Adriaan Pask, CIO at PSG Wealth, looks at research that investigates how optimists – those who tend to hold positive expectations about the future – make better decisions that improve their financial outcomes.

An optimist is defined as someone who tends to be hopeful and confident about the future or the success of something. For investors, an optimistic mindset translates into a willingness to think long term, which positions them well for building and accumulating wealth.

The idea is simple: a pessimist’s negative outlook will lead them to assume that their investments will generally perform badly, and they are therefore unlikely to stick with long-term investments. But someone who is optimistic about the future is more likely to invest in that future.

According to a recent study, which surveyed 143 000 people across different demographics and income levels, optimists save 20% more than other investors – regardless of income status – and are more likely to invest for the long term. Optimists show a greater tendency to invest in retirement vehicles such as RAs and pension funds.

The study also showed that positive people generally have better money habits and are more inclined to do things like budgeting, or enrol for automated savings via debit orders or retirement contributions.

Optimists show resilience in times of market stress

When times are tough, saving and investing can unfortunately be one of the first areas to take a knock as people prioritise expenses. But for investors with a positive outlook, optimism tends to act as a buffer when finances are constrained.

The research shows that a positive outlook fosters resilience in saving habits, even during periods of hardship. Optimistic participants kept saving, stayed committed to their plans, and maintained their automated contributions, reflecting the importance they place on saving.

Optimists view hardship as temporary, whereas pessimists tend to think of bad times as more permanent in nature.

Optimists view market volatility as a temporary hurdle: the assets they invest in or the managers they use will shield them against downturns. There’s no need to panic. Pessimists, however, display a fragility that causes an overly risk-averse reaction to market volatility, which often leads to disinvestment.

This failure to take a long-term view results in not only market-timing mistakes but also financial-discipline mistakes. These investors essentially disrupt their own savings routine, which is potentially destructive from a wealth-generation perspective.

Investors are much better served by continuing to save. Even if market turbulence does occur, it is likely be short-lived and portfolios will recover. But you can only recover if you’re in the market in the first place.

That resilience, therefore, serves optimists very well, and it becomes a positive cycle. The more optimistic you are, the more resilient you are, and the more resilient you are, the more it fosters further optimism and resilience.

Do optimists end up wealthier?

Investment outcomes are largely impacted by behaviour. If two investors invest in the same thing, the way that they interact with their investment is ultimately what’s going to decide whether they are successful or not.

Generally, if you stay invested in equity markets, without worrying too much about volatility, you will see the fruits of your resilience. Accept that equity markets will go through tough patches, and just continue saving as you always do, and you will reap the rewards.

But if market turbulence causes you to react negatively – by pausing contributions or selling your investments – the impact on your wealth can be disastrous. Poor investor behaviour significantly undermines prospective returns.

Reasons to be optimistic in today’s market

Investor optimism in this context is tied to how you are wired as a person, specifically how you deal with adversity and disruption. Some specific areas of the current market provide a good illustration of how different investors may approach things differently.

Take global equities as an example. Despite the debate around US valuations, we believe global equity markets remain quite resilient and that there are pockets of attractive areas. In this context, a negative investor might hold the view that US markets are expensive and therefore take the decision to disinvest until there is a crash. Timing the market like this is extremely difficult to do.

The optimist might say that because the US portion of their portfolio is looking a bit stretched, they will look for other opportunities such as emerging markets, or other developed geographies, such as Europe. The approach is very different.

A positive outlook can not only make you happier, it can also drive healthy money habits and end up making you wealthier!

This post was based on a press release issued on behalf of PSG Wealth.