Author Topic: Are you subject to the "Wealth Effect" ?  (Read 14191 times)

TreeTired

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Are you subject to the "Wealth Effect" ?
« on: February 15, 2014, 10:28:58 AM »
I trade fairly actively -  not as much as I used to -  but I definitely watch the market on a daily basis.   I have most of my accounts with Schwab, both IRA and non-retirement,  so when I log into my account I see almost my total financial assets and a net change on the day.   If the market is up or down 1%  my change on the day can represent a significant chunk of change -  more than I would make in a week if I was working.  So naturally I feel better when the number is a plus than I do if the number is a minus, but I don't like that it affects me at all.   And sometimes I feel like it is easier for me to justify spending money on something... anything...  when my total account balance is making new highs.   

I am not concerned that a growing account creates reckless spending,  I am just observing that the changes do have an effect on me and I wonder if anyone else has the same issue.

ShortInSeattle

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Re: Are you subject to the "Wealth Effect" ?
« Reply #1 on: February 15, 2014, 10:44:54 AM »
I do notice that the swings in the market have a bigger effect on a bigger portfolio, but no - I can't say that it makes me want to spend more.

If it did, I might peek at my portfolio less frequently. :)


hoppy08520

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Re: Are you subject to the "Wealth Effect" ?
« Reply #2 on: February 15, 2014, 10:50:17 AM »
I try to take the long view. I know the market will rise and fall on a daily and yearly basis so I don't get too hung up if I make or lose a few thousand in a day.

Yet, and this may seem strange, on the same day where my investments may go up or down a few thousand dollars, I will tell myself, "No, I know they taste good, but don't buy that Panera blueberry scone, it's $2.39 plus tax, it's not worth it."

That's not a hypothetical situation. I did that yesterday afternoon, when the stock market went up around 0.5%, meaning I "made" around $2,000 yesterday, but passed on the $2.39 scone when I walked by Panera. I figure you should control what you can (your spending) and not get hung up on what you can't control (the daily rise and fall of the stock market).

I think you need to do some mental compartmentalization with investing or you'll drive yourself nuts.

golfer44

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Re: Are you subject to the "Wealth Effect" ?
« Reply #3 on: February 15, 2014, 10:50:33 AM »
I try to feel better when it's low (won't be selling those stocks for a long time).

Cheddar Stacker

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Re: Are you subject to the "Wealth Effect" ?
« Reply #4 on: February 15, 2014, 10:54:45 AM »
I'm still in the accumulation phase, so I shouldn't be happy when the market goes up since the purchase price goes up, but it gives me the warm and fuzzies anyway. I'm sure there's an almost unavoidable subliminal effect that occurs for everyone, but I have never noticed it make me want to spend more.

anisotropy

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Re: Are you subject to the "Wealth Effect" ?
« Reply #5 on: February 15, 2014, 11:33:06 AM »
I think I am affected. Back in late Jan / early Feb when the market was tanking everyday it really made me sad knowing that each day I was losing more than what I am making in a week.

Then I felt awesome when I "made" the money back in the past week..... I ended up offering to take my parents and siblings out for dinner at a pricey steakhouse lol

Frankies Girl

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Re: Are you subject to the "Wealth Effect" ?
« Reply #6 on: February 15, 2014, 12:23:51 PM »
Investing is still new enough to me where I like to check in to see what happened during the day a few times a week.

Definitely no urge to spend more if it was a good day/week however.

I don't think feeling a little bummed when it's down and a little pleased when it's up is wrong. I know I do the same thing. I find it kind of fascinating to track the progress monthly, and I'm not freaking out either way when it's up or down so ultimately it's just the same as someone tracking a sports team or playing a game online that racks up points. Until I'm actually dependent on my investments, it's just a fun little game to track that I might win one day and lose another.

