Excerpts from The Power of Negative Thinking the WSJ:
Just thinking in sober detail about worst-case scenarios—a technique the Stoics called “the premeditation of evils”—can help to sap the future of its anxiety-producing power. … Positive thinking, by contrast, is the effort to convince yourself that things will turn out fine, which can reinforce the belief that it would be absolutely terrible if they didn’t.
… learning to accommodate feelings of uncertainty is not just the key to a more balanced life but often leads to prosperity as well
The ultimate value of the “negative path” may not be its role in facilitating upbeat emotions or even success. It is simply realism. The future really is uncertain, after all, and things really do go wrong as well as right. We are too often motivated by a craving to put an end to the inevitable surprises in our lives.
Investing is about postponing spending today so it can be used at some point in the long term future. (Savings is money put aside for short term future use.) But many don’t invest nearly enough or they are fearful of taking appropriate risk to achieve their long term goals because they might lose money. Two severe bear markets in stocks in 2000-03 and 2007-09 may have devastated their positive expectations and scared them away. But the concepts presented in “The Power of Negative Thinking” may be helpful.
One lesson to take away from two stock market debacles with a decade of each other is to accept that negative outcomes do happen. Investors must be mentally prepared for these surprises and accept that uncertainty is a fact of life. The future is NEVER certain. Perceiving any feelings of certainty in the financial markets, as many did with technology stocks in 1999 and real estate in 2006, is a warning sign itself.
The reality of negative outcomes is a powerful reason for having a proper long term strategic investing plan and a portfolio that is reasonably diversified across several asset classes (at least common stocks and bonds). Investors who stuck with their plan that included a properly diversified portfolio have actually done fine since the first stock market peak on March 24, 2000, in large part because their losses were mitigated. Maybe their returns over that period were not great, but they have positive returns and did not experience the end of the world.
Successful investing includes accepting uncertainty, volatility, and bear markets and not avoiding them or even lamenting them. The best investors actually embrace these events as opportunities because they know these episodes are not permanent. Negative events have occurred before, more frequently than we might imagine, and are practically inevitable in the future.
So invest into the uncertainty, knowing full well there is a bear market out there somewhere. Your future prosperity may very well depend on it.