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Can Money Buy Happiness?
Rich, poor or middle-class, there are happy people across all levels of the socioeconomic spectrum. So what is the common thread?
Daniel Lancaster
January 13, 2025
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“What you get by achieving your goals is not as important as what you become by achieving your goals.”
-Zig Ziglar
NEWS
What Happened Last Week
US job growth showed 256,000 new non-farm payrolls in December, far above the estimates of around 165,000.
The unemployment rate dropped to 4.1% in December from 4.2% in November.
Average earnings, average hours worked, and therefore average purchasing power for workers as a whole have all increased in December.
Mortgage rates rose due to renewed expectations of 3%+ inflation for longer. The average 30-year mortgage surpassed 7% again.
Investor sentiment is fearful at the moment, and has trended fearful for the last month, according to the AAII Investor Sentiment Survey and Fear and Greed Index.
Both the S&P 500 and the MSCI World are below their 50-day moving average, but the 50-day moving average remains above the 200-day moving average.
How I See It
There is a lot of uncertainty and fear in markets right now, mainly due to the fear of higher interest rates for longer.
But while there are tradeoffs, I believe the best course forward is exactly that: higher rates for longer.
While inflation has many drivers, the largest among them is money supply. If the Federal Reserve attempts to reduce interest rates too quickly through purchasing up US Treasuries this year, that risks increasing money supply (M2) fast enough to push inflation rates back up in 2026 and potentially beyond.
That’s a bit oversimplified, because not all money goes into circulation (what we call M1) or even potential circulation (M2), but an environment that favors lending certainly encourages it.
High inflation, if it becomes the norm, is extremely difficult to slow down.
So the Fed has to make a decision. They have a dual mandate: to keep inflation low and maintain full employment.
Right now, the employment side of things appears to be easily thriving in this high interest rate environment.
High interest rates can cause difficulty in the long-run for companies which rely heavily on loans. They can also affect expected earnings many years into the future, which affect growth stocks more than value stocks. But they aren’t the only contributor, so there is usually an initial overreaction in stocks when interest rate expectations change suddenly.
Interestingly, the long-term rates turned higher than short-term rates in the past month (as measured by US Treasury yields). This was the first time this has happened in two years.
These higher long rates incentivize bank loans now as opposed to later, because they can potentially get some of the highest return on investment during this window of time. The average interest paid on bank savings accounts is less than 0.5% annually. Think about how much the bank makes by borrowing at 0.5% and lending at 7%!
Bottom line: we can still experience reasonably good economic growth with high interest rates.
The fact is, we had a lot of economic news this past week that would be considered good news under other circumstances. But it was interpreted more like bad news. That’s usually a good sign for the likelihood of a positive 12 months ahead.
I think there is a healthy fear in the markets right now, and the markets are taking a breather.
As I mentioned on December 9, I think this year could be one in which we experience a correction (down 10%-20% over a few months before continuing upward). Right now, the S&P 500 is down close to 5% from its high back on December 6 , which would be considered a pullback.
That said, I think a likely scenario is that we’re looking at a single-digit return by the end of the year. But that return is still essential to capture when investing with long-term goals in mind. And that means riding through pullbacks and corrections if necessary.
Covered call option strategies can be particularly attractive in an environment that expects smaller, but still positive, returns. For those who are less inclined to take the risk, those covered call options could help pay for put options on the downside, which act as a type of insurance against market loss beyond a certain threshold.
Options strategies can be risky if one doesn’t have full knowledge of how to execute them. But there are also ETFs that allow access to professional managers who do this for you, particularly Defined Outcome ETFs.
PARADIGM SHIFT
Can Money Buy Happiness?
We’ve heard it said that money can’t buy happiness.
Rich, poor or middle-class, there are happy people across all levels of the socioeconomic spectrum.
So what is the common thread?
Consider the one who first said, “Blessed (also translated ‘happy’) are you who are poor, for yours is the kingdom of God” (Luke 6:20).
How is it possible, then, for him to also show approval to the very wealthy Zacchaeus, who made it a point to be both fair and charitable?
Poor or rich, there is something beyond this material standard which determines a person’s happiness.
I believe it comes down to something like the sense of purpose based upon a worthy aim.
As Dr. Jordan Peterson has observed, “You experience positive emotion by noticing that you’re moving towards a goal.”
In other words, positive emotion is not the direct result of a lot of money.
That’s good news. Because the prelude to wealth accumulation is the willingness to risk loss and failure. If happiness does not depend primarily on material possessions or money, that means our natural fear of loss is actually an exaggerated fear.
That fear of loss, fear of the unknown, is what keeps most people doing the same thing today that they did yesterday.
It’s also what causes the biggest mistakes when it comes to investing. Fear of loss, combined with the illusion of knowledge, costs many investors a life-changing fortune over the course of their lives. Fortunately, many of them never stop to calculate just how much that opportunity cost is, so they don’t have to experience the regret.
How do you escape this fear of loss? There are several ways, but here are a few practical steps:
Practice being grateful. Consider all of the good things that you’ve already experienced in your life that has already made this whole wild ride a priceless gift.
Make your dreams come true as much as they are in your power to perform. That means identify what they are and set an end date for when you will attain them. Then follow through. Don’t leave it up to “someday.”
Remember when you had less than you have now. Were you as concerned about loss then as you are now? Consider why or why not.
Realize that you have more power to make money today than ever before in your past. If you lost it all in a worst-case scenario, you could rebuild it faster than you built it when you had less knowledge and experience.
Determine your aim and take calculated risk to achieve it. The experience will be powerfully transformative regardless of the missteps along the way, and you will discover new parts of yourself that emerge out of that courage.
FINANCIAL TOOL
Unsystematic Risk
While we want to eliminate the paralyzing fear of loss, we also want to act prudently to avoid unnecessary mistakes.
One way to limit your downside risk without sacrificing upside potential is by recognizing what’s called “unsystematic risk.”
This is inside speak that means company-specific risk.
Think of it this way. There is an economy which is driven by all sorts of interconnected factors. Think of the economy as the system. And there is risk inherent in the system. So when we invest in line with a broad market index, we’re taking on the risk of the whole system. This is systematic risk. The whole thing sort of rises and falls together.
Then there’s unsystematic risk. That is the risk that can be attributed to one single company, much less correlated with the rest of the economy. Maybe that company mishandled its finances, made a bad business decision, fell behind the technology curve, or flopped on its latest product or service. Whatever the case may be, the problem is with that company specifically, regardless of what its competitors or other sectors of society experienced.
Let’s start with the good news.
Unsystematic risk is how a very few individuals have become rich virtually overnight. That is, they went all in on a particular company which subsequently grew far and beyond the average stock market, and they multiplied their money several times over in a short amount of time.
But here’s the bad news.
For every story of quick riches with unsystematic risk, there are hundreds more stories of those who lost nearly everything in a bad investment.
Why?
Because unlike systematic risk, the odds are weighted against those who take on unsystematic risk.
The risk of one single company far outweighs the likely reward. That means you’re massively overpaying in terms of risk for the likely outcome that you’ll receive. The difference between unsystematic risk-taking and gambling at the casino is not very wide.
That is why, when it comes to betting heavily on one particular company, it’s best not to allow for more than about 5% of your total investment portfolio to be subject to that risk. Regardless of how confident you are in the investment, the odds are against you. So you always want to seriously consider the question: what if I’m wrong?
That’s not to say you can never take bets. But calculated bets are best in the long-run!
Systematic risk, on the other hand, exhibits a far greater potential for reward for each unit of risk taken on.
In other words, a diversified portfolio will win against the tightly concentrated portfolio in the vast majority of cases.
In a world of uncertainty, betting with the odds is typically the best way to achieve your goals consistently.
HERE’S HOW I CAN HELP
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I’d love to hear from you. Let me know what you’d like to see in upcoming newsletters, articles, or a digital course at Contact Us - The Wealth Expedition.