The stock market has seen unprecedented levels since the crash last March. But has your financial well-being improved? By financial well-being, we mean your state of happiness based on the level of your wealth. In this article, we discuss why a stock market that is trending up does not automatically translate into improved financial well-being.
Relative wealth
Absolute levels of income matter till our basic needs are met. Thereafter, how happy we are with our lifestyle and income levels depend on how where we rank in the pecking order with our friends and relatives. This behaviour, perhaps, also explains our continual desire to chase returns.
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You prefer active funds, not passive funds, even though your objective is to achieve a goal and not chase returns. Similarly, you want high interest-income products, not relatively stable low-return bank deposits. Cryptocurrencies would certainly be one of your favourite if not for the lack of regulation in that market. This kind of behaviour has a bearing on our financial well-being.
The stock market has moved 10,000 points since February; that is nearly 130% return on the Nifty index. If you are a typical person, your wealth may not have kept pace with this unprecedented rise.
Why? You may have taken quick profits each time the market rallied in the fear that it may decline. Then, there is the possibility that your returns pale in comparison with those of your friends and relatives. For these reasons, you could suffer regret, despite earning more profit than you did in the earlier years! And that could adversely impact your financial well-being. So, what should you do?
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Reducing stress
One side to your financial well-being is your actual wealth. The other side is what you do with it. True, savings are important to protect your financial well-being in the future. But savings need not come at the cost of denying yourself some pleasure in the present. If you have earned more profit than you expected on your trading portfolio, then spend some to improve your financial well-being. If the money does not improve your happiness, you are not spending it right. Many opine that spending on experiences is better than spending on material goods. That is because the experience stays with you for long. The same is not the case with material goods, the argument goes.
You get used to deriving happiness from your recent phone or car or even colonial furniture. This argument is based on a concept called hedonic adaptation. You ‘adapt’ to your new acquisition and, therefore, your level of happiness (hedonic) stabilises after a while.
But there is a flip side to this argument. You could spend on passion assets — collectibles such as art, paintings and antiques. These assets combine the buying experience (online auctions, for instance) with the pleasure of owning material goods. In any case, spending on experiences may not be possible because of the pandemic-related travel restrictions.
Conclusion
Markets that are trending upward can be very unnerving. The emotional stress of not keeping with the market returns can hurt your financial well-being.
The feeling of not keeping up with your peers and friends can be even more harmful. Sure, you can buy luxury products and services and acquire more passion assets to improve your financial well-being. But you also must work hard to be able to afford such spending.
This, perhaps, explains why having more wealth does not necessarily bring happiness; the happiness from spending is, perhaps, neutralised by the need to do work that you may not necessarily enjoy.
Yet, if money is important (and it certainly is for most of us), our perception needs to change. Shifting the frame of reference from peers to our past self could help.
So, appreciate the increase in your wealth because of the favourable market. That could be a step towards improving your financial well-being.
(The writer offers training programmes for individuals to manage their personal investments)