“We are never as happy or as unhappy as we think we are,” said the French sage La Rochefoucauld. This principle can be applied to money as well. You are never as rich or as poor as you think you are.
Understand this, and you will be less likely to behave foolishly during a bull market and less likely to swoon during corrections. In other words, you won’t be making constant adjustments to your lifestyle. One instinct, of course, is to measure wealth by the bottom line on a brokerage statement. When the markets go up, by dint of either irrational exuberance or a Federal Reserve asset-inflation scheme