But again, I've just begun really investing and having real holdings over the past year, so my hope is once the newness has worn off and I really get how the whole thing works, I'm going to get to the point where I stop checking it except maybe once every couple of months.

the fixer

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Re: Are you subject to the "Wealth Effect" ?
« Reply #7 on: February 15, 2014, 12:59:28 PM »
I'm curious: anyone want to take a shot at analyzing their spending patterns and seeing if there's a correlation with market ups and downs? If someone is subject to the wealth effect, they wouldn't necessarily know about it.

As for me, I don't check my portfolio balance nearly as often as I used to, but I still know what it is ball-park. It wouldn't surprise me if a big purchase here or there gets influenced by knowing how much money I have, but I doubt it's the #1 factor. I also haven't been investing long enough to know how I behave during a major downturn.

PeteD01

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Re: Are you subject to the "Wealth Effect" ?
« Reply #8 on: February 15, 2014, 03:14:17 PM »
I am affected by the wealth effect - in the opposite direction though as far as unnecessary spending goes.
With the market gains our investment portfolio ceased being the limiting factor for FI.
Now it is the mortgage and especially a basement apartment which we have been renovating ever so slowly. So in the last two months we have spend much more than scheduled on the renovation and in mortgage payments. As a consequence our discretionary spending has been curtailed quite a bit below the usual.
I do enjoy seeing the apartment getting finished ahead of time though.
Next month our roommate (family member) will move in.
All in all a rather big wealth effect for us.

Peter

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Re: Are you subject to the "Wealth Effect" ?
« Reply #9 on: February 15, 2014, 04:32:40 PM »
I'm still in the accumulation phase, so I shouldn't be happy when the market goes up since the purchase price goes up, ...

This!  Exactly!

An ideal stock market trend would be for prices to gently rise for the entire time you're buying stocks before retirement, then jump way up the day before you retire and climb for years afterward.  Gently rising is better than dropping or staying the same because it means the economy is healthier.

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Re: Are you subject to the "Wealth Effect" ?
« Reply #10 on: February 15, 2014, 05:07:52 PM »
I started tracking our net worth daily back in September 2008 when things started tanking.  I know a lot of people would find that overly obsessive, but for me it has been easy (I log into yodlee once a day, update account balances, and copy the net worth total over to my spreadsheet) and has had a really interesting effect on my psychology.  I basically don't worry about the market any more -- neither the ups nor the downs bother me much.  They are all just data points for my tracking.  When things are going down, I can look back and find similar phases when they were going down and see that yes, eventually the momentum turned and things went back up again.  And when things are going up, I don't get too excited either because I have 5+ years of data that shows that those upward trends don't last either.  And I don't think the wealth effect is affecting me much, because spending choices are not based on short term ups or downs but rather a long term plan/goal of eventual FIRE.

I'm pretty similar.  I track it daily and I like when things go up because that means I've met wealth goals and I like when things go down right before I make a contribution but I don't think it affects my spending.  Why?  Because I have a budget that I stick to and stays the same irrespective of market changes.

Rural

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Re: Are you subject to the "Wealth Effect" ?
« Reply #11 on: February 15, 2014, 06:50:49 PM »
Doesn't affect me because I look at quarterly statements when they come in the mail and don't look otherwise. I've found it grows without my staring at it.

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Re: Are you subject to the "Wealth Effect" ?
« Reply #12 on: February 20, 2014, 01:07:55 PM »
I get up usually 3 hours before the Market opens and do a ton of reading and trade all day till the market closes most days. Have emails from all different site i belong to etc... and I use TD Ameritrade.  I always would prefer to see green than red BUT I invite the red as I buy stocks i dont care so much in the long run if they go down but see it more as a buying opportunity. But like i said i do tons of research. Long and short of it my red or green doesn't indicate me buying more or less materiel things. Nor does my Vanguard Index funds. I do it because I enjoy it and hopefully speed up my goals BUT also dont put myself in a position that its going to ruin me.  I use stops or trailing stops on a few stealth stocks but if KO dropped 10$ tomorrow i probably would be happy! If you can find that sweet spot in trading that where you want to be so takes all emotion out. I have been doing it now what seems forever so maybe its just the longer you do it! Good Luck.

aclarridge

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Re: Are you subject to the "Wealth Effect" ?
« Reply #13 on: February 20, 2014, 01:36:40 PM »
I'm still in the accumulation phase, so I shouldn't be happy when the market goes up since the purchase price goes up, ...

