market returns.
The idea also corresponds to another concept put forward by Housel: “Invest in preparedness, not in predictions.”
Forecasts are useless because most of the time they are wrong. There is therefore no point in trying to predict what is coming, but rather we must try to prepare for any eventuality that could arise at any time.
This is true on several levels, including the diversification of one’s portfolio. For example, in our management, we try to obtain a healthy balance between so-called defensive stocks (which do well when the economy is difficult) and so-called growth stocks (which do better when the economy is running at full speed).
Another way to be prepared in to not use debt to invest.
There are several other elements that I like about Housel’s book, which presents several phenomena that will not change in the future.
In my next blog, the last one before the start of 2024, I will share with you the list of books that I enjoyed the most in 2023 and that I rated ★★★★★, just to offer you some interesting reading for the holidays.
