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Short Summary
Main recommendation: Stay invested in stocks for the long run and avoid letting pessimism about market crashes keep you out of or underweight in equities, because pessimistic beliefs have historically cost investors expected long-term returns. Ben Felix argues that pessimism is expensive and that a few behavioral tools, such as checking investments less often and automating or delegating portfolio decisions, can help reduce its cost.
Key Points
- Global stock returns have been strong: an annualized 5% real return in US dollars from 1900 through 2022 across the world's markets, with the Netherlands and UK data back to 1629 and one French company's data back to 1372 suggesting similar persistence.
- Stocks are not risk-free: single-country investing can lose money in real terms even over 30 years, but diversified, disciplined long-term investors have typically been rewarded.
- Investors overestimate crash probabilities, roughly an order of magnitude above historical frequency, and those beliefs reduce equity fund flows and equity allocation.
- Media coverage skews pessimistic: negative articles raise crash beliefs while positive ones have little effect, and bad market news gets disproportionate coverage.
- Investors become more pessimistic after crashes even though falling prices usually signal higher expected returns, so they tend to underallocate to stocks at the worst times.
- Personal experience of poor returns and asymmetric learning from losses make investors more risk-averse and more likely to sabotage long-term returns through short-term decisions.
Details Worth Noting
- Concrete instructions:
- Look at your investments less frequently, since investors who check less tend to earn higher returns.
- Automate or delegate portfolio management so you interact with investments less often; investors lose less to poor timing decisions in automatically rebalancing asset allocation funds than in equity funds.
- Consider rebalancing as part of an automated process, since rebalancing after equities drop is difficult for many investors.
- Tune out financial media, which adds pessimism without new information because news is already reflected in prices.
- Improve financial literacy, since it appears to increase stock market participation; watching educational content like this video may help.
- Get an outside perspective on base rates such as long-term expected returns and how they vary over time.
- If using a financial advisor, watch for high fees and conflicts of interest, and be aware that many advisors make the same errors as individual investors.
- Ben Felix notes that many people would do well simply buying low-cost ETFs in a discount brokerage account, but says many will not do this well on their own, which is where advisors may help.
- Automation only helps if you are invested in stocks to begin with, which many pessimists are not.
Bottom Line
Pessimism is a real cost in investing, and the practical response is to reduce how often you react to market news and to build an automated or advised process that keeps you consistently exposed to stocks.
