Today the Federal Reserve convenes the Federal Open Market Committee (FOMC) meeting and we will find out whether the central bankers will cut interest rates for the seventh consecutive meeting. The current rate cut cycle started last September, when short-term rates stood at 5.25%. At that time, the FOMC noted that “Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.” In retrospect, that may be one of the biggest understatements that the central bank ever made!
Seven meetings later, the fed funds rate is 2.25% and according to the futures markets, there is an 80% probability of a 25 basis points (1/4 point) cut to 2%. It is also likely that the accompanying statement will mention the possibility of a pause in the current rate cut campaign. The committee is likely to note that upside risks to inflation are now nearly as important as the downside risks to growth, a view voiced by various Fed officials recently. This has led Fed-watchers to reduce expectations from a 50 basis point cut to a 25-point cut.
Some believe that the cycle will end today, but I think that the Fed has to leave the door open for a variety of outcomes. There is still far too much risk in declaring the “all-clear” sign to investors. With food and energy prices soaring, a weak US dollar and rising inflation expectations, the Fed is grappling with two real and opposing forces: upside risks to inflation and concern about downside growth caused by the housing downturn and tight credit.
To balance these opposing forces, the Fed must be praying for the US economy to be weak enough to dampen inflation, forestalling any pass-through of price increases. Unfortunately, the Fed does not have any control over supply shocks, like those that continue to plague the crude oil market. Concurrently, the central bank does not want to see the country mired in a sluggish state for too long as threats from tight financial conditions, declining housing demand, falling home prices, and supply-induced spikes in energy prices, continue to lurk.
That’s why the opportunity to take a breath could not come at a better time---just as Uncle Sam is distributing $115 billion of stimulus checks, which is estimated to add 1% to Gross Domestic Product and as exports continue to add to growth. It seems that a break in the action is warranted this time around.
Wednesday, April 30, 2008
Tuesday, April 29, 2008
Seeking Guidance
I am often asked where people can turn for help with their investments as well as their more general wealth management questions. It came up last night when an interview aired on WJAR-NBC-10 (to see the segment in full, go to http://www.turnto10.com/northeast/jar/home.html) and I mentioned one of those $10 words that most people hate: FIDUCIARY.
My friend Kristine likes to say that words like “fiduciary” are scary so I need to find another way to describe it, so here goes. When seeking financial guidance, whether it is investment management or more general planning issues, it is preferable to work with a professional who is legally bound to put your interests first and that’s what a fiduciary means. After all, why would you want to engage someone who actually does not have to do this? And yet, that is the de-facto choice that so many people make. While they believe that they are hiring someone to provide advice, they are actually working with an individual who is not bound by the law to put you first, and is instead can sell you assets that are simply “suitable” for someone like you but may put another entity’s interests before yours.
As Alina Tugend noted in the New York Times on April 26, 2008 (“Pick a Planner Who Can Spell ‘Fiduciary’”) “while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.” Tugend correctly advises, there are a myriad of folks who hold themselves out as experts or counselors or advisors, so it is up to you to ask the correct questions so that you understand who you are hiring and what you are getting out of the relationship.
In general, there are three types of people in the financial services industry: investment advisers, salesmen (either investment or insurance) and hourly financial planners. The hourly planner is easy: you pay a certain rate and receive advice on specific planning issues, like retirement, college, estate, etc. In my experience engaging an hourly consultant for portfolio questions may not be the greatest idea because the advice by its very nature must be dynamic. A salesperson sells you anything from a mutual fund to an insurance product and is usually paid by commission. The salesman is often not going to provide ongoing advice, unless he or she can earn another commission by doing so.
The last category is an investment adviser (IA), which according to the NYT, “is a legal term that describes people who are in the business of giving advice about securities, stocks, bonds, mutual funds and annuities. Anyone who manages $25 million or more in securities generally must be registered with the Securities and Exchange Commission. In most states, advisers who manage less than that should be registered with their state’s regulatory agency.” Full disclosure: I am registered as an IA and so is my firm, so my bias is clear—I believe that those professionals who take the time to register and are legally bound to work in the best interests of their clients are preferable to others. “Investment advisers have a fiduciary duty, while brokers and financial planners may or may not. It’s a confusing legal situation, so the best bet is to ask anyone you are considering hiring straight out, ‘Are you a fiduciary?’”
