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It’s wild to realize that roughly two years ago, the world was in a COVID-induced panic. The U.S. market experienced its largest decline since the 2008/2009 era and we were all uncertain of what would follow.READ THE ARTICLE
A shocking spike: During this time, author Nick Maggiulli conducted a Twitter poll to gauge investors’ thoughts on how long they thought it would take the market to recover and reach an all-time high. The average answer was one-to-two years, while the median answer was two-to-three years. Interestingly enough, five months after March 23, 2020, the market reached a new all-time high, which meant even the most optimistic investors were thinking too pessimistically.
This five-month turnaround resulted in a shocking 64 percent return (based on an annual basis), and the market continued trending upward even into August 2020. Moral of the story? As Magguilli states, “...upside surprises are often overlooked by investors”. We naturally hate losses more than we love gains, therefore we tend to spend more time thinking about those downside surprises, such as a market crash.
Glass half-full: In reality, upside surprises occur more than we might realize, and this is due to what Magguilli refers to as “geometric growth”, versus our default way of viewing expansion, which is “linear growth”. We are not always intuitively aware of the power that comes along with the compounding effect, but by shifting your default way of thinking, you might find that optimism often wins.
Take it with a grain of salt: We often overestimate the downside risk and should approach everything in life and finance through the lens of optimism. However, I think this can be an extremely slippery slope that requires you to check yourself from time to time as well.