The Money for Life Letter
Tuesday, 29th April 2014
Melbourne, Australia
By Nick Hubble
The wealth effect’s affect
And what to do about it
The big taboos
The Other Wealth Effect
Central bankers around the world have broken the taboo of printing money one after the other since the global financial crisis. Their aim was to pump the stock market higher to make investors feel richer. This concept was named ‘the wealth effect’.
Did it work? I’m far from sure. The economy in the US and Europe is still barely bumbling along.
But you’re not an economy. You’re you. So let’s explore how wealth affects you as an individual.
How are wealth and happiness related? There are studies showing every possible answer. Wealth makes you happy, or unhappy. Happiness makes you intrinsically wealthy and makes you stop caring about wealth. Some studies say the two are entirely unrelated.
So economists and psychologists are as clueless as they are confident in their conclusions. If you would like to be famous, the easiest way might be to become an academic and ‘discover’ the opposite of whatever the day’s conventional wisdom is on this topic. The latest studies, by the way, showed happiness and wealth are inextricably linked without limit. The richer you get, the happier you’ll be.
What confounds any attempt to study the links between wealth and happiness is that people perceive happiness differently. Some people don’t want to worry about things — they want to be content and not much more. Others want a more emotionally volatile life with all the ups and downs. These types of differences interfere with how economists calculate happiness and even wealth.
For example, there are plenty of people who view wealth as an end, not merely a means. Others become distressed at the responsibility of managing wealth. The difference in how these two groups of people perceive the link between wealth and happiness completely confuses any economist trying to study that link.
Making your personal wealth a matter of interest — like a hobby you take seriously — is perhaps the surest way to building a financially prosperous retirement. That’s not always easy to do. And it’s not for everyone. But if you do have that interest, foster it. Your spouse and friends might call you greedy. But their views are most likely driven by fear of having to deal with their own financial ‘obligations’. If you can turn those obligations into a challenge like a sailing race or a golf handicap, then you’ll get better at managing them and probably wealthier.
The fact that you’re reading this tells me you’ve decided to take an interest in your wealth and take charge. So I should also mention the dangers of linking your happiness to your wealth.
The first part is obvious. If your wealth takes a hit, it can damage your happiness. If this happens, your mental state could end up damaging your wealth even further. So you have to be honest with yourself and prepared. How would a bad result affect you?
Secondly, your relationships can suffer when managing your wealth becomes a large part of your life. Your spouse might not share your enthusiasm, or may disagree with your decisions. Decisions on spending and which lifestyle opportunities to make the most of can be very divisive. This is why lottery winners tend to struggle in their personal relationships. Suddenly being able to do and buy anything brings up differences in people’s priorities. Of course, friendships can also suffer due to differences in wealth.
How to link wealth and happiness
The good thing about how clueless economists are about the effect of wealth on happiness (or the other way around) is that you can decide to control it. I think you should decide for yourself that your money will make you happy and being happy means making more money.
The first step is taking a measured interest, as I mentioned. Your wealth is your responsibility. It’s very easy to sabotage yourself in a way that lets you blame others. ‘It was the financial advisor’s fault,’ probably won’t be good enough for your future self’s happiness.
By ‘measured’ I mean that your happiness cannot be dependent on the amount of wealth you have. I think your enjoyment of managing your own wealth should come from the feeling of independence, pride, and acceptance that any mistakes are your own. Of course, the successes will be too. And your chances of success are higher if you take an interest.
Of course, this isn’t for everyone. If you know that managing your wealth may affect your happiness badly, taking on a different role could be a better option. Closely overseeing a trusted financial advisor’s decisions might help you distance yourself enough without losing the benefits of taking charge.
Setting aside some of your wealth is a great way to settle differences of opinion inside yourself and with your spouse and dependents. Allocate some money you can manage personally as a hobby, some money that can be spent and some money that won’t be touched except under certain (specified) circumstances.
Too much experience?
There’s something else I’d like to discuss. It’s a little taboo, especially for a younger person like me. But it’s a simple fact that your age will impair your ability to make good financial decisions at some point.
