When we began advising clients on money matters many years ago, most financial advisors believed the path to riches and happiness was simple: (1) spend less than you earn and invest the difference, (2) pick superior performing stocks for your portfolio and (3) time your stock purchases and sales so that you sell them before they go down in value and buy them before they go up in value. Unfortunately for most investors, that belief remains the prevailing one among advisors today.
Truth is, the path to riches and happiness is a bit more complicated than that.
First, the link between happiness and wealth is a complex one. In a study published in 2010, Nobel Prize winning researcher Daniel Kahneman and Angus Deaton defined happiness in two ways: (1) life evaluation/life satisfaction – the thoughts people have about their life when they think about it, and (2) emotional well-being or daily happiness – the emotional quality of an individual’s everyday experience (i.e., the frequency and intensity of experiences of joy, stress, sadness, anger and affection). The question Kahneman and Deaton posed in their study was this: does money buy either or both types of happiness? They polled more than 1,000 Americans for the answer and found that increased income did raise life evaluation and life satisfaction. However, beyond $75,000 per year, it did not increase one’s sense of well-being or daily happiness – what most of us regard as the true measure of happiness. After $75,000, more was not better – more was just more.
Moreover, there is no statistical evidence to support the belief that an advisor can consistently beat the market through stock selection – an overwhelming percentage of advisors fail to hit their performance benchmark each year.
Equally important, it’s virtually impossible to successfully time the purchase and sale of your investments to avoid losses and maximize gains, and the reason is clear – you have to be right twice – once when you sell and again when you buy back in. As one hedge fund manager put it for us, this is why the market timing hall of fame is an empty room.
So the notion that you will be happier if you earn more and invest your money in the traditional way is largely a myth. That said, we strongly believe there is a path to more money and an increased sense of well-being, and it’s there for all of us if we adopt the proper approach to acquiring and utilizing our wealth.
