Wealth vs. Returns: Which Is Naughty, Which Is Nice?

Money

If given the choice, should investors focus on chasing returns or building wealth? In a vacuum, the answer is simple. Be prudent! Don’t over-expose yourself and chase your winners off a cliff. Stick to your plan. Easy enough, right? No matter how pious you are about following your investment strategy, your emotions will complicate matters. You can set up a plan for a 20% market correction, but staring in the face of an actual correction takes resolve. But it doesn’t take a bear market for your feelings about money to influence your decisions. Your emotions may sabotage your wealth-building plan even in the absence of a market crisis.

More presents don’t always mean happier investors

Let’s consider Santa and Frosty, two hypothetical, financially independent investors. They’ve prudently socked away $1 million each, and both withdraw $80,000 a year to supplement their cash flow. The only difference between the two will be their market returns. Frosty’s market return percentages are the same as Santa’s, but in reverse order.

Take a look at their fortunes below, and ask yourself: which one is happy?

It’s obvious why Frosty is unhappy – he’s taken an absolute beating in the market. In 10 years, more than half of his wealth has melted away. (Frosty has also, in all likelihood, sacked his financial advisor.) But what about Santa? After a decade, he has more money than when he started! What’s not to like?

The sad truth is Santa doesn’t like his finances, either. Look at his performance in year 5 – almost $2.1 million dollars! The figure is bolded in the chart for emphasis, but I guarantee it’s bolded in Santa’s mind, too. What might you fixate on in his situation? The fact that you’re 10 years in with more money than you started? Or the brief, shining moment when you had $2 million in assets?

Santa is thinking about all the doors in his life that $2 million would have opened, all the possibilities he had before five years of mixed returns brought him down to $1.3 million. Santa wants to return to his high water mark. Instead of focusing on his net positive wealth, he’ll face temptation to load his sleigh with high returns.

And doesn’t this monster bull market look like one in which to chase returns? Volatility is nonexistent. It has shrugged off all the usual signs of imminent correction and seems largely immune to natural disasters and geopolitical strife. Shouldn’t you listen to your FOMO and go all-in to build your wealth?

Yule regret chasing returns

In this environment, it may be prudent to consider reducing your market exposure in the interest of preserving capital. While things look great now, we don’t know when the other shoe will drop. It could be imminent, or it could be another 2 or 3 years.

That’s not to say we need to stuff mattresses with cash and gold ingots. We should still participate in the market! Don’t think in terms of the return you’re missing by reducing your market exposure. When you invest more cautiously this late into a bull market cycle, you’re preserving the progress you’ve made to build your wealth.

When you feel emotional turmoil from difficult financial decisions, it helps to get a second opinion and reconnect yourself with the reason you’re investing in the first place. Are you trying to make a mint by timing market forces beyond your ability to control? Or are you trying to make sure you’re able to lead the life you want?

Give yourself credit – financial discipline is difficult. It pays to understand the way your emotions may work under the surface to hinder your progress. A good place to start might be the free Money Mind® tool, which gauges your psychological relationship to money. That insight will help you stay on track to lead your One Best Financial Life®.


Add Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Pat Brown
10 Things You Didn’t Know About Impossible Foods CEO Pat Brown
Dr. Deborah Birx
10 Things You Didn’t Know About Deborah Birx
Shakespeare
20 Shakespeare Quotes that Apply to Business
Bill de Blasio
10 Things You Didn’t Know About Bill de Blasio
American Airlines
Is American Airlines Stock A Solid Long Term Investment?
stocks
Is Fabrinet a Solid Long Term Investment?
Stocks
Is Antero Resources Stock a Solid Long Term Investment?
Chase
How to Prequalify For Chase Credit Cards
Riviera Palm Springs
The 20 Best Hotels in Palm Springs
Unicoi State Park
The 20 Best Things to Do in Helen, GA, for First Timers
St. Mark’s National Wildlife Refuge
20 Best Things to Do in Tallahassee for First Timers
Glenbow Museum
20 Things to Do in Calgary for First-Timers
Volvo's Polestar
Volvo’s Polestar May Be the Four-Door Electric Car of the Future
2021 Genesis GV80
10 Things You Didn’t Know About the 2021 Genesis GV80
2021 Hyundai Elantra 2
10 Things You Didn’t Know About the 2021 Hyundai Elantra
2020 Audi Q5 Hybrid
The 10 Most Efficient Small Hybrid SUVs
10 Things You Didn’t Know about Moller Watches
The Iconic No. 1 by TID
The 20 Best Minimalist Watches for Men
Brew Watches
10 Things You Did Not Know About Brew Watches
Phoibos Ocean Master PY005B 1000M Automatic Diver Watch
The 10 Best Phoibos Watches Money Can Buy
Jake Tapper
How Jake Tapper Achieved a Net Worth of $10 Million
Jared Padalecki
How Jared Padalecki Achieved A Net Worth Of $12 Million
Tati Westbrook
How Tati Westbrook Achieved A Net Worth Of $6 Million
Gwyneth Paltrow
How Gwyneth Paltrow Achieved a Net Worth of $100 Million