This!  Exactly!

An ideal stock market trend would be for prices to gently rise for the entire time you're buying stocks before retirement, then jump way up the day before you retire and climb for years afterward.  Gently rising is better than dropping or staying the same because it means the economy is healthier.

I think I've sort of conditioned myself to love the down days - up days just raise my costs which sucks.

The way I see it, just by the nature of the financial markets, there will likely be at least one, maybe two big crashes in equity markets during my accumulation phase. I seriously hope that one happens as soon as possible, because I'm at a point where I'm saving aggressively so I'll just get lots of shares cheaply. The worst scenario is doing all your accumulation during a big runup, then immediately after you ER there's a giant crash. Best to have it happen as early as possible in your accumulation phase.

dragoncar

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Re: Are you subject to the "Wealth Effect" ?
« Reply #14 on: February 20, 2014, 02:06:27 PM »
Had to look it up:

Quote
People should spend more when one of two things is true: when people actually are richer, objectively, or when people perceive themselves to be richer—for example, the assessed value of their home increases, or a stock they own goes up in price.

I know it's Wikipedia but I don't think you can discount unrealized capital gains as mere perceived wealth.  It's real afaic.

However, my wealth doesn't affect my spending.  My income does, but not daily fluctuations in net worth.

On the other hand, those daily fluctuations are significant compared to my income so it definitely affects my mood.  There are months where I save 70% of my income but end up with a lower net worth.  It's a bit depressing.  I guess I shouldn't look at my investments but that's really hard for me.

golfer44

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Re: Are you subject to the "Wealth Effect" ?
« Reply #15 on: February 21, 2014, 09:53:07 PM »
On the other hand, those daily fluctuations are significant compared to my income so it definitely affects my mood.  There are months where I save 70% of my income but end up with a lower net worth.  It's a bit depressing.  I guess I shouldn't look at my investments but that's really hard for me.

I absolutely feel you here.

I've played around with the idea of keeping my investments out of my Mint account, and just keeping them over at Personal Capital (it's like Mint, for investments)... so you can track your savings rate/cash flow and your investment performance independently.

Abe

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Re: Are you subject to the "Wealth Effect" ?
« Reply #16 on: February 21, 2014, 10:30:48 PM »
The fluctuations in my portfolio so outsizes any discretionary (i.e. buying coffee) spending in a given time period that it didn't even occur to me that the fluctuations could alter my spending. I found a correlation to when I was working overnight and spending, but nothing with the portfolio fluctuation.

MDM

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Re: Are you subject to the "Wealth Effect" ?
« Reply #17 on: February 27, 2014, 12:39:43 AM »
Probably didn't pay enough attention to net worth for too long.  When I finally looked up from the heads-down work approach and realized even conservative investment results were doing and would do better than the salary from work - I retired!

Yes, if I do look too closely on a bad market day there is a twinge - but fortunately not enough to cause any investment changes.

Left

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Re: Are you subject to the "Wealth Effect" ?
« Reply #18 on: February 27, 2014, 06:30:09 PM »
not really for me, even though the account said I "made" that much money... I don't really "have" that much until I sell it, and I'm not selling just yet

iris lily

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Re: Are you subject to the "Wealth Effect" ?
« Reply #19 on: February 27, 2014, 08:01:05 PM »
No, I went for years without checking my investments. Well, once a year we do a net worth evaluation so I "check" it then, and while I remember the total number, I've forgotten the amounts in my market funds by the next day.

I'm not a daily or weekly or monthly or even quarterly checker. And if that makes some of you crazy, so be it.

For me, if I'd been more investment savvy, I would have dollar cost averaged into an index fund for 25 years and be done with it. I don't care about "beating the market."   I just don't care.

