The title of this post comes from a quote in a recent podcast with Dax Shepard and Sam Harris that I’ll attempt to expand upon for all our financial well-beings. Sam was referencing that a life mission should be geared more towards tranquility and contentment versus the pursuit of happiness or the avoidance of sadness. The latter two come from the same place of satisfying our cravings and desires. Tranquility, on the other hand, watches happiness and sadness come and go without much celebration or melancholy as it recognizes the impermanence of each. While tranquility doesn’t exactly make for great TV, here’s what it means for your financial health. Consider the following two scenarios when pursuing happiness, avoiding sadness, or other forms of chasing cravings/desires.
- Our Craving For More Money
- In the 1990s, General Electric employees were some of the happiest people on Earth, at least in relationship to money. Many were paid handsomely with company stock, and that stock soared. The company was a global leader and imagining GE’s speed bumps, let alone identity crises, was not within our realm of understanding. Many of the company’s employees stockpiled their equity in GE and banked their retirements on the stock’s value. There have been plenty of bruises for the GE stock, but none like the recent. A tranquil ride to retirement along the ‘orange line’ (chart below) would have left today’s GE retiree with approximately 60% more savings (in comparison to someone who diversified very little).
Chart is for illustrative purposes only.
I get the struggle, though. Because, imagine yourself throughout the ‘90s and early 2000s with a diversified portfolio having coffee talk with fellow colleagues at GE who sat on a mountain of GE stock. Mentally reconciling those DECADES (as indicated in the chart above) where your portfolio value would have been significantly higher without diversification is a daunting task. Funny thing about euphoria and celebrating more money; we’re usually left with a craving for more. You don’t have to be a GE employee or a large stakeholder to appreciate this chart. Simply acknowledge the concept that craving more over several decades doesn’t necessarily translate to a higher net worth.
- Our Desire To Chase Losses
- Whether seeking revenge on someone, looking for your fair share, or chasing investment returns – the feeling is about as useless as “solving an Algebra equation by chewing bubblegum”, a quote credited to Kurt Vonnegut’s MIT commencement speech. JP Morgan Asset Management provides good insight into what chasing your losses might look like in numbers (chart below). Pretend you have sudden notions over a 20-year period to get out of the market when stocks aren’t cooperating (as most humans do). And, also, to time your return to the market appropriately. Also, consider that the best days in the market have historically followed very soon thereafter the worst days. In a 20-year period, missing the best 10 days alone means you have less than half the money (this doesn’t even include dividends being reinvested). Tranquility urges us to watch the unpleasant feeling of market downturns come and go – while seeking happiness or avoiding sadness encourages action, often to our demise.
|January 4, 1999 to December 31, 2018||Annualized Performance|
|Fully invested (S&P 500 index)||5.62%|
|Missed 10 best days||2.01%|
|Missed 20 best days||-0.33%|
|Missed 30 best days||-2.35%|
|Missed 40 best days||-4.20%|
|Missed 50 best days||-5.87%|
|Missed 60 best days||-7.41%|
All this is to say that tranquility represents a state of mind that observes more than it attempts to correct. This is not to say that we must be piles of mud without emotion and that a basketball player shouldn’t rush up the court to make his/her buzzer beater attempt to win the game. Certain scenarios call for urgency. This is to say that watching the experience first is far better than leading with celebration or sulking.
We might come to realize that our initial interpretation is not even real. In other words, “My 401k lost money last year” is a lot different than, “My account value declined last year.” You lose money (and gain) only when you sell something, not when your account statement has red numbers on it. A decline in account value is nothing more than falling off your bike. You didn’t lose your bike. Falling off hurts, but it’s not permanent.
True, tranquility isn’t exactly cozy with the sensationalism that’s present in our world of unlimited entertainment. You don’t need to be a high priest or a Tibetan monk, though, to practice the concept in your financial well-being. Rebrand tranquility so that it works for you. Whatever the financial threat: the craving for more, the fear of a market decline, the exuberance of a big raise, the ring of the gong after making a huge sale – observe the experience first and take inventory of what this really means for you. “Decades-later-you” will thank you.
Stay calm. Stay invested.
Thanks for reading,
The case study on the first page is for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risks, including the possibility of losing one’s entire investment. This is not a recommendation to purchase or sell stocks of the companies pictured/mentioned.