Of course, the other question that you should always ask is how the professional gets paid. According to Tugend, “Most experts I talked to said to be leery of financial advisers who work on commission because they have an incentive to get clients to trade and buy on the highest-commission products — an inherent conflict of interest.” Then again, there may be certain situations when a transaction-based or hourly planner could be appropriate. In general, if you are seeking ongoing wealth management, it usually makes sense to choose a fee model which calculates a percentage of assets under management.
Just like if you were hiring a lawyer or doctor, ask the potential adviser/broker about his or her experience and education. “A minimum, say the experts, is a degree as a certified financial planner, which means the adviser has a certain level of education and experience, as well as attends continuing education classes. Certified financial planners are also bound by a code of ethics that includes fiduciary duty.” Finally, make sure that you actually like the person. The relationship between an adviser and client is an intimate one. In addition to all of this information, trust your gut.
My friend Kristine likes to say that words like “fiduciary” are scary so I need to find another way to describe it, so here goes. When seeking financial guidance, whether it is investment management or more general planning issues, it is preferable to work with a professional who is legally bound to put your interests first and that’s what a fiduciary means. After all, why would you want to engage someone who actually does not have to do this? And yet, that is the de-facto choice that so many people make. While they believe that they are hiring someone to provide advice, they are actually working with an individual who is not bound by the law to put you first, and is instead can sell you assets that are simply “suitable” for someone like you but may put another entity’s interests before yours.
As Alina Tugend noted in the New York Times on April 26, 2008 (“Pick a Planner Who Can Spell ‘Fiduciary’”) “while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.” Tugend correctly advises, there are a myriad of folks who hold themselves out as experts or counselors or advisors, so it is up to you to ask the correct questions so that you understand who you are hiring and what you are getting out of the relationship.
In general, there are three types of people in the financial services industry: investment advisers, salesmen (either investment or insurance) and hourly financial planners. The hourly planner is easy: you pay a certain rate and receive advice on specific planning issues, like retirement, college, estate, etc. In my experience engaging an hourly consultant for portfolio questions may not be the greatest idea because the advice by its very nature must be dynamic. A salesperson sells you anything from a mutual fund to an insurance product and is usually paid by commission. The salesman is often not going to provide ongoing advice, unless he or she can earn another commission by doing so.
The last category is an investment adviser (IA), which according to the NYT, “is a legal term that describes people who are in the business of giving advice about securities, stocks, bonds, mutual funds and annuities. Anyone who manages $25 million or more in securities generally must be registered with the Securities and Exchange Commission. In most states, advisers who manage less than that should be registered with their state’s regulatory agency.” Full disclosure: I am registered as an IA and so is my firm, so my bias is clear—I believe that those professionals who take the time to register and are legally bound to work in the best interests of their clients are preferable to others. “Investment advisers have a fiduciary duty, while brokers and financial planners may or may not. It’s a confusing legal situation, so the best bet is to ask anyone you are considering hiring straight out, ‘Are you a fiduciary?’”
Of course, the other question that you should always ask is how the professional gets paid. According to Tugend, “Most experts I talked to said to be leery of financial advisers who work on commission because they have an incentive to get clients to trade and buy on the highest-commission products — an inherent conflict of interest.” Then again, there may be certain situations when a transaction-based or hourly planner could be appropriate. In general, if you are seeking ongoing wealth management, it usually makes sense to choose a fee model which calculates a percentage of assets under management.
Just like if you were hiring a lawyer or doctor, ask the potential adviser/broker about his or her experience and education. “A minimum, say the experts, is a degree as a certified financial planner, which means the adviser has a certain level of education and experience, as well as attends continuing education classes. Certified financial planners are also bound by a code of ethics that includes fiduciary duty.” Finally, make sure that you actually like the person. The relationship between an adviser and client is an intimate one. In addition to all of this information, trust your gut.
