The Paranoid Optimist

It has been said that, “only the paranoid survive.” But for many of us, the idea of having to become paranoid is decidedly unpleasant. Paranoid investors may find success, but also find themselves susceptible to fear and anxiety that can crush their spirit. It is simply no fun to live in a penumbra of paranoia.

Blind optimists have the opposite problem. If everything is just going “to work out,” you may well find yourself just out. As investors, blind optimists tend to be at the mercy of the market’s prevailing mood. Most of the time, however, optimists are a joy to be around. They make the world seem brighter and more hopeful… and with everything happening around us, a little hope can go a long way. 

So, how do you blend the best of both these two mindsets? By becoming a “Paranoid Optimist.” A paranoid optimist follows 3 important mantras:

1 – Have a plan, but be flexible

2 – Learn from your losses

3 – Play for the long term

Let’s take them one at a time.

Mantra #1 – Have a plan, but be flexible

“Everybody has a plan until they get punched in the mouth”

—Mike Tyson, professional boxer

Your money plan is likely built on some solid principles. Maybe you just follow a dollar cost average plan, maybe you invest with a specific strategy, maybe you just “index and chill.” No matter what plan you have come up with, at some point it is going to get hit in the face by some event. The current market downturn is a prime example. So much seems to be going wrong. From cyclical events like the current market downturn, spurred on by rising interest rates and inflation, to geopolitical turmoil as a result of the war in Ukraine and fears of nuclear war, these events blur your vision and may buckle your knees. In times like these, most of the time, sticking with your game plan is the best option. You just have to stay in the ring and last another round. Eventually, you will be able to regroup. 

This is also where flexibility becomes an asset. With a planning tool like OnTrajectory, you can review your plan and assess other options. You can run a longer term analysis to see how different scenarios are likely to play out over time. This allows you to consider changing your investment portfolio allocations in the short run and see if there are options for you to mitigate some of the losses, or prepare yourself for future opportunities.

Mantra #2 – Learn from your losses

“Let me embrace thee, sour adversity, for wise men say it is the wisest course.” 

—William Shakespeare, “Henry VI”

Humans rarely go looking for hardships. When difficult times do come—and they do, for all of us— most people work hard to rise to the occasion. Whether financial stress breaks you or builds you is largely within your control. The perspective you take when times are tough often forms the backbone of new insights, new plans and greater growth, both personally and financially. Spending a few moments confronting your missteps or just bad luck can help you gain insight. 

Jason Zwieg, who authors The Wall Street Journal’s “The Intelligent Investor ” column, recently wrote about the psychology that keeps investors chasing losses. He described how many investors set up some form of stop loss (a market trading order that automatically sells an investment at a predetermined price below the current market price to “stop loss”), but ended up adjusting it lower every time the stock dropped. The psychology for these people is that they may not want to admit they picked a losing bet, so they double down.

You may learn how to cut your losses in a down market and reposition yourself. You may also reflect on your strategy and realize that you believe in the companies or funds you have invested in. The decision to stay invested, hold through the decline and come out the other end may well result in a fantastic payoff—if you have the time frame and steel nerves to pull it off. These lessons often become most clear to us in the moments of adversity. So, take time to reflect on what a few months in the valley might be teaching you.

Mantra #3 – Play for the long term

“Time in the market beats timing the market”

—Ken Fisher, founder of Fisher Investments

In baseball, each team plays 162 games per season. In 2001, the Seattle Mariners tied the Chicago Cubs for the all-time most wins in a season at 116—over 70% of their games. That’s a great season, but it still included 46 losses. Having a longer term view helps you weather the temporary setbacks of losses in both sports and finances. In fact, most of the best investors only dream of having a winning percentage like the ‘01 Mariners. 

Establishing a sound plan, putting in a regular routine to review and assess performance, and then executing is critical to having a successful financial plan. When you see the long term result of playing the whole season, it is much easier to weather the day-to-day ups and downs. If you look at the chart below, you can see how using OnTrajectory to track your progress over time can actually help you visualize the long term.

There is no magic formula. All investments carry risk. That’s why you see the disclaimer that “past performance does not determine future returns” on most investment products. Still, with a little paranoia and a healthy dose of optimism, you can make it through the current storm.