But now since I'm nearing retirement I pay a little more attention and look at my 401k about 1X monthly. Oh, I remember when the market hit 15,000--I did take myself out to dinner. DH was gone that week, so I celebrated on my own.

kyleaaa

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Re: Are you subject to the "Wealth Effect" ?
« Reply #20 on: February 28, 2014, 07:12:51 AM »
Yes, everybody is subject to the wealth effect. No, you wouldn't be aware of it if you were. It's not a conscious thing.

pom

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Re: Are you subject to the "Wealth Effect" ?
« Reply #21 on: February 28, 2014, 07:33:29 AM »
I also think that everyone is subject to it to a lesser or greater degree depending on personality.

I can't really see someone worth $10 million wondering if they should buy a $2.99 bag of rice or wait until there is a special to have it for $2.49.

PeteD01

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Re: Are you subject to the "Wealth Effect" ?
« Reply #22 on: February 28, 2014, 08:24:49 AM »
I also think that everyone is subject to it to a lesser or greater degree depending on personality.

I can't really see someone worth $10 million wondering if they should buy a $2.99 bag of rice or wait until there is a special to have it for $2.49.

You'd be surprised....

TreeTired

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Re: Are you subject to the "Wealth Effect" ?
« Reply #23 on: February 28, 2014, 09:21:23 AM »
Yes, everybody is subject to the wealth effect. No, you wouldn't be aware of it if you were. It's not a conscious thing.

Yes, but in order to feel wealthier because the value of your portfolio has gone up  (like today for example...  WE ARE RICH!!!!...  or we would be if we were 100% in equities..   )

I started this thread because I watch my portfolio value on a daily basis and very often on a minute to minute basis and was concerned that I was having too much of an emotional reaction to day-to-day swings in portfolio value,  but my wife is oblivious, even when I occasionally mention to her that the the stock market keeps going up and maybe we won't run out of money in 10 years.  More significantly, she has her own IRA accounts and she checks her quarterly statements maybe once a year.   My point being, in order to be subject to the wealth effect it seems to me you first must at least be aware of your "wealth." 

« Last Edit: February 28, 2014, 09:24:33 AM by NC_MJ »

wtjbatman

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Re: Are you subject to the "Wealth Effect" ?
« Reply #24 on: February 28, 2014, 07:45:19 PM »
I look at it every day or every few days. I also do a lot of reading/research. But I'm not doing index investing either, so I have a good reason to keep an eye on the market and certain stocks. If I was an index investor and had, say, a three fund portfolio, I probably wouldn't check it nearly as often.

Bateaux

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Re: Are you subject to the "Wealth Effect" ?
« Reply #25 on: February 28, 2014, 09:28:30 PM »
With a 1% market move equating to more than $10,000 change in my accounts now, I must admit it can be mood altering.  I'm guilty of totaling all accounts net worth almost daily.  I put a huge portion of my earnings into savings.  I find I'm more inclined to keep at it by knowing where my accounts stand.

Justin234

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Re: Are you subject to the "Wealth Effect" ?
« Reply #26 on: February 28, 2014, 10:48:32 PM »
I don't actively check the market, but since I listen to NPR a lot, it is difficult to avoid hearing how the market is doing throughout the day.

Since I've been recently formalizing my asset allocation (as opposed to my old strategy of having half in cash (for a down-payment) and half in the total stock market, I traded in the cash for international, REITS, and some bonds), I am often curious to see my total investment balance at the end of the day, just to know if it followed the Dow Jones, etc., or didn't.

I get some pleasure in seeing that, when the US market indices are down, my balance hasn't changed or is even sometimes up. Otherwise, I really just stick to a monthly update of my spreadsheet (like I did this evening). If I could keep the radio people from telling me what's going on on an hourly basis, I would do it in a heartbeat.

Rural

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Re: Are you subject to the "Wealth Effect" ?
« Reply #27 on: March 01, 2014, 08:15:57 AM »
If I could keep the radio people from telling me what's going on on an hourly basis, I would do it in a heartbeat.

