Reflect Pause Focus

Jonathan Clements

WANT TO GET MORE out of your money? Whether you’re spending or investing, try this three-pronged strategy:

1. Reflect

There’s ample evidence that most of us aren’t good at investing or figuring out what will make us happy. Looking to improve? Spend a little time pondering the past.

When during your life were you happiest—and what were you doing? This may help you figure out whether you should change careers and what you might do with your spare time or with your retirement. Also think about the money you’ve spent in recent years. Which expenditures delivered plenty of happiness—and which do you recall with a shrug of the shoulders and maybe even a touch of regret?

Research suggests that spending on experiences delivers more happiness than spending on possessions. One reason: We tend to forget the incidental annoyances of vacations, dinner parties and other experiences, and instead recall the overall good time. By contrast, it’s hard to forget the annoyances that accompany possessions, because they stick around and we have to watch them deteriorate.

Recalling past investments is a little more perilous because our recollection may be sanitized, as we remember our successes and conveniently forget our mistakes. In fact, we may not simply forget our mistakes, but recall doing the exact opposite.

We might have two contradictory thoughts. One says, “I believe I’m smart about money.” The other says, “I sold stocks at the March 2009 market bottom.” To ease our psychological distress, we might conveniently forget our panic selling—and perhaps even decide that we were buyers of stocks in early 2009.

A possible cure: Dive into the filing cabinet and pull out your old account statements. That could be a sobering reminder of all the bum investments you’ve bought over the years—and all the ill-timed purchases and sales you have made.

2. Pause

I have become increasingly convinced that there’s great value in pausing between an initial thought and acting upon it. There are two reasons.

First, it gives us a cooling-off period, during which we can ponder whether we have settled on the right course of action. We’ve all had snap reactions—for example, to an email from a colleague or family member—that we later regret and which, with a few hours delay, we would have handled differently.

The same holds true for spending and investing decisions. We fall in love with an expensive pair of shoes or a new electronic toy, make the impulse purchase and later wonder whether it was money well spent. The market surges or sinks, we make a change to our portfolio and later wish we hadn’t been so hasty.

Moving slowly doesn’t just help us avoid mistakes. It can also boost happiness. That brings us to the second reason to pause. It turns out that delaying spending, whether on experiences or possessions, can bring with it a pleasurable period of anticipation. The implication: If you plan to buy a new car or take a special vacation, start thinking about it far in advance, so you have a long time to savor the eventual prize. You may even discover the months of anticipation prove more pleasurable than the car or vacation itself.

3. Focus

When one of my favorite sports teams loses, I don’t bother to read the account in the newspaper. Why upset myself further? But when they win, I go hunting for the newspaper recap—even if I had watched the game. In terms of our happiness, what matters is what we focus on.

For instance, research suggests that high-income earners don’t enjoy their daily lives any more than the rest of us and yet, when surveyed, they’re more likely to say they are happy. Why? When asked about their level of happiness, those with high incomes ponder their fat paychecks—and that prompts them to say they’re happy.

This mindset creates a conundrum, even for those with plenty: Unless you’re the world’s richest individual, there will always be somebody who has more money than you. Don’t want to feel relatively deprived? Don’t put yourself in a position where you feel poor. That means avoiding high-end stores and restaurants that you can barely afford, and resisting the temptation to move to a town where others are much wealthier.

Even as you avoid thinking about those who have more, you should spend time considering your own good fortune. Remember the expensive kitchen renovation you undertook two years ago—and which today you barely notice? Spend some time admiring your fine kitchen and you’ll squeeze a little more happiness out of the dollars spent.

This notion of focus can also help with investing. If an investment is volatile and hence likely to fall hard during declining markets, experts will often describe it as risky. But this risk is much reduced if we don’t need to sell during the market decline—and the sense of risk is diminished even further if we don’t pay attention.

Indeed, I’ve heard many folks say they look at their brokerage and mutual fund accounts less often when the markets are falling. That strikes me as entirely sensible. If you are well diversified, there’s no need to torture yourself with frequent reminders that you’re now poorer. As a money manager once told me, “If you own growth stocks, you should only look at the price every 12 months. That way, you’ll only suffer one sleepless night a year.”

