Finances and happiness

Finances and happiness

The following article reviews a book written by a friend of mine (and in which I’m quoted several times!) that may well be of interest to anyone seeking happiness AND financial security/success. Read on and enjoy…

Less pain, more gain really

Sunday Star Times | Sunday, 16 September 2007

The search for the magic ingredient that can turn hopeless investors into financial whizzes led money expert Arun Abey to happiness, writes Rob Stock.

Happy people make better investors. That’s the claim of Arun Abey, one of the grandfathers of financial planning in New Zealand and Australia, now turned happiness author with his book How Much is Enough, out in Australia and soon to be published here.

It’s a beguiling conclusion, and one that should imply that New Zealanders, recently ranked 18th happiest nationality in Leicester University’s global happiness survey, should be among the world’s savviest investors.

We are patently not (look at our track record speculating on things like car licence plates, Gold Coast property, finance companies and overpriced inner city apartments) but Abey isn’t talking about what you or I might mean by happiness.

“It’s not about having a happy disposition. What I am talking about is a sense of inner wellbeing and contentment,” Abey says. “For me, the 21st century provides the possibility to live an authentic life however you define it. That’s a great opportunity, but also the great challenge of the 21st century.”

In developed countries, there is sufficient wealth available for people to individually lead lives that suit them best and bring that deep sense of contentment even if most of us fail to manage it.

The authentic life of a miser might not be your or my idea of a good time, but as long as it brings that miser that sense of inner contentment, they have achieved Abey’s brand of happiness.

Such people, Abey believes, are much less likely to be hijacked by another’s definition of financial success and deceived about the risks of attaining it.

They not only have the independence of mind to defy herd instincts, but they also have the energy to use it.

In short, they are not victims of the “learned helplessness” of American psychologist Robert Seligman, facing the future with an impassive acceptance rather than attempting to take control.

Abey, who brings insights from decades in the business (he helped set up ipac, one of the largest financial planning firms in Australia, and in New Zealand Spicers was set up mirroring ipac’s business model), says: “Through studying the psychological literature, it is hard to escape the conclusion that long-term success with money, including investing, is impossible to separate from more general success in life.

“Generally, we have observed that those people who have the greatest sense of contentment in life are also the best at adopting sensible focused investment strategies.”

The trouble is many people mistake having money for success, and the multi-billion advertising industry is working hard to cement that idea, Abey says.

But, he adds: “There’s compelling evidence to suggest that the pursuit of money simply to buy more and more, or to keep up with the Joneses, can make us unhappy.”

Beyond a certain low minimum level of wealth necessary to feed, clothe and shelter an individual, money does not bring substantial improvements in people’s happiness, says Abey.

That perhaps explains the current Western focus on happiness, as people realise decades of remorseless growth in wealth has not made us happier, though it has clearly allowed people in the West to live longer.

It’s tempting to read Abey’s conclusions as suggesting people should forget about the money and aim to live authentic lives, and the money will follow, but there’s a complicating factor.

“Research conducted by ipac found there was only one essential factor separating people who rated themselves as highly satisfied with their lives from those who felt vulnerable,” says Abey. “This was a sense of feeling in control of their financial situation. It applied whether someone was making a six-figure income, or getting by in the mortgage belt.”

Though being a success with money is based on leading an authentic life, it does not remove the need for a financial plan to support that life, says Abey.

Part of the reason for that is there are some aspects of money which do effect a person’s happiness.

One is that people with income certainty are happier than those who do not have it. “There’s a strong link there,” says Abey.

“Having enough money to maintain our living standards in retirement can have a tremendous impact on our quality of life and peace of mind.”

That has a special meaning in today’s New Zealand where those in their 20s, 30s and 40s, and perhaps even 50s will find the spending power of state retirement provision dropping in future years, and perhaps the age of entitlement to it rising.

Abey says the 21st century may have brought unique opportunities, but it has also brought the imperative for individuals to amass sufficient wealth to fund retirements that can last 30 years.

