In the United States we arguably live in one of the most peaceful and prosperous times in our county’s history. Our husbands and brothers are not being drafted into war. Most of us worry more about our weight than we do where our next meal will come from; and we live in comfortable homes with multiple cars, computers and other material things.
So why are so many of us unhappy? It seems it’s not what happens to us or what we have that matters, but how it all measures up against what we expect.
In his book, Solve for Happy: Engineer your Path to Joy, former Chief Business Officer of Google X, Mo Gawdat, explores what it means to be happy and how we can follow practices to achieve it. He even developed a formula to quantify it:
Happiness ≥ Your Perception of the Events of your life – Your Expectations of how life should behave.
How many times have you built something up in your mind, only to be disappointed when it didn’t live up to your expectations? We once surprised our kids with a trip to Disney World, visualizing magic moments with characters and happy times together on rides, only to find they were both more interested in the hotel pool. Not exactly what mom and dad envisioned when we bought all those Magic Tickets.
On the other hand, there have been times when we traveled with little or no expectations and were surprised by a terrific meal or beautiful scenery that made me happier than I could describe.
The formula can be applied to our lives as investors as well. We expect – and rely on – having a positive investment experience over our lifetime in order to buy a home, pay for college, and retire rather than working to support ourselves until our health fails. Our expectations are built on some key assumptions that have been tested over time:
Stocks have higher expected returns than safer investments like Treasury bills and CDs. There’s a reason you make more money owning shares in companies than you do lending money to a bank or the U.S. government. Companies can fail, or they can go long periods of time when their stock price doesn’t budge. Over the long term, diversified stock portfolios are rewarded for taking that risk with higher returns.
All stocks don’t have the same expected return. Some stocks have higher expected returns based on the greater risk you’re taking. Small companies may grow to become the next Apple computer, or they may cease to be, like Compaq. Companies headquartered in emerging economies like China or India have the potential to grow quickly or succumb to government changes and other unforeseen risks. Investors are rewarded, but it’s not a smooth ride.
Expected premiums are positive but not guaranteed. When you purchase a CD, you receive a guaranteed rate of return for a specific time – but it’s not much. We expect stocks to outperform Treasury bills, small company stocks to outperform larger and more established ones, undervalued companies to outperform growth stocks, and profitable companies to outperform low profitability ones, but there can be long periods of time when those expectations aren’t met:
Which brings us to perception. If our expectations aren’t being met, we may perceive that we are in a different place and time when the rules no longer apply, and we may be tempted to abandon our investment plan.
This happened during the early 2000’s when large technology companies traded at higher and higher prices based on expectations of their continued growth, regardless of their current profitability, and many people were tempted to sell off their diversified portfolios in favor of a basket of technology stocks. In 2006 investors were tempted to pour their savings into real estate and real estate derived investments, and during the Great Recession the term the Lost Decade was borrowed from Japanese investors and used to describe U.S. investment returns in the S&P 500.
Currently, small companies are underperforming large companies around the globe, and value stocks have underperformed growth companies as well. Understandably, this can lead to disappointment, if not unhappiness.
If I was diagnosed with a disease, and a physician approached me with a cure that would work even 57% or more of the time, I would take those odds. Fortunately, TAAG’s investment discipline isn’t based on one-year expectations, and neither are the financial plans we build for our clients. The years of underperformance are factored in, as are the things we can control, like long-term spending and other decisions.
Our perception of what is happening in our lives and our finances vs. the way we think things should be happening is a major factor to our happiness. Understanding – and accepting – there will be times when things won’t go the way we expect allows us to grow our wealth and sleep peacefully at night, no matter what happens in the outside world.