Monday, April 28, 2008
A Bit of Wall Street Nostalgia
I was with a bunch of people in lower Manhattan for a charity walk-a-thon and after we were finished, I asked some of the participants if they wanted to see some of the sights of the financial district. Before you know it, I was playing tour guide to a dozen people who were born and raised within thirty miles of Wall Street, but had never seen the exchanges.
We started by walking to the World Financial Center so that we could observe the progress of the World Trade Center site -- I still can’t quite get myself to call it Ground Zero. The area looks like a massive construction zone, but I was able to provide some perspective by describing some of the events of that day. I reminded the group that the Commodities Exchange, where I worked for three and a half years, was housed in 4 World Trade Center, which was destroyed on 9-11. I recalled having breakfast at Windows on the World with my brother-in-law (they validated parking!) at least once a month. The COMEX and the NY Mercantile Exchange had already moved to a new location before 9-11.
We walked over to the two nearby churches that were miraculously spared during the terrorist attacks. Trinity Church and St. Paul’s are gorgeous structures set amid the massive buildings of the financial district. St. Paul’s was turned into a makeshift memorial shrine following September 11th and served as a place of rest and refuge for recovery workers at the WTC site. I have fond memories of Trinity Church, because it served as my own refuge during busy days.
After Trinity, we walked to the American Stock Exchange, where my father worked for three decades. I grew up at the AMEX, visiting Dad often and held my first job on Wall Street as a high school senior there. The AMEX got its start in the 1800's and was known as the "Curb Exchange" or simply “The Curb” until 1921 because it met as a market at the curbstone on Broad Street near Exchange Place. Its founding date is generally considered as 1921, the year when it moved into new quarters on Trinity Place.
As we made our way to the New York Stock Exchange, I told the history of the oldest and largest stock exchange in the US, which is located on Wall Street. It traces its origins to 1792, when 24 brokers and merchants gathered under a Buttonwood tree at the tip of Manhattan and signed an agreement to trade securities. “The Buttonwood Agreement” eventually grew into the place where representatives of buyers and sellers met and shouted out prices at one another in order to strike a deal. They were trading shares of “stocks” or “equities,” which represent ownership of public companies.
The current exchange building was unveiled on April 22, 1903 and was noted for its masterful architecture. The six massive Corinthian columns across its Broad Street façade impart a feeling of substance and stability --- the very embodiment of the nation’s growth and prosperity. While it is difficult to visit the interior of the building in the aftermath of 9-11, seeing the structure still thrills me. As a young college student clerking for my godfather, I walked into the building as most might enter a house of worship. It was not that I confused the two, but I had respect for all that the building represented.
As I stood before the massive building, I found myself a bit sad. The hey-day of physical exchanges has long passed with the advent of computer-based trading. There is certainly better execution and increased efficiencies now, but nothing can match the exhilaration of walking onto a trading floor and seeing capitalism come to life. Now you know that at heart, I am an old-fashioned and nostalgic gal!
We started by walking to the World Financial Center so that we could observe the progress of the World Trade Center site -- I still can’t quite get myself to call it Ground Zero. The area looks like a massive construction zone, but I was able to provide some perspective by describing some of the events of that day. I reminded the group that the Commodities Exchange, where I worked for three and a half years, was housed in 4 World Trade Center, which was destroyed on 9-11. I recalled having breakfast at Windows on the World with my brother-in-law (they validated parking!) at least once a month. The COMEX and the NY Mercantile Exchange had already moved to a new location before 9-11.
We walked over to the two nearby churches that were miraculously spared during the terrorist attacks. Trinity Church and St. Paul’s are gorgeous structures set amid the massive buildings of the financial district. St. Paul’s was turned into a makeshift memorial shrine following September 11th and served as a place of rest and refuge for recovery workers at the WTC site. I have fond memories of Trinity Church, because it served as my own refuge during busy days.
After Trinity, we walked to the American Stock Exchange, where my father worked for three decades. I grew up at the AMEX, visiting Dad often and held my first job on Wall Street as a high school senior there. The AMEX got its start in the 1800's and was known as the "Curb Exchange" or simply “The Curb” until 1921 because it met as a market at the curbstone on Broad Street near Exchange Place. Its founding date is generally considered as 1921, the year when it moved into new quarters on Trinity Place.