Recorded books. :-)

Exflyboy

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Re: Are you subject to the "Wealth Effect" ?
« Reply #28 on: March 01, 2014, 01:54:02 PM »
I must admit since i retired I do look at the market on a daily basis.

I keep 5 to 7% of my portfolio in cash. I try to remain objective and look for buying opportunities.

I rolled about 30% of my spare cash into the market at the perfect time during the recent pullback.. Mainly cus I kept a clear head and didn't get sucked into the emotion.

Frank

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Re: Are you subject to the "Wealth Effect" ?
« Reply #29 on: March 03, 2014, 07:50:51 AM »
In college I spent what felt like a vast sum of money ($3,000) on a device called a Macintosh computer.  I cheered myself up that the gold stock I owned at the time was up about that amount the same quarter.  Well, the gold stock didn't stay high forever (and I still have it!) but the Mac was possibly the best investment of my life in terms of quality of life over the next ten years or so. It also gave me the faith in Apple stock to buy heavy when I saw the first iPod, which in turn was the best investment I have made financially.

Ok, I get an email daily from Barron's with my portfolio summary. I am curious if there is a big change either direction, but especially interested if there is a nice fat drop in prices that could be the start of a fabulous collapse in equities.  I also look from time to time at two stocks I own which are in the red but clawing their way out of the hole.

soccerluvof4

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Re: Are you subject to the "Wealth Effect" ?
« Reply #30 on: March 04, 2014, 11:20:42 AM »
Wealth is a huge factor of your life and why most people are here. I don't think there is anything wrong with it affecting you a bit one way or another I would wonder if you had a pulse if it didn't. And again you said you were actively involved in your portfolio so I guess some trading was involved and that's just hard to walk away with. To me , which is why i continue despite my index funds I trade with a very small portion of my portfolio is because i enjoy it. Perhaps you need to dabble again.

hodedofome

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Re: Are you subject to the "Wealth Effect" ?
« Reply #31 on: March 04, 2014, 12:30:04 PM »
Unless you are actively trading an account, there's probably no reason to check your account balance daily. I look in Mint and notice my retirement accounts probably once every week or two, but that's it. I record my net work probably once every month or two. I check my trading account once a day. Maybe twice. But I have a systematic process for buying and selling so looking at my account balance doesn't affect me much. I have noticed, however, that having my trading application (Interactive Brokers Trader WorkStation) pulled up all day long raises my heartbeat. Watching my daily P&L fluctuate minute by minute gets me excited. So I close it and only open TWS when I actually have to make a trade. I check my balance from my phone instead. It doesn't change with every tick...

I use a longer-term system for my retirement accounts that doesn't require me checking more than once a month. So I leave those alone because there's nothing 'to do' on a daily basis. Checking every day would just introduce feelings that could cause you to make a bad decision. For instance, checking your weight every day will probably introduce more stress than checking your weight once a week.

I would recommend some trading/investing psychology books to read in your spare time. Mark Douglas, Van Tharp, Ari Kiev, Brett Steenbarger, Jesse Livermore, all those guys are good. Your human nature is going to be your worst enemy.

It was never the doing that made the big money for me, it was always the sitting - Jesse Livermore

TreeTired

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Re: Are you subject to the "Wealth Effect" ?
« Reply #32 on: March 04, 2014, 07:23:09 PM »
I'm RICH!!!!!  (today)...   didn't rush out and buy a (used)Porsche, so I guess I am making progress.

Rob

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Re: Are you subject to the "Wealth Effect" ?
« Reply #33 on: March 04, 2014, 08:47:45 PM »
I look at it every day or every few days. I also do a lot of reading/research. But I'm not doing index investing either, so I have a good reason to keep an eye on the market and certain stocks. If I was an index investor and had, say, a three fund portfolio, I probably wouldn't check it nearly as often.