This Is a Test, This Is Only a Test

The current grudging economic recovery is in its seventh year and the stock market rally is in its eighth year. Here I earn nobody’s admiration by stating the obvious: These things don’t go on forever—but nobody knows when the music will stop.

That makes this a good time to hold a financial fire drill. Focus on three key questions. How would you react if the stock market dropped 30% next week? Would a market plunge derail your upcoming financial goals? How would you cope if an economic downturn put your job at risk?

This first question is about emotional fortitude, while the second and third questions are practical ones—but all three have profound implications for how you position your portfolio.

Let’s start with first principles: Most folks should own a portfolio that has healthy exposure not only to stocks, but also to bonds and other more conservative investments. That way, you should earn handsome long-run returns, but your overall wealth shouldn’t be too badly bloodied by a stock market crash and you shouldn’t find yourself selling stocks at fire-sale prices to buy shoes for the children.

Not sure you have the right balance between stocks and bonds? The tricky issue: What counts as a bond—and what counts as a stock?

Looks Like a Bond

Bonds typically deliver a steady stream of regular income. If that’s the defining characteristic, many parts of our financial life look like bonds. Think about all the income streams you collect: There might be Social Security retirement benefits, income from immediate annuities and any traditional employer pension you’re entitled to. If these provide a hefty portion of your retirement income, that can free you up to invest more heavily in stocks—and potentially earn higher long-run returns.

As you consider the bond-like income you receive, also give some thought to the regular drains on your finances—in the guise of mortgages, auto loans and other debts. You can think of these debts as negative bonds. Got $400,000 in bonds and a $300,000 mortgage? Arguably, your net bond exposure is just $100,000.

Between student loans, car loans and mortgages, many folks reach their 30s with what seems like an alarming amount of debt. But typically, their net position in bonds is still substantial—thanks to their paycheck, which can be viewed as another bond-like source of income.

Indeed, among academics, the four decades of income that we collect from our so-called human capital provides the intellectual justification not only for taking on debt early in our adult lives, but also for investing heavily in stocks. By taking on debt in our 20s and 30s, we can buy items—think college degrees, cars and homes—that we couldn’t afford if we had to pay cash. This has the added benefit of smoothing out our consumption over our lifetime. Meanwhile, the debt involved shouldn’t be of great concern, because we know we have plenty of paychecks ahead of us to service these debts and pay them off by retirement.

Those paychecks, with their steady bond-like income, also free us up to invest the bulk of our portfolio in stocks. We don’t need income from our portfolio while we’re in the workforce, so we can go light on bonds and instead shoot for higher returns with stocks. But as we approach retirement and the last of our paychecks, most of us will want to cut back somewhat on stocks and invest more in bonds.

Are You a Stock?

Keep in mind that not everybody’s paycheck is bond-like. Let’s say you work on commission, you’re a Wall Street trader or you’re involved with a Silicon Valley startup. Your income isn’t bond-like. Instead, it looks more like a stock. Maybe you will have a huge payday—or maybe you won’t be so lucky, and you will find yourself with far less income than you had hoped and perhaps even out of work. To reflect this risk, you might want a healthy stake in bonds and other conservative investments, even if you’re in your 20s.

Whether it’s bonds, a regular paycheck, a pension, an immediate annuity or Social Security, you’ll likely discover that much—and maybe most—of your assets are in bonds and bond lookalikes. And, of course, you likely own other assets, notably a home and perhaps even a second home.

The implication: Even if the stock market tumbled 30% tomorrow, the hit to your overall net worth would probably be modest, so there’s scant reason to panic. But to avoid feeling unnerved, it’s important to stay focused on your overall net worth, or you won’t get the emotional benefit that comes with spreading your money across a broad array of assets.

Owning multiple assets doesn’t just make for a less unnerving financial life. It also has a practical benefit: If the stock market plunges, you can draw on these other financial resources to buy groceries and pay the mortgage.

For retirees, those resources might include their monthly Social Security check and their bond portfolio. For those in the workforce, they have a paycheck. What if that paycheck is at risk, because there’s a chance you’ll get laid off if the economy turns down? This may be the moment to accumulate cash and set up a home-equity line of credit—so, if the need arises, you can get your hands on enough money to make it through a long spell of unemployment.

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