Is pessimism the best worldview for an investor?

The intellectual combat between optimists and pessimists is longstanding. Optimists argue that they are healthier, happier and have more successful relationships, while pessimists insist they have a more realistic world view and are generally better prepared for the worst. Of the two, which is the more beneficial mindset when it comes to investing?

Pessimists have a number of obvious advantages as investors. Like the ant in Aesop’s fable, The Ant and the Grasshopper, they are likely to be more inclined to save in the first place. A pessimist is likely to see more value in putting aside resources for tough times because – in their view – these are more likely to happen. Optimists are like the grasshopper, whose naturally sunny perspective leads them to believe everything will be fine. And if everything is fine, why save for a moment when they lose their job or the roof falls in?

This inclination to save is a distinct advantage. A pessimist is likely to save more and earlier, which will enable them to benefit from the long-term effect of compounding. Someone who begins investing in their early 20s will be in a far better financial position at retirement than someone who does not get around to it until their 40s or 50s. An individual setting aside €100 a month for 15 years, monthly compounding at 5% per year, would enjoy a total of around €27,000, rising to €83,000 over 30 years.

Pessimists may also exercise caution in the way they invest, thus avoiding significant declines in the value of their investments.

Avoiding damaging losses

Pessimists may also exercise caution in the way they invest, thus avoiding significant declines in the value of their investments. While investors should not be deflected from their long-term strategies by short-term volatility, significant losses can have an impact.

The greater the amount lost, the more an investment needs to rise in value to recover its previous level. While a 10% loss in a particular year needs an 11% gain to break even, a 30% loss requires a rebound of 43%. In other words, avoiding big losses is likely to improve long-term returns. Slow and steady tends to beat exciting but volatile.

Similarly, pessimists are unlikely to be seduced by faddish investment ideas. They are less likely to be seduced by bitcoin, ethereum or other crypto-currencies, despite the enthusiasm of advocates and growing acceptance by governments such as the US administration and some financial institutions.

Someone with a less upbeat outlook is also more likely to cut their losses. Optimists often believe they are right even in the face of overwhelming evidence to the contrary. Pessimists (or, as they would say, realists) recognise that they can make mistakes. This is a valuable lesson when investing. Accepting that an investment has gone wrong and that the facts have changed can enable the pessimist to exit before losses become even greater.

Understanding irrational exuberance

‘Anchoring’ – the conviction that the price of an investment won’t deviate significantly from its historic price – is a well-recognised phenomenon in financial markets. Pessimists may be less persuaded by market sentiment. More than optimists, they are likely to recognise that stock markets can be buffeted by short-term considerations and that investors will not always act rationally. That may enable them to tune out market noise and focus on longer-term prospects, a significant advantage when building wealth.

However, there is danger in being ’recklessly cautious’. Too many people keep too much of their long-term savings in cash. In the UK, for example, around three-quarters of tax-free savings investments go into cash.

With interest rates low, cash represents a poor investment; long-term wealth held in savings accounts is unlikely to grow faster than inflation, reducing the real value of ’individuals’ assets over time – a consideration that was suddenly brought home to investors when inflation surged in many countries between 2021 and 2023.

Cash has a place in portfolios, for short-term capital needs or to provide an emergency reserve, but over the long term, stock markets have beaten almost all other asset classes, despite their occasional periods of weakness. As of May 2025, the annual return of the broad-based US S&P 500 index was 10.46% over the previous 100 years, assuming reinvestment of dividends, which accounted for about 40% of the total gain, and 7.28% adjusted for inflation.

While pessimists might well have avoided some of the gut-wrenching losses during the 2007-09 global financial crisis, they probably would also have missed out on the rapide recovery in its aftermath.

Missing the growth train

A pessimist may be more inclined to sell up at the first sign of market difficulties. As markets wobble, they may assume that it is a sign of something more serious. The problem is, as the late American Nobel Prize-winning economist Paul Samuelson once said: “The stock market has forecast nine of the last five recessions.” While pessimists might well have avoided some of the gut-wrenching losses during the 2007-09 global financial crisis, they probably would also have missed out on the rapid recovery in its aftermath.

As a rule, waiting until there is a noticeable improvement in the market environment before reinvesting has proved a poor strategy. Research by US index fund specialist Vanguard has found that while a hypothetical $100,000 portfolio tracking the S&P 500 Index starting in 1988 would have increased to $4.9 million at the end of 2024, growth would have more than halved to $2.3 million if the portfolio had been out of the market for the 10 best-performing days, down 72% to $1.4 million if it had missed the best 20 days, and 82% less at $900,000 if it had skipped the best 30. Given that most of these days happen just after a market correction, investors generally do better to stay invested.

This conclusion is supported by the Quantitative Analysis of Investor Behavior, an annual study by US investment research group Dalbar, which reported in 2025 that investors had lost an average of 8.48% a year over the last 25 years as a result of buying and selling at the wrong time. The psychologically understandable tendency to sell up when markets are tough and waiting until the environment looks better before reinvesting has mostly served investors very poorly.

The wood and the trees

In addition, pessimists focus on the bad investments in their portfolio and are liable to miss the wood for the trees. For example, in recent years many investors have been concerned about the gradual decline of economic growth in China. For many companies this has little or no impact on the fortunes of their business, but their shares have been pushed lower by wider gloom among investors. This can create opportunities for investors who are capable of focusing on hard data and ignoring market ’noise’.

Both optimists and pessimists need to work against their natural inclination to succeed as investors. Stock markets tend to rise over time, so optimists are generally rewarded for sticking with more volatile investments. However, they may be hurt by throwing money at fashionable companies about which expectations can overtake reality. Pessimists may be so cautious that their investments do not benefit from stronger growth trends.

Navigating between the fear of missing out on opportunities and the satisfaction of side-stepping severe market slumps is a complex exercise. On a daily basis, the likelihood of equity markets delivering a positive return is a coin flip, but the further you extend the time horizon, the more likely the prospect of overall growth. Thinking long term is a prerequisite for any stock market investment.

Being pessimistic or optimistic, or seeing the glass as half-full or half-empty, is meaningless – the glass will always contain half water and half air. What matters is keeping a realistic perspective while avoiding stubbornness and ’reluctance to confront reality. A natural scepticism about flavour-of-the-month investments, solid risk management and an inclination to save for a rainy day all help to build long-term wealth. Investors just need to be careful not to let their caution blind them to sound growth opportunities.

“Dear Optimist and Pessimist, while you were busy debating over whether the glass was half-full or half-empty, I drank it.” Signed the Opportunist