Of course, young people tend to be far worse fiscal managers. I’m continually horrified at what my friends get up to with their and the bank’s money. So please don’t get me wrong — I’m not being patronising. In fact, all the studies show the older you are the more capable you are of making responsible financial decisions. That’s why they have wealth in the first place.
But at some point it’s a simple medical truth that your decision making ability becomes slowly impaired. Perhaps think of your grandparents as you grew up. No doubt they made some odd decisions while you tried to help them with their finances.
Eric Johnson, director of the Center for Decision Sciences at Columbia University’s business school, addressed this at a seminar on this topic. He explained that everyone loses ‘fluid intelligence’ as they age — the ability to learn and process information quickly. ‘After 60, it’s harder to make good financial decisions’ because of this loss. Around 70 the measured financial literacy of people declines and investment decisions follow.
Strangely enough, the confidence of people in their financial decisions rises as they age. The mix of confidence and a tendency to react to situations in a fixed way is what makes elderly people the prime target for financial fraud.
Dealing with these changes might merit an entire monthly issue for The Money for Life Letter. But for now, if you notice yourself or your parents struggling with basic financial decisions, you should do three things:
Assist incrementally — having someone invade your personal life is distressing, so think carefully about how much assistance is a good idea.
Consolidate financial affairs — keeping things simple can go a long way to making wealth manageable.
Establish personal relationships — link the important financial service providers in your life to the important people in your life.
Managing the movement of wealth before someone passes away must be one of the most troubling financial decisions anyone can ever make. If you would like to share how of you and your families have dealt with such a scenario just email moneyforlifeletter@portphillippublishing.com.au with your story.
Have a great week!
Nick Hubble
Editor, The Money for Life Letter
Company Name
Sym
Date Tipped
Buy Price
Current Price
Stop Loss
Gain/Loss
Comment
DRP
Cash-out Companies
APA Group
APA
30/10/2012
$4.97
$6.72
$3.48
35%
HOLD
Coca Cola Amatil
CCL
30/10/2012
$13.55
$9.50
$9.50
-30%
CLOSED
tick
Troy Resources
TRY
30/10/2012
$4.30
-
$1.50
-65%
CLOSED
Tatts Group
TTS
30/10/2012
$2.73
$3.03
$1.90
11%
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tick
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Russell Australian Government – Bond ETF
RGB
30/10/2012
$20.92
$20.03
$17.78
-4%
HOLD
tick
iShares UBS Government Inflation Index Fund
ILB
30/10/2012
$106.16
$103.94
$90.00
-2%
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tick
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Vanguard Large Companies Index
VLC
30/01/2013
$53.89
$63.01
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17%
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tick
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$153.35
$134.70
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-12%
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$101.86
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-2%
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Speculative Punts
Warrnambool Cheese and Butter Factory
WCB
20/02/2013
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-
$2.85
61%
CLOSED
tick
iShares MSCI South Korea
IKO
29/08/2013
$63.50
$68.42
$35.00
8%
BUY
Tiger Cubs
iShares MSCI Thailand Investable Market Index Fund
THD
31/07/2013
$76.49
$74.99
$38.25
-2%
BUY
iShares MSCI Malaysia Index Fund
EWM
31/07/2013
$15.36
$15.59
$7.86
1%
BUY
iShares MSCI Philippines Investable Market Index Fund
EPHE
31/07/2013
$36.30
$35.07
$18.15
-3%
BUY
Market Vectors Indonesia Index ETF
IDX
31/07/2013
$27.14
$24.80
$13.57
-9%
BUY
Market Vectors Vietnam ETF
VNM
31/07/2013
$18.27
$20.09
$9.14
10%
HOLD
Hybrid Securities
Seven Group Convertible Preference Shares
SVWPA
17/03/2014
$90.20
$88.95
$38.25
-1%
BUY
Goodman Group PLUS
GMPPA
17/03/2014
$100.80
$100.55
$7.86
0%
BUY