I read a great Morgan Housel quote over the weekend from his book The Psychology of Money.
“Happiness, as it’s said, is just results minus expectations.”
Think about that for a second. Or visualize it as a math equation like this:
Results – Expectations = Happiness
Good stuff. So let’s dig in on that from the perspective of money and what the money is for.
Most investors view money as a tool – a tool to create “Happiness.”
What are “Results”? In the broadest and most general terms, results can be viewed as the return on your overall portfolio at a point in time. Results can be viewed literally every second online but can also be considered at some milestone in the future, like retirement.
Results are unpredictable and indeterminable. Erratic…especially when viewed frequently.
“Expectations” are what you plan for. You imagine them. Presume. Believe in them. They are, well, what you expect!
When a Result is better than the Expectations, you realize Happiness.
If the Result is inferior to Expectations, well, no Happiness.
This logic works for anything…if you go to a Michelin Star rated restaurant, your expectations will probably be very high. Along with the bill. If the Result is a mediocre meal or dreadful service, you will be very disappointed.
(At this point, I’m going to stop capitalizing the three words because my grammar checker in Word is going to explode.)
Because results are unpredictable, setting your expectations is the essential component of this equation because expectations can be as nebulous as just having a dream or as scientific as a modeled outcome based on algorithms and statistical data.
Expectations ungrounded in reality or realism are the main culprit when happiness is not achieved. Results that do not live up to expectations cause the equation’s difference to be a negative number for happiness.
Here’s the key to happiness – it resides in the setting of realistic expectations, and that means using a modeling approach.
Expectations need to be grounded in reality.
They need to be based on historical outcomes. They need to incorporate different years of variable cash flows, both in and out of a portfolio. They need to be analyzed and simulated over thousands of circumstances to be assigned a realistic and practical probability of success over a full lifetime.
Results can never be computed nor determined in advance. They are genuinely unpredictable.
Don’t let results drive your happiness – refine and clarify your expectations to minimize the reliance on the result’s unpredictable nature.
We help people with this.
Reach out if we can help you. Even though we specialize in a particular niche, we can help no matter what…we have many great colleagues we like and trust at other firms that we can introduce you to for the perfect fit.
Keep looking forward.
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