As we made our way to the New York Stock Exchange, I told the history of the oldest and largest stock exchange in the US, which is located on Wall Street. It traces its origins to 1792, when 24 brokers and merchants gathered under a Buttonwood tree at the tip of Manhattan and signed an agreement to trade securities. “The Buttonwood Agreement” eventually grew into the place where representatives of buyers and sellers met and shouted out prices at one another in order to strike a deal. They were trading shares of “stocks” or “equities,” which represent ownership of public companies.
The current exchange building was unveiled on April 22, 1903 and was noted for its masterful architecture. The six massive Corinthian columns across its Broad Street façade impart a feeling of substance and stability --- the very embodiment of the nation’s growth and prosperity. While it is difficult to visit the interior of the building in the aftermath of 9-11, seeing the structure still thrills me. As a young college student clerking for my godfather, I walked into the building as most might enter a house of worship. It was not that I confused the two, but I had respect for all that the building represented.
As I stood before the massive building, I found myself a bit sad. The hey-day of physical exchanges has long passed with the advent of computer-based trading. There is certainly better execution and increased efficiencies now, but nothing can match the exhilaration of walking onto a trading floor and seeing capitalism come to life. Now you know that at heart, I am an old-fashioned and nostalgic gal!
Friday, April 25, 2008
Ag-flation
You know something weird is going on when two of the largest retailers in the US are restricting the purchase of RICE. Both Costco and Wal-Mart limited consumer purchase of the grain, due to what Costco called “recent supply and demand trends.” This sounds like a story out of the former Soviet Union, circa 1975, not from American the Beautiful.
Evidently the rice issue has something to do with Vietnam and India, two large rice exporters, but the trend is disturbing across the globe: as agricultural prices soar, retailers like Costco and Wal-Mart do not want to promote a run on all of their inventories. But as soon as the stores impose a limit, the natural inclination is for consumers to want to buy more simply to hoard what appears to be a valuable asset, even if they do not need the items. Unfortunately, that cycle is tough to break once it starts.
The rice incident is a mere scuffle, when compared to the riots erupting in certain parts of the world, as food availability comes under pressure. Accelerating food prices are a global phenomenon, have recently intensified, and the sources of the increases are global in scope.
U.N. officials recently noted that there was a perfect storm of problems that created the current crisis, but specifically, the growing demand from India and China’s rising middle class after years of tremendous economic growth and the divergence of US corn crops to ethanol production, have pushed prices higher -- the S&P GSCI agricultural commodities nearby index jumped by over 80% over the past 14 months.
Many are hoping that inflation will recede, as the US economy contracts. After all, if the world’s number one consumer is pinched in the pocketbook, it is likely to effect prices. Despite the recent headlines screaming about rice rations and how certain restaurants are now charging for sour cream due to rising prices (who needs those extra calories anyway?), the above-mentioned agricultural index has tumbled by 10.5% from its mid-March peak.
While I think that in the near term, we could see some of these prices fall a bit, it is disconcerting that the factors that have pushed up food prices are still in play and likely will be around for a while. Strong global demand from the developing world, rising living standards and associated demands for protein in the developing world; and the rise in energy costs that drives up both fertilizer and transportation costs for food producers, are all likely to keep ag-flation on the radar screen for some time to come.
Evidently the rice issue has something to do with Vietnam and India, two large rice exporters, but the trend is disturbing across the globe: as agricultural prices soar, retailers like Costco and Wal-Mart do not want to promote a run on all of their inventories. But as soon as the stores impose a limit, the natural inclination is for consumers to want to buy more simply to hoard what appears to be a valuable asset, even if they do not need the items. Unfortunately, that cycle is tough to break once it starts.
The rice incident is a mere scuffle, when compared to the riots erupting in certain parts of the world, as food availability comes under pressure. Accelerating food prices are a global phenomenon, have recently intensified, and the sources of the increases are global in scope.