I'm similar to this, maybe checking a little more frequently. It is very uncommon for me to go a day without having my portfolio open and refreshed frequently. I haven't noticed any wealth effect. I am in a lot of growth stocks, so I know that the numbers that I have right now could fade away very quickly. I somewhat view it as a potential wealth indicator since I am up quite a lot at the moment. When I have up days, it definitely makes me happy, and when I have down days, I like to look at which stocks drove it down and see if there is a reason or if it is just due to market fluctuation. The majority of the time, it is due to market fluctuation which causes me no concern because I am confident it will come back. In addition, on those down days, any of my stocks that moved up, I see as being a huge success because they beat the market significantly and will likely rise when the market does. Then when the stocks that were down level out, I will be ahead. May be some weird rationalization, but it has actualized that way for me many times.

I also get some good buying opportunities like this. One example was a month ago when one of my positions, DDD, fell by 30% on an earnings warning. Looking at the release, it was due to high r&d and acquisitions costs, and they actually expected higher revenues than before. To me this was great news because I want my growth company completely focused on capturing that growth and growing revenues. You don't own a stock like DDD for earnings right now. I bought some that day and that's now up 30% in a month, it was a clear overreaction. That being said, with a stock like DDD, any day could lead to another 30% drop.

Doing this doesn't give me any reason to sell. I usually buy a stock intending to hold at least a year, so until that year is up I don't really consider it. For example I have some JCP (damn) that I bought at a cost of $18.11. It was down about 70% recently, but I'm definitely not selling it at that point. I've pretty much written it off as going to 0 and if I eventually get it back, then it's a nice bonus. The last few days it's risen about 40%, so while I'm still way down, maybe after a year I will be close to even.

Either way, I still eat my pb&j and water for lunch.

MrCash

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Re: Are you subject to the "Wealth Effect" ?
« Reply #34 on: March 12, 2014, 06:21:30 PM »
I do check my balances a lot, but I don't have enough to experience any kind of "wealth effect".  Hopefully this will change in the future. :)

Shor

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Re: Are you subject to the "Wealth Effect" ?
« Reply #35 on: March 12, 2014, 08:04:46 PM »
Is there an anti-wealth effect too?
When the market is down, and I'm seeing red, it makes me sad. When I get sad I get hungry. Lunch out at the buffet bar is the only recourse!

MrCash

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Re: Are you subject to the "Wealth Effect" ?
« Reply #36 on: March 12, 2014, 09:19:38 PM »
Is there an anti-wealth effect too?
When the market is down, and I'm seeing red, it makes me sad. When I get sad I get hungry. Lunch out at the buffet bar is the only recourse!

This would explain so much!

hodedofome

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Re: Are you subject to the "Wealth Effect" ?
« Reply #37 on: March 13, 2014, 08:08:02 AM »
Tom Basso was a hedge fund manager featured in the New Market Wizards book. His nickname is Mr Serenity because nothing really seemed to change his attitude or demeanor. He mentioned on a recent podcast that on the bad days he would think back on the good times and realize that it would eventually get better in the future. On the good days he would remember the rough days so that would keep him from getting greedy and making a bad decision. That's probably something we could all do to stay self controlled.

MrCash

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Re: Are you subject to the "Wealth Effect" ?
« Reply #38 on: March 13, 2014, 09:05:44 AM »
Tom Basso was a hedge fund manager featured in the New Market Wizards book. His nickname is Mr Serenity because nothing really seemed to change his attitude or demeanor. He mentioned on a recent podcast that on the bad days he would think back on the good times and realize that it would eventually get better in the future. On the good days he would remember the rough days so that would keep him from getting greedy and making a bad decision. That's probably something we could all do to stay self controlled.

This too shall pass.

DrTesla

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Re: Are you subject to the "Wealth Effect" ?
« Reply #39 on: March 13, 2014, 11:12:02 AM »
As a dividend growth investor for a couple years now, the ups and downs are like tidal waves soothing you as you float along, eventually almost putting you to sleep and not caring anymore. The closer you are to the shore (broke) the more they slam you mentally. Taking a margin account and loans for investing makes the waves bigger and more possible to wash you all the way inland with debt.

But if you focus on life itself and let the palm trees grow (dividends) passively, then you should be able to relax more and more.