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Personal investing

Why financial optimism matters and how to find it when the world is a mess

Research suggests that people who adopt an optimistic mindset are significantly more likely to experience better financial health and engage in healthier financial habits than people who have a pessimistic outlook. Lise-Mari Crafford, head of ManCo Distribution, discusses why being optimistic about our personal finances matters, and how we can look on the bright side when the world can feel like a mess.

The South African inflation rate hit its highest peak since 2009 this year, accelerating to 7.6% in August. In the US, inflation reached a four-decade high of 9.1% in July. As households around the world grapple with rising food and fuel costs, central banks are faced with the difficult task of hiking interest rates in a bid to rein in inflation. On top of this, the International Monetary Fund (IMF) recently warned that the world’s economies could be facing a recession, driven by the dual problems of high inflation and high interest rates. South Africa, too, is at risk of a recession, given the significant financial pressure on the economy.

When looking at the current state of affairs, is it possible to be optimistic about our financial future? The answer, according to my colleague Sandy McGregor, portfolio manager, is yes. Reflecting on the inflationary surge experienced during the 1970s, when he started his career, he reminds us that periods of strife can present new opportunities for long-term investors and a degree of optimism is required to reap the rewards.

How optimistic are we?

Interestingly, South Africans are also more upbeat than many would imagine. According to a recent local survey, more than 70% of the working households that participated believed the financial outlook over the next six months would improve. This was the highest level of optimism recorded since the start of the survey in 2009.

It also helps to know we are not alone. According to a study by TransUnion, despite worries over high inflation and rental costs, as well as the threat of a recession, more than 50% of Americans remain optimistic about their finances.

We all know the old adage that misery loves company, but the opposite is also true, in that if we are surrounded by people who see the world more favourably, it may help us to see our own experience from a different, more positive perspective.

Why being optimistic about the financial future matters

According to a study published by the Harvard Business Review, optimists are significantly more likely to experience better financial health than pessimists and engage in healthier habits with their money. By way of example, nearly two-thirds of optimists that were surveyed had started an emergency fund while less than half of pessimists have.

What’s more, optimism helps people stick to their plans because they are committed to their vision of the future, even in the face of adversity. Having a deeper sense of optimism can help us achieve our investment goals.

How to cultivate a sense of financial optimism

When thinking about optimism, it is important to understand its link to control. For example, can you control whether a recession happens? No. Can you control and improve your state of mind? Yes. It is a good idea to look at what actions you can take that are within your control to look after your own financial security; this can help to make you feel more optimistic about reaching your goals.

Below are three tips on how to be more optimistic when it comes to your financial outlook.  

1. Bring awareness to your own behaviour

When there is a threat to economic stability, making impulsive changes to investment portfolios is common. Taking panic-driven action can derail you from reaching your long-term financial goals. The more aware you are of what your intentions are and the more firmly you keep your financial vision in mind, the more likely you are to tune out the noise and only make changes if your goals change.

2. Revisit your goals

It is likely that difficult periods, like high inflation or the threat of recession, will bring into sharp focus your goals. When would you like to retire? When do you need access to the money? If you need to access your money over the short term, you should consider lower-risk investments like a money market fund. If your goals are beyond five years out, then you can afford to take on more risk in pursuit of a higher return. The best thing to do is avoid the headlines or making rash decisions that will put your long-term financial happiness at risk. An independent financial adviser can help you choose appropriate investments for your various financial goals and offer an informed view.

3. Think of setbacks as moments, not as a permanent change

Changing your mindset to be more optimistic requires you to think of financial blips as temporary. Of course, this can be difficult if you experience a financial blow like losing your job. However, the challenge will feel more manageable if you don’t see it as a permanent change.

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