5 Money Rules for Optimists

(MoneyWatch) 

This article is part of a package on optimists and pessimists. To read the other article, on 5 Money Rules for Pessimists, click here.

Science has confirmed what Bing Crosby figured out long ago: Accentuate the positive and you'll live longer, remain healthier, and, obviously, be a lot more fun at parties. But research also suggests you might be wealthier, too, if you can eliminate the negative: One study followed first-year law students through their career and found that, 10 years later, those who were more optimistic by nature when they started law school made about $32,000 more for each point higher on the 1-5 optimism scale. "Something about optimists makes them better employees," says study author Suzanne Segerstrom, a psychology professor at the University of Kentucky. "Perhaps they're more persistent in solving problems."

But there’s a fine line between problem solver and Pollyanna. The developers planting condos in South Beach a few years back were very optimistic, and that didn’t work out so well. Here’s how you can avoid the common pitfalls of the happy-go-lucky approach to finance.

1. Avoid Fads and Too-Good-to-Be-True Scenarios

Studies on optimists and gambling have found that optimists are more likely to fall victim to the “near miss” syndrome, Segerstrom says. In other words, because you were just one lucky seven away from a jackpot, you’re more likely to pull the lever again. But that’s a fallacy: The fact that your last stock pick zoomed higher before crashing doesn’t mean your next one will pay off. Optimists are also more at risk for getting caught up in get-rich-quick schemes. “Be careful of attaching to every fad,” says Moshe Milevsky, finance professor at York University. When researching an investment, carefully consider the worst-case scenario as well as the best case. Investors who jumped into industry leading driller Transocean (RIG) in the midst of the financial meltdown doubled their money in 15 months. What could go wrong? Two words: Deepwater Horizon.

2. Start Saving — Now

Because optimists often assume they will be wealthier in the future, they sometimes wait longer to save, says Dan Ariely, a professor of psychology and behavioral economics at Duke University and author of The Upside of Irrationality.

“Optimists are always shocked when I tell them that they haven’t saved enough for retirement,” says Colorado Springs financial planner and CBS MoneyWatch blogger Allan Roth. Optimists often take the view that they’re in it for the long haul — which is true. But they fail to realize that the long haul needs to start now.

3. Be Wary of ‘But It Has to Go Up’ Thinking

In fact, investments don’t have to go up. Real estate is the most recent example, and not surprisingly, optimists tend to invest more heavily in real estate, Roth says. “Optimists need to be careful of putting too many eggs in one basket or having too high of hopes for one thing,” he says.

The history of finance is filled with “can’t miss” investments that destroyed portfolios. Instead of betting a big share of your wealth on one particular stock, sector or real estate investment, try a more passive investment strategy, such as index funds, which provide broad market exposure at low expense.

4. Take a Lesson from Penny Pinchers

“Pessimists get pleasure out of the idea of a good deal, whereas I think optimists get more pleasure from things themselves,” Roth says. An optimist is more likely to assign a stigma to “being cheap,” Roth says, but should re-frame the idea of bargain hunting: “You save a penny, you get the whole penny. You earn a penny, the government takes part of it,” Roth says. An optimist needs to remember that the search for a good deal can be as much fun as the thing itself.

5. Don’t (Always) Trust the Moment

Those giddy moments of excited optimism, like right after your boss tells you you’re getting a raise, or when your daughter brings home straight A’s and you are just certain she’ll get a college scholarship, aren’t the time to hit the “send transaction” button. “It’s really important to recognize your own cycles of optimism and pessimism,” Milevsky says. Decide on the important stuff when you are feeling neutral.

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• A Retirement Plan for the Overly Optimistic
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