“Both optimists and pessimists contribute to our society. The optimist invents the airplane and the pessimist the parachute.” ~ Gil Stern
I read an interesting article recently that argued that our ability to make sound, informed, good financial decisions can depend on whether as a person we are an optimist or a pessimist – it appears it really does matter whether we consider our account half empty or half full.
And I suppose this point of view resonated with me because when I meet people and we talk about their finances, they really are one or the other type of individual.
For example, I met a person last week who financially was actually in a good place – she had money to invest but because she didn’t trust the banks (and I mean every bank) and feared they all would eventually “go bust” she kept her money at home. “It’s safer there,” she told me.
But surely it is not safe at home at all, I argued. She was having none of it, she had a very negative view and there was nothing I or anybody else could say to convince her otherwise.
The optimists on the other hand are people who are not afraid to take a risk and they only focus and see the best possible outcome which of course has its own dangers.
I meet people all the time who take risks with their savings, with their pension and so on and if their accounts increase in value it is not down to them knowing anything more than anyone else. No, I believe if they go it alone without seeking expert advice, they are just lucky, nothing else.
I have encountered my fair share of “optimists” who think they are smarter, faster and shrewder than everyone else – maybe high roller is a better description of this type of person.
And if I have learned anything in the past 25 years working in personal finance, it is knowing that everyone has their own set of attitudes, values, fears and behaviours that when put together make them become whatever money-type personality they are today, whether that is being optimistic about money or pessimistic.
But when it comes to investing, buying a property or budgeting for example it is important to try to take the traits of both the pessimistic and optimistic into account because finding a happy medium is the ideal solution.
Take investing for example, the pessimist will refer to the recent stock market collapse that began in 2008 and how this will happen again and taking any risk in the stock market is the wrong thing to do and fund managers are not to be trusted (they may have a point here).
Whereas the optimist will point to the fact that the Irish Index of Irish Shares has increased by 57% in the last three years and this is set to continue and that is where you should be putting all of your money.
Two very different points of view and maybe the happy medium is what a professor in Carleton University in the USA, Tim Pychl, refers to as a “defensive pessimist”.
He says the ideal investor is someone who thinks they might fail and lose money but they turn their natural, instinctive pessimism to their advantage by making sure they will absolutely not fail.
It may not mean investing in the stock market but they will find another option to ensure that they make money in a manner that suits them.
I am not so sure myself. You will know from reading my articles that I am conservative when it comes to investing – my tolerance level is zero risk - but there are ways of investing in accounts that have some exposure to the stock market but where your capital is guaranteed.
So, when the stock market increases you benefit and if it tanks you are protected; that for me is a happy medium for the optimist/pessimist trait. The key of course is knowing what these accounts are.
It isn’t that long ago when buying a property, no buying multiple properties was viewed by most people as an easy rite of passage into the world of wealth creation and financial security.
But obviously having too much optimism about how house values were only going one way (up) has come back to haunt people.
In the book “Investor Behaviour: The Psychology of Financial Planning & Investing”, the author, Victor Ricciardi, found from his research that “people had in their mind that prices are always going up – they just didn’t see an end coming”.
The pessimist, on the other hand, does see the end coming – they only focus on the downside and risks to owning property, for example the maintenance of the property, property taxes, interest payments to the bank, prices falling etc.
They fail however to see the long term benefits (and I think there are far more to owning a property than to renting) of buying a property and the security that brings with it, the wealth some properties can generate.
The happy medium here is to remember just because you can, doesn’t mean you should.
Buying a property just because everyone else was doing it or because your parents wanted you to, or now when house prices appear to be hitting rock bottom, is not enough reason to justify what in all likelihood will be the biggest purchase of your life.
Ask yourself those tough questions like what if you lose your job or if you wanted to move, before you do anything and this is not being overly pessimistic, it is being realistic and there is a big difference between the two.
It will just help you make better, informed, logical decisions and help you manage the potential risks before you decide to ever buy.
And finally when it comes to, budgeting, your money on a monthly basis, there is no happy medium in my opinion because I am the eternal optimist in this regard.
Why? Because I know budgeting is your golden ticket to financial security.
I have been working with a company who is a client of mine for the past number of months who use our website My|Money and within the site is a monthly spending planner and it is incredibly powerful because it does all the work for you.
The key thing here, however, is that those who use it have seen a dramatic improvement in their monthly finances.
Even those who started out sceptical or who tried before and failed are huge converts to budgeting.
You just have to make it simple, easy to use and focus on the small wins to start off with and everything else will just fall into place.