Four reasons why pessimism in financial markets is so seductive

Recession headlines will always dominate the news, but we only live in them 13% of the time.BRENDAN McDERMID/Reuters

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Investors generally have a love-hate relationship with bad news. They hate nasty economic and financial market news, but they love reading about it and just can’t look away.

This negativity bias is also very present in other areas such as sports news – think of Toronto Maple Leafs fans, for example – or political news. We are surrounded by it and we have to learn to live with it.

But why is this happening and how can wealth advisors help their clients? Here are four ideas to consider to help break through the negative market noise.

1. Our brains are wired to treat threats as more urgent than opportunities

If someone is yelling at you saying you’re in danger, you’ll probably stop and listen to them even if you don’t know them. On the other hand, if someone yells at you to tell you that everything is fine, you will probably think that this person is wasting your time.

The same goes for investing. Advisors face the challenge of ensuring they educate clients to do the opposite of what their brain signals.

This means minimizing the perceived “threats” of bad news while promoting opportunities to do the basics of personal finance that are often sources of procrastination, such as financial planning, systematic investing, and diversification, among others.

2. People remember pessimistic events more than positive events

If you ask a typical investor what have been the worst years in the stock market over the past two decades, most will remember 2002 and 2008.

But ask investors what some of the stock market’s best years were and most won’t be able to remember them. The two best years for the S&P/TSX Composite Index were 2003 and 2009 – ironically, second only to the worst.

Good advisors will make sure to communicate and celebrate good years with their investing clients. If advisors do not draw attention to these events, they are likely to be forgotten.

3. Bad news grabs the headlines while good news is progressive

There has been a lot of talk about the coming economic recession lately, and it has been in the headlines of most major media outlets for many weeks now.

Although recessions should never be underestimated, good advisors will help their clients by having evidence-based discussions about them.

A good example shows investors data that illustrates how many days there were in the stock market when the economy was in a recession compared to when it was not. For example, from Jan. 1, 1970, to March 31, 2022, there were 2,539 days the U.S. economy was in a recession, compared to 16,543 days the economy was not in a recession, according to data from the National. Bureau of Economic Research.

Recession headlines will always dominate the news, but we only live in them 13% of the time. Statistics like these should help reassure investors.

4. Pessimism tends to push investors to act

Optimism often requires believing in unknown and unspecified future breakthroughs, which seem naïve compared to pessimism, which focuses on tangible actions.

This is why investing is a test of character more than a test of intelligence. That said, in order to “scratch that itch” into action, good advisors can work to prepare their clients for economic downturns by going through “what if” financial planning scenarios, doing pre-mortems of a bad year in the market, and having conversations about it before it happens.

These little habits will accumulate over time and help investors better cope with the challenge of coping with the constant stream of negative news.

Pessimism is everywhere and always will be, but understanding it can make a big difference in how advisors can guide clients in their approach to life and their investments.

Jonathan Durocher is President of National Bank Financial Wealth Management.

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