Abey’s focus on happiness as a key to financial success grew out of the bitter realisation that intelligence and education do not appear to increase people’s chances of managing their money, and investing well, and the search for the factors that did.

“Over the years, I thought financial literacy was the answer. I wrote hundreds of columns for newspapers and delivered lectures all over New Zealand, and it did not make any difference. It did not change behaviour. You need to go to the inner person. You need to start off with the happiness and wellbeing part.”

Abey, who admits to being a logical left-brain person, tells this story of Sir Isaac Newton, the physicist who enunciated the laws of gravity.

Newton invested in shares in the South Sea Company, set up ostensibly to exploit burgeoning trade in the Caribbean, South America and the Pacific South Seas. In 1720 a speculative mania drove the share price up. Newton, unable to reconcile the price with the company’s prospects, sold his shares for 7000 (then a huge sum) at a 100% profit.

He then watched the share price rise and rise, and unable to resist, reinvested at the peak before the mania and the bubble exploded. He lost 20,000.

The moral is clear enough. Intelligence and education in itself is not enough.

It has long been known that people are subject to what behavioural psychologists call behavioral heuristics: mental and behavioural short-cuts which cause us to make bad decisions.

Examples include herding: in investment terms the ability to blind ourselves, like Newton, to the true nature of an investment’s risk because others are piling in.

The theory goes that to survive on the grasslands of Africa, vulnerable species like humans herd together, and we have in the simplest terms failed as modern society has developed, to adapt.

The instinct to herding behaviour still drives us, only what it does is drive us to do things like invest at the peak of markets, when everyone else is saying it’s a great idea, and to sell up when things have taken a dip, when everyone else is doing it.

That’s incredibly destructive on wealth, says Abey. One study from the US showed that such behaviour means some investors are capturing as little as a quarter of sharemarket returns.

Other heuristics include putting more faith in recent information than older information, that fear motivates us more than greed, and that the pain of loss is twice as strong as the pleasure of an equivalent gain.

All these mental short-cuts undermine our investing ability.

The only way to defeat what Abey calls this “enemy within” is to build a financial plan with a properly qualified (no less than a certified financial planner, or CFP, will do for Abey) and experienced financial planner, and stick to it.

That can build a buffer against things like the propensity to invest at the peak of markets, and panic and bail when times are bad.

One drawback is that there aren’t many good financial planners around, Abey says, conceding that the bad press the advisory industry has recently received for accepting commissions to invest clients’ funds in dodgy finance companies is justified.

But Abey, who has a financial planner himself despite possessing the knowledge and ability to do it himself, likens the industry to the medical profession several hundred years ago, saying this century will see it grow up, become more professional, and become one of the world’s most important industries.

THE WISDOM OF ABEY

1. Money alone will not make you happy. Living an “authentic life” will. People have more money today than 50 years ago, yet are no more happy.

2. Have a financial plan for you, not your money. Those with a financial plan report greater satisfaction with life than those who do not.

3. Your plan should be based on your goals, not goals someone else says you should have. Those selling dreams are probably trying to sell you something else.

4. Understand “The Prize”. Over the long term, cash makes a real return of 0%-1%, bonds 1%-3%, property (without leverage) 3%-5% and shares 5%-8%.

5. Understand the “enemy within”. You are wired to make bad investment decisions, and your financial plan needs to defeat that.

6. Beware false accounting. An investment you bought for $100 five years ago, and sold for $150 yesterday, but cost you $4 to buy, $10 in finance interest costs, and $11 to maintain and insure, made a 25%, not a 50% return.

7. Drip-feed money into the markets so you do not worry about short-term ups and downs. You’ll be buying in both.

8. Do not attempt to chase fads, or time the market. You will fail, unless you are lucky. Very few people are consistently lucky.

9. Do not watch your investments constantly. Review annually.

10. Have a financial planner. Make sure he or she is not a commission salesman.