Is wealth a monster?
“Wealth is a monster. It takes a month to learn to control it financially. And many years to learn to control it psychologically” – excerpt from The Magus, John Fowles, 1968.
I was reading these lines only a few weeks ago and I paused to reflect how our clients at Maseco are feeling given the recent market turbulence. I was considering how all equity investors are feeling at the end of January after seeing many indexes post over a 10% loss. Are they feeling happy, sad, worried, are they panicking, are they wishing they could have done something in advance? Most of these feelings are entirely normal, if not rational.
Many of us experienced the dot com crisis, the financial crisis, the European sovereign debt crisis and the ‘whatever we call it today’ crisis. Looking back at your life over these last fifteen years is there a positive correlation between how happy you are and the economic events that surround you? For some, that were treating the financial markets as a slot machine, or didn’t have adequate diversification across their portfolio, their emotional balance would have been seriously affected by market gyrations. When we experience market falls it affects one’s belief systems and we naturally start to question the logic. This can make us anxious, worried, and feel a need to control the uncontrollable.
For most I do not think that this is the case. If one has made sensible, smart and rational decisions about the structuring of wealth then the market gyrations should not upset the emotional apple cart.
Everyone is different and a 10% swing in the value of a portfolio will affect everyone differently. Some will sell, some will do nothing and some will buy more – all three investor types will have completely different portfolio returns that will be largely based on their psychological relationship with risk. It is these choices that can affect our retirement, our lifestyle and ultimately our happiness. Generally our psychological relationship with risk is hard wired.
John Fowles reckons we are also hard wired about happiness:
“However in the end I did discover what some rich people never discover – that we all have a certain capacity for happiness and unhappiness. And that the economic hazards of life do not seriously affect it”.