U.N. officials recently noted that there was a perfect storm of problems that created the current crisis, but specifically, the growing demand from India and China’s rising middle class after years of tremendous economic growth and the divergence of US corn crops to ethanol production, have pushed prices higher -- the S&P GSCI agricultural commodities nearby index jumped by over 80% over the past 14 months.
Many are hoping that inflation will recede, as the US economy contracts. After all, if the world’s number one consumer is pinched in the pocketbook, it is likely to effect prices. Despite the recent headlines screaming about rice rations and how certain restaurants are now charging for sour cream due to rising prices (who needs those extra calories anyway?), the above-mentioned agricultural index has tumbled by 10.5% from its mid-March peak.
While I think that in the near term, we could see some of these prices fall a bit, it is disconcerting that the factors that have pushed up food prices are still in play and likely will be around for a while. Strong global demand from the developing world, rising living standards and associated demands for protein in the developing world; and the rise in energy costs that drives up both fertilizer and transportation costs for food producers, are all likely to keep ag-flation on the radar screen for some time to come.
Wednesday, April 23, 2008
What a Difference a Fortnight Makes
Two weeks ago, I had dinner with one of my best friend’s father “Eli”. He is about 76 years old and loves to talk about his investments. As we munched on our Chinese food, he pulled out a slip of paper – on it, his total dollars made or lost in the portfolio each year since 1999. He wanted to talk to me because he felt like although he had done pretty well, he was concerned that he could no longer handle the account on his own.
To some extent, investing was Eli’s hobby. His wife has been sick for about ten years and as she became more and more incapacitated, Eli expanded his knowledge base and became a student of the markets. Although he had gone through most of his life working with brokers who sold him “hot” stocks, he came to me at the end of 2000 to ask what he should do. “I have all of these gains and the broker doesn’t think I should sell. The broker begged me to ‘hang in there’ because he believes that the market will come back.”
At that moment, I encouraged Eli to manage his own accounts. For years, he seemed to have better ideas than his broker and I feared that unless he took over the account himself, things could go south. I talked to him about exchange-traded and open-ended mutual funds and suggested that he develop a plan to create a more diversified portfolio, sell some of his stuff and move into a structure that he could effectively manage with an easy-to-use on-line brokerage firm.
To say that I created a monster is an understatement. Eli became obsessed with portfolio management, reading everything he could and keeping tabs on the various new funds that were introduced. In honor of his 70th birthday, he called me to talk about his new favorite asset class-bonds and even dabbled in commodities with a small percentage of the portfolio. I figured that things were going along well because I did not hear from him too much. That’s why I was surprised when we went out to dinner two weeks ago and he lamented “I’m too old for this…it just hurts too much to go through the gyrations.” We discussed solutions and by the end of the meal, he seemed OK.
Yesterday, I attended the funeral of Eli’s wife, Liz. When we were back at his house talking about her, he said to me, “Can you believe how much my life has changed since I saw you two weeks ago? Then it seemed like my most important problem was my stupid account and today, I could care less about it.” I reminded him that he did not need to think about that right now. He smiled and said, “You know, Liz used to tease me that my portfolio was like the only girlfriend she would share me with!” I noted that they both appreciated whatever got him through hard times. I got home and thought indeed, what a difference 14 days can make.
To some extent, investing was Eli’s hobby. His wife has been sick for about ten years and as she became more and more incapacitated, Eli expanded his knowledge base and became a student of the markets. Although he had gone through most of his life working with brokers who sold him “hot” stocks, he came to me at the end of 2000 to ask what he should do. “I have all of these gains and the broker doesn’t think I should sell. The broker begged me to ‘hang in there’ because he believes that the market will come back.”
At that moment, I encouraged Eli to manage his own accounts. For years, he seemed to have better ideas than his broker and I feared that unless he took over the account himself, things could go south. I talked to him about exchange-traded and open-ended mutual funds and suggested that he develop a plan to create a more diversified portfolio, sell some of his stuff and move into a structure that he could effectively manage with an easy-to-use on-line brokerage firm.
To say that I created a monster is an understatement. Eli became obsessed with portfolio management, reading everything he could and keeping tabs on the various new funds that were introduced. In honor of his 70th birthday, he called me to talk about his new favorite asset class-bonds and even dabbled in commodities with a small percentage of the portfolio. I figured that things were going along well because I did not hear from him too much. That’s why I was surprised when we went out to dinner two weeks ago and he lamented “I’m too old for this…it just hurts too much to go through the gyrations.” We discussed solutions and by the end of the meal, he seemed OK.
Yesterday, I attended the funeral of Eli’s wife, Liz. When we were back at his house talking about her, he said to me, “Can you believe how much my life has changed since I saw you two weeks ago? Then it seemed like my most important problem was my stupid account and today, I could care less about it.” I reminded him that he did not need to think about that right now. He smiled and said, “You know, Liz used to tease me that my portfolio was like the only girlfriend she would share me with!” I noted that they both appreciated whatever got him through hard times. I got home and thought indeed, what a difference 14 days can make.
T is for Testosterone…and Trading
Just two days apart, two articles with the word “testosterone” in the headline made me think that I was reading the science pages, not the financial ones. Of course I have seen the effects of testosterone gone wild when I was a trader on the floor of the Commodities Exchange in NY. There was an almost animal spirit to the pits, which after reading the latest research on the hormone, may in fact be attributed to the magic T.
According to a study by two researchers (John Coates and Joe Herbert) from the University of Cambridge, there is a link between the level of testosterone and the profitability of traders. (The findings were published in the Proceedings of the National Academy of Sciences -you can read more about it at newscientist.com) The scientists sampled the saliva of seventeen traders in London twice a day for eight days in order to determine how levels of testosterone affected performance. Their findings may offer clues for all investors and help explain why trading has sometimes been linked to thrill of other activities, like gambling.
The study showed that fear, confidence, greed and exhilaration can influence financial decisions, even among professional traders. But here is the interesting thing: the net result was those with elevated levels of testosterone when they started their days made more money than those who did not. As Coates noted, “The popular view is that experienced traders can control their emotions, but in fact their endocrine systems are on fire.” This does not mean that investors should run out and start taking testosterone supplements. As is the case with most things in life, excess may breed ill effects.
The research notes that over-the-top testosterone can lead to irrationality, which may help us understand the root cause of bubbles or manias. For most, the antidote to the exhilaration is another chemical that our bodies produce called cortisol. Of course while cortisol can bring a bit more rationality to decision-making, it can also make you too risk-averse and it may diminish brain activity over time. As my father would like to say, “Are those my only choices?” -- irrational exuberance or brain mush?
In the end, we have all known for some time that money is a wildly emotional topic. Because the science is there to prove brain behavior impacts financial decisions, it is imperative that all investors develop and maintain a disciplined system to keep those chemicals in check. If you can’t do it, hire someone who can. Otherwise your brain may lead to committing costly financial mistakes.
According to a study by two researchers (John Coates and Joe Herbert) from the University of Cambridge, there is a link between the level of testosterone and the profitability of traders. (The findings were published in the Proceedings of the National Academy of Sciences -you can read more about it at newscientist.com) The scientists sampled the saliva of seventeen traders in London twice a day for eight days in order to determine how levels of testosterone affected performance. Their findings may offer clues for all investors and help explain why trading has sometimes been linked to thrill of other activities, like gambling.
The study showed that fear, confidence, greed and exhilaration can influence financial decisions, even among professional traders. But here is the interesting thing: the net result was those with elevated levels of testosterone when they started their days made more money than those who did not. As Coates noted, “The popular view is that experienced traders can control their emotions, but in fact their endocrine systems are on fire.” This does not mean that investors should run out and start taking testosterone supplements. As is the case with most things in life, excess may breed ill effects.
The research notes that over-the-top testosterone can lead to irrationality, which may help us understand the root cause of bubbles or manias. For most, the antidote to the exhilaration is another chemical that our bodies produce called cortisol. Of course while cortisol can bring a bit more rationality to decision-making, it can also make you too risk-averse and it may diminish brain activity over time. As my father would like to say, “Are those my only choices?” -- irrational exuberance or brain mush?
In the end, we have all known for some time that money is a wildly emotional topic. Because the science is there to prove brain behavior impacts financial decisions, it is imperative that all investors develop and maintain a disciplined system to keep those chemicals in check. If you can’t do it, hire someone who can. Otherwise your brain may lead to committing costly financial mistakes.
Tuesday, April 22, 2008
Rich or Poor…
One of my mother’s favorite sayings comes directly from her father, a hard scrabble guy who was quick with a one-liner. Poppy used to say, “Rich or poor, I’d rather have money!” After reading up on recent research conducted on our attitudes about wealth, it seems that my grandfather and my mother may have been on to something.
Two young economists from the University of Pennsylvania (Betsey Stevenson and Justin Wolfers) have created a stir in the world of economics. As highlighted in the New York Times (Money Doesn’t Buy Happiness. Well, on Second Thought… by David Leonhardt), I learned that maybe the old phrase “money doesn’t buy happiness” is not entirely true. While the two economists probably did not set out to disprove that notion, they did find that “money tends to bring happiness, even if it doesn’t guarantee it. ‘The central message,’ Ms. Stevenson said, ‘is that income does matter.’” Wow, that kind of sinks the whole Pollyanna view of money.
Hold on one minute---I thought that it wasn’t the actual income that mattered but how people felt in relation to others. In other words, if you have the biggest house on the block, maybe you feel like a big shot, while if you are surrounded by those who have lots more money than you yourself have, it may make you fell less wealthy. Not so, at least as far as these results indicate. “Absolute income seems to matter more than relative income.”
From a purely non-academic standpoint, this is not my experience. I have seen hundreds of folks and spoken to thousands of people on the radio and invariably there are more than a few people who ask me: “how am I doing compared to those my age?” These are not people who have no means—in fact, this is a question that is usually posed by someone who has a few bucks. What is funny is that even when I tell the person, “Don’t worry, you’re doing just fine”, I sense that he or she really does want to know how fine, compared to the neighbors.
Of course if we were able to see a rundown of everyone’s net worth, that wouldn’t make you happy either. What is clear is that figuring out what you need to accumulate in order to make sure you can get where you want to go, can make you happier, simply by providing peace of mind. “Affluence is a pretty good deal” because it may allow you reach those goals faster, but it will not make you happy in and of itself. Then again, given the choice, who among us would choose to be less wealthy? Or as mom says, “Rich or poor, it’s nice to have money.”
Two young economists from the University of Pennsylvania (Betsey Stevenson and Justin Wolfers) have created a stir in the world of economics. As highlighted in the New York Times (Money Doesn’t Buy Happiness. Well, on Second Thought… by David Leonhardt), I learned that maybe the old phrase “money doesn’t buy happiness” is not entirely true. While the two economists probably did not set out to disprove that notion, they did find that “money tends to bring happiness, even if it doesn’t guarantee it. ‘The central message,’ Ms. Stevenson said, ‘is that income does matter.’” Wow, that kind of sinks the whole Pollyanna view of money.
Hold on one minute---I thought that it wasn’t the actual income that mattered but how people felt in relation to others. In other words, if you have the biggest house on the block, maybe you feel like a big shot, while if you are surrounded by those who have lots more money than you yourself have, it may make you fell less wealthy. Not so, at least as far as these results indicate. “Absolute income seems to matter more than relative income.”
From a purely non-academic standpoint, this is not my experience. I have seen hundreds of folks and spoken to thousands of people on the radio and invariably there are more than a few people who ask me: “how am I doing compared to those my age?” These are not people who have no means—in fact, this is a question that is usually posed by someone who has a few bucks. What is funny is that even when I tell the person, “Don’t worry, you’re doing just fine”, I sense that he or she really does want to know how fine, compared to the neighbors.
Of course if we were able to see a rundown of everyone’s net worth, that wouldn’t make you happy either. What is clear is that figuring out what you need to accumulate in order to make sure you can get where you want to go, can make you happier, simply by providing peace of mind. “Affluence is a pretty good deal” because it may allow you reach those goals faster, but it will not make you happy in and of itself. Then again, given the choice, who among us would choose to be less wealthy? Or as mom says, “Rich or poor, it’s nice to have money.”
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