‘Tis the season to gather and celebrate with friends and family. Each year, old traditions are remembered and new traditions are made. We reconnect with those we see often and long-lost relatives alike. Reliability has become an evasive event in the busy world we live in today. In the craziness and uncertainty of our day-to-day lives, we take solace in the certainty that some of these events provide.
In some families, it is a holiday tradition to attend church or temple together. In others, it is a certainty that Grandma will play the piano while everyone sings along. And in others, it is a virtual certainty that everyone will get their year’s worth of invaluable wisdom from that goofy brother-in-law that goes by “Blaze”.
Celebrating with relatives is a wonderful thing, but this time of year, we must all be more conscious of the unrelenting human desire to compare ourselves and our decisions to the people and things around us. The relatives you ought to ignore are not people, but perceptions.
In his book, Predictably Irrational, author Dan Ariely describes that “humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly” and later “we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable – and avoid comparing things that cannot be compared easily.”
In other words, we often use completely irrelevant benchmarks to gauge our success and make decisions. We make comparisons about the car we drive or clothes we wear relative to our siblings. We draw comparisons about how our children act relative to the neighbors. We decide how much to spend on our holiday shopping after we figure out how much our friends or family members are going to spend on theirs.
None of these comparisons make any rational sense. However, it is far easier to take a shortcut and follow something easily comparable than it is to really figure out what makes sense in our own lives. After all, these comparisons provide a simple, concrete (but irrelevant) answer, while the question about how things fit into our own lives seems far more abstract.
People often share that they refinanced their mortgage at 4% while their brother got 3.75%. The interest rate provides a simple comparison for people, but misses the big picture. Digging a touch deeper, we find out that their brother paid closing costs and they didn’t. The monthly savings of that 0.25% difference would finally cover the closing costs after 10 years, while they only want to stay in the home for 5. Indeed, the rate is lower, but will end up costing them more.
No where in the world is relative benchmarking more prevalent and more irrelevant than the investment realm. How you perform against the S&P 500 has no bearing on your financial well-being. I am guessing almost everyone reading this beat the S&P 500 in 2008. I am also going to surmise that each one of you didn’t feel very good about that. Earning returns of -30% when the market is at -37% hardly provides a reason to celebrate.
If you own a business, you most certainly understand the cyclical nature of being a business owner. Your revenue goes up and down, your profits rise and fall, and the value of your business goes along with it. However, you choose to continue running it because of the lifestyle it provides for you. In fact, the goal of most business owners is to run the business in a way that allows them to live the life they want. It provides a nice income stream, job security and the hope of a nice payout when they sell.
A large minority of business owners really run their business to maximize returns at all times. Those that do are often hung out to dry when things get rough. We ought to consider our portfolios as our own small business. After all, our portfolios are literally comprised of ownership in thousands of very real, functioning businesses you can touch and feel. If we strive to maximize gains at all times, we are inevitably going to get burned. The business (portfolio) performance of the bicycle shop guy down the street has no relevance to that of your bakery.
Your portfolio is (or should be) designed to provide you with the lifestyle you want to live. In most cases, that does not result in a blind effort to maximize returns. Comparing it to an arbitrary benchmark (especially in short time periods) tells you nothing about whether it is going to allow you to achieve your life goals.
As it pertains to holiday spending, your holiday budget should reflect your own budget, not that of your relatives. Your relatives are trying to accomplish very different things in life than you are. As these comparisons begin to creep into your mind, ask yourself if they are relevant.
Invariably, year-end often provides a time for reflection on the past year and an opportunity to look forward toward the year ahead. In reality, it simply marks another day on the calendar. Our lives do not follow a calendar – they do not start over on January 1. Yet we somehow find ways to take comfort in the opportunity to start over again, to try new resolutions or to retry those we set the year prior. Year-end provides that certainty we strive for, so take comfort in that and your family traditions, and set a goal to ignore those irrelevant relatives you drag around with you in your day-to-day life.
In my extended family, we celebrate together with an appetizer contest that has become exceptionally competitive in recent years. Despite the herculean efforts of many of my cousins, aunts and uncles to garner votes for their dish, we all know full well that the newest member of our family wins every year. It is a certainty that the husband of my recently married cousin will magically procure enough votes to win the 2011 prize. Congrats in advance, Jim!
Joe Pitzl, CFP®
Director of Financial Planning
Intelligent Financial Strategies, LLC