Does money equate to happiness? It all depends on your perspective.
“I’m rebuilding everything. I lost it all when I got sick and that included going through my retirement accounts” shared my friend.
At the age of 34, she was told by heart specialists that nothing was wrong. Five years later, almost dead, she underwent emergency open heart surgery. Seven years after the procedure, she lives with her wife and child, and has an extremely successful real estate career. My friend undeniably earned the best investment return her money could have ever provided.
To say that money isn’t everything is more than a cliché. Studies in the early 1970s demonstrated that a sense of happiness had not increased commensurately with income over the previous half-century. That trend continues as the modern world has arguably made well-being more elusive than ever. In the 1990s, positive psychology attempted to find the key to understanding what makes people flourish. It spawned the so-called happiness literature that seeks new truth by weaving together science and ancient wisdom. How to be happier is now the most popular course at Harvard and Yale.
Business people and entrepreneurs also contemplate some of these age-old questions. For example, Mo Gawdat, a serial entrepreneur and Chief Business Officer at Google X, wrote a book, Solve for Happy4, in which he expressed happiness in the following equation:
HAPPINESS ≥ Your Perception of the EVENTS of your life − Your EXPECTATIONS of how life should behave
How does this relate to investing?
Investors wanting to increase their wealth and well-being should consider Gawdat’s model. You can’t control many events that affect your portfolio, but events themselves are not part of the equation. Fortunately, you have some control over the two variables driving happiness—your perception of the events and your expectations.
Expectations
First, let’s briefly highlight some fundamentals about investment expectations:
1. Stocks have higher expected returns than safer investments
2. All stocks don’t have the same expected return.
Perception
The other, more important half of the equation is your perception of an event.
Consider an event, such as realizing a negative comparative return over ten years, a time frame that some investors consider long term. In the last ten years, for example, value stocks have underperformed growth stocks. Lengthy periods of underperformance are disappointing. Nonetheless, disappointment shouldn’t turn into anger or regret if you know in advance that periods like these will occur and recognize you can’t predict them.
Ancient wisdom teaches acceptance, as resistance often fuels anxiety.
Instead of resisting periods of underperformance, which might cause you to abandon a well-designed investment plan, lean into the outcome. Embrace it by considering that if positive premiums were certain, even over periods of ten years or longer, you shouldn’t expect those premiums to materialize going forward. Why? Because in a well-functioning capital market, competition would drive down expected returns to the levels of other low-risk investments, such as short-term Treasury bills. Risk and return are always related.
Conclusion
Your happiness as an investor depends on how your perception of events stacks up against your expectations. Proper expectations alongside the appropriate perception help you stay disciplined and improve your wealth and well-being.
My friend is now one of the happiest people I know. Perhaps it’s due to the logical cumulative effect of factors outside of her control? She now lives within an ecosystem of people who openly care and appreciate her. Whatever the reasons for her near death experience, having a disciplined investment plan years prior, afforded her the flexibility to save her own life.
Thanksgiving is around the corner; any of us could be my friend. Share with those closest, that you love and appreciate them. I can guarantee an immediate return on happiness.
Notes
1 This post is an adaptation of “The Happiness Equation” a paper written by Brad Steiman, Director, Head of Canadian Financial Advisor Services, Dimensional Fund Advisors in September 2018.
2 In his seminal article, Easterlin (1974) saw that while industrialized countries had experienced phenomenal economic growth over the past 50 years, there had been no corresponding rise in the happiness of their citizens. Easterlin, Richard A. “Does Economic Growth Improve the Human Lot? Some Empirical Evidence,” University of Pennsylvania, 1974.
3 Ben -Shahar, Tal. Happier: Learn the Secrets of Daily Joy and Lasting Fulfillment. “Yale’s Most Popular Class Ever: Happiness,” The New York Times, 26 Jan. 2018 https://www.nytimes.com/2018/01/26/nyregion/at-yale-class-on-happiness-draws-huge-crowd-laurie-santos.html
4 Cliff note (tl;dr) version of the book: If you perceive events as equal to or greater than your expectations, then you’re happy. https://www.amazon.com/Solve-Happy-Engineer-Your-Path/dp/1501157582/ref=sr_1_1?ie=UTF8&qid=1542057684&sr=8-1&keywords=solve+for+happy
Cover Picture
Kal Loftus (https://unsplash.com/@kalvisuals/portfolio)
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