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

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®.


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