Zen and the Art of Retirement Investing

Posted on December 2, 2010 at 7:46 AM PDT by

It has been proven that most active investors who struggle to out-perform the market will find that over time, their machinations and efforts were all for naught. A recent study has proven that these efforts won’t help one’s happiness either. On this Thanksgiving weekend, we present a few studies that address the connection between happiness and money.

The Gallup World Poll of 132 nations and over 136,000 respondents revealed that the U.S., though the richest nation on Earth, is losing out to poorer nations when it comes to personal contentment. And Latin American countries trounced the U.S. in day-to-day happiness even though their income levels fell far short.

Why is that? According to the study, after basic human needs are addressed, happiness appears to increase based upon rewarding relationships and a strong sense of community, not greater wealth.

Researchers found two categories of happiness that correlate to wealth. The first relates to our overall assessment of our life, rooted in how we compare ourselves with our peers. We tend to establish an internal accomplishment rating such that the greater our wealth, the more our satisfaction depends upon our perception of how we are doing relative others in our world.

The second type of happiness was “day-to-day contentment” as measured by behaviors such as laughter, smiling, joy and what researchers call social-psychological well-being. Shockingly, any income increase over $75,000 a year had no impact on increased “day-to-day contentment.”

One of the more revealing findings was that the more time we spend thinking about money, the lower our happiness rating becomes. When researchers exposed subjects to pictures of large amounts of dollars or Euros, their savory rating (a measurement of how good the subject felt towards images of a sunset, panorama and the like) substantially decreased.

Finally, when we sense that our life is financially secure, we score higher in terms of day-to-day happiness. As Dr. Ed Diener of the University of Illinois pointed out, one individual may have a motor home while another a mansion. If the person with the motor home feels secure that it will never be taken, then his happiness rating will be higher than the individual who is fearful of losing his mansion. This security principle underscores the importance of living within our budget and not putting retirement capital at unnecessary and higher risk.

These studies have clear implications for investing styles and underscore the value of passive asset allocation over stock picking and active forms of management. Active management requires increasing risk in the never-ending search for increasing returns. Index investing across a variety of asset classes lowers risk and provides much greater stability to our portfolios.

Could it be that adopting our MarketRiders investment philosophy increases happiness? Using an asset allocation strategy with index funds or ETFs frees your time and mind for more important things in life. When you know that your money is diversified and your assets are safe, you can leave your computer monitor behind and get busy with the truly valuable things in life. You’ll be thinking less about your money and more about the people around you. And contrary to what some might believe, most friends and family members really don’t want to hear about your recent stock or option conquest.