The Fear Merchants
A few years ago a summer storm roared through our area and took our electric power with it. Because I tend to be an optimist, I had not the slightest worry as I drifted off to sleep, trusting we'd have our power back on soon. After four days without refrigeration, hair dryers, or TiVo, I had to admit I was way too optimistic that time around.
And I will be next time, too. I don't seem to learn from these kinds of experiences. When the next storm comes along and knocks out our electricity, will I give more than a passing thought to the possibility that we could be in for another four-day stint of inconvenience? No. I'll drift off to sleep with the same sunny expectation that all will be okay in the morning. Despite past disappointments, I just generally expect good things to happen.
A side benefit of this is that it makes it much easier to be a long-term investor. My take on stock investing can be reduced to these two basic points. One, thanks to free market capitalism, the U.S. has the world's strongest, most resilient economy, and it will continue to grow. And two, investing in a broadly diversified portfolio of stock funds is the easiest way to own a piece of it all. As investors, our job is to take the occasional down cycles in stride and collect the profits that will accrue over time. I know there are always things that can go wrong and temporarily upset my smooth ride. But I don't expect them to do permanent damage, so I don't worry about them.
Of course, there are other observers of the investing scene who disagree. They foresee many serious problems, some of which they expect will be devastating. If not this year, then next. Or the next. And they're not deterred by the fact that years can come and go without their grim predictions coming to pass. Just as I tend to remain optimistic despite being disappointed on occasion, they are able to maintain their pessimism in the face of the great economic booms of the past two decades.
That's all well and good for them, but I would hate to see them infect you with their fears. Here's what I mean. In front of me, I have a file of old newsletters and direct mail solicitations from a very successful newsletter publisher. For as long as I've read this fellow, he's been ... well, concerned. See for yourself.
1/93: "Don't get caught in the stock market trap ... The market is more vulnerable than ever to a crash." The reality is that the Dow closed the month at 3300 and has never again been that low.
12/93: "Four-year bear market in Japan foreshadows similar slump in U.S. ... Japan and America have taken several steps beyond the abyss." Not quite. Not only had we not gone into the abyss, but the great bull market of the 1990s lasted another six years.
1/94: "Watch out for a new wave of inflation ahead!" In fact, inflation was steady to lower over the following five years.
1/95: "Get out now, before the exit doors slam shut. ... It is virtually impossible for stocks to continue rising ... This is not going to be a silent crash. It could be worse than 1987." On the contrary, the market rose for the rest of the decade.
9/98: "The great bull market is over, and an even greater bear market has begun. This is it! There's no turning back." Far from it. The market reversed course almost immediately. The Dow resumed its upward march for another 15 months, climbing more than 50% to the 11,000 level.
Throughout the 1990s, his mail solicitations consistently painted a frightening picture. Eventually, he got it right. Stocks, which he'd been warning his readers against owning since at least 1993, finally fell. And when the worst was over, what was he saying at the bottom in October 2002? "A new bull market is a pipe dream. ... The Dow must fall to 5000." As you know, the Dow went on to recover to a new all-time high. I'd say the pipe dreamers are doing pretty well.
When times are good, he warns of bad times ahead. And when times are bad, he warns of more bad times ahead. There are others like him. They may truly believe that a financial Armageddon is always lurking around the corner. Or, it might just be their business strategy in the newsletter business, fear sells. I just don't want it to sell you. Stock market history is on the side of the optimists.
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