“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

Winston Churchill, Former United Kingdom Prime Minister

Half-full or half-empty?

July 15, 2021

We’ve all heard the definition of optimism and pessimism distilled to a simple question: “Is the glass half-full or half-empty?” Of course, like so many other proverbial expressions, this is wildly over-simplistic. It does lead to some interesting observations, however. A few years back, Borden Dairy commissioned a study of 2,000 Americans to explore the differences between glass half-full and glass half-empty thinkers.

The study was simply a glass containing an equal amount of liquid and empty space. When asked, 58% responded that the glass
was half-full, 16% felt it was half-empty, and 26% were indecisive. Subsequent questions in the study focused on various personality traits in an attempt to shed light on differences between the two camps.

Not surprisingly, the half-full thinkers were more optimistic. Additionally, they were found to be more patient, more creative, more competitive, more adaptable, and more playful than half-empty thinkers. On the other hand, glass half-empty thinkers tended to be more laid-back, more introverted, more serious and prouder than their half-full counterparts. Oddly enough, glass half-empty thinkers don’t always self-identify as pessimists. In fact, nearly half of glass half-empty types believe they’re more optimistic than pessimistic.

While on the surface it might seem that optimism is much preferred over pessimism, there is more to the story. Overly optimistic people might be accused of looking at the world through “rose-colored glasses” or being “Pollyannish.” Similarly, pessimists are often labeled as being a “Gloomy Gus,” or to use a more current expression, a “Debbie Downer.” Like so many things in life, though, there is a balance to be struck between extreme optimism and extreme pessimism.

We know that being optimistic does not mean having the power to directly influence events, no matter how much one desires a certain outcome. In fact, sometimes the opposite occurs. For example, in the investing realm, market commentators have created various gauges of market beliefs based on investor optimism or pessimism. These measures go by many names, including the Investor Sentiment Survey and the Fear & Greed Index, each of which attempt to measure the prevailing attitude of investors in an attempt to anticipate future market movements.

What most of these indicators have in common is that they are contrarian in nature. Simply meaning they often indicate the opposite of what is widely believed. When too many people are optimistic about the stock market it creates a situation of imbalance. Just the slightest hiccup, in a company’s earnings for example, can have cascading effects when so little risk is built into the current stock price. These situations often lead to a substantial drop, or even a “crash,” of the stock in question.

Naturally, one’s outlook on life should be predicated on a number of factors, and the stock market should probably not be one of them. Nevertheless, it has been shown that optimists tend to fare better with their overall investments than their pessimistic counterparts.

A study recently published in the Harvard Business Review, showed that optimists were significantly more likely to experience better financial health than pessimists, and engage in healthier habits with their money.

The study found that 90% of optimists have put money aside for a major purchase, compared to 70% of pessimists, and that nearly two thirds of optimists have started an emergency fund, while less than half of pessimists have. Additionally, it was found that optimists are more likely to seek out and follow advice from someone they trust.

One might ask, however, is this a case of the “chicken-or-egg?” Meaning, are optimists in better financial health because they are optimists or does having a stronger financial position make one more likely to be optimistic? The researchers controlled for variables such as wealth and income, so the findings seem to suggest optimism can, in fact, lead to improved financial stature.
It has been said that the best financial plan is to “save like a pessimist and invest like an optimist.” What this means is that you need to be prepared for the worst, while hoping for the best. Preparing for the worst means having an investment plan and sticking to it. This, of course, is harder to do than “hoping for the best,” but it is a critical step in the journey toward achieving your investment goals.

The article above is an excerpt from the Q3 Quarterly Market Commentary. Here is a link to the most recent issue. Complete the form below if you would like to get this emailed to you each quarter.

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