Did you know that investment risk can be just as addictive as sugar?

What’s For Breakfast?

I was meeting with a prospective client recently when a random image popped into my head. It was of an educated, successful couple eating breakfast—but instead of eggs and toast, the couple was sharing a big bowl of M&M’s and they were eating them by the handful.

Gross, right? But in my mind the colorful concoctions represented the higher and higher investment returns my client was seeking. Returns that were becoming more and more elusive, but more and more tempting.

Of course everyone knows eating M&M’s for breakfast might seem like a great idea today but bring lots of problems tomorrow.

Manage Investment Risk With Balance

Our philosophy of aligning investment risk with concrete financial planning goals is akin to recommending a well-balanced diet. 

In the world of limitless sugar and sweetness that might seem unappealing and boring. But that’s our mission, to provide objective truth in a financial world of make-believe, even when our message is seen as boring or “unsexy”.

The Dopamine Effect

Addiction is addiction. Whether it’s sugar or a big financial gain after an outsized investment risk, the same system of reward is at work in the brain.

There is a strong correlation between the attraction to sugar and the incessant desire for higher investment returns. Each of these render a certain amount of fulfillment emotionally and physiologically. Sugar provides an intense injection of the neurotransmitter dopamine into the bloodstream. The pleasure associated with higher investment returns also creates a dopamine response. 

This powerful reward system in our brains motivates us to seek this response over and over again.

This can lead to investment risk far beyond what’s needed.

Addiction to sugar isn’t biological, but long-term consumption of sugar alters the brain chemistry and distorts reality. 

On the financial side, the momentary pleasure from an unexpected success after an investment risk has the same effect on our brain chemistry. It hooks your brain on looking for that same experience again and again.

The Fulfillment Curve

Yes, your body, your brain, and your financial life are indeed connected. 

Food has a purpose (fuel) and money has a purpose (purchasing power). We can easily get off track if we forget that. 

The chart below is on the flipboard in our conference room. This is an adaptation of a concept in Vicki Robin’s book, Your Money or Your Life.

The Fulfillment Curve

The Fulfillment Curve depicts the two primary aspects of money—how much we spend, and how much happiness and fulfillment those purchases create. 

The apex of the curve shows us where we have “Enough”. This is the point where we have enough money to be comfortable. Beyond this point lies clutter, complexity, and hassle.

How Much is Enough?

Interestingly, having enough food and enough money are equally foreign concepts to many folks. 

We callEnoughthe Repository of Wealth. That’s the point where you can reasonably expect to sustain your existing lifestyle in real terms, (adjusted for living cost increases) for the remainder of your life. Some investors will reach that plateau and many will not.

Chasing Returns and Investment Risk

Ironically, many investors fail to reach the Repository of Wealth because they ignore their long-term reason for investing. Instead, they constantly take on more risk and chase higher returns. 

Predictably, the outcome of this is that these investors generally achieve lower returns. Just like those M&M’s for breakfast, investment risk feels great while you’re doing it. But causes problems in the long run.

You can’t out-exercise your diet and you can’t invest your way out of overspending/undersaving. Remember the purpose for both and you are well on your way. Start there. Ready for a real conversation? 

Contact us today to talk about how we can get you investing smarter, not riskier.

 

Enjoyed this article? Here are three more to help you:

Old lessons for the new reality.

Five surprising myths about the new reality.

How to build a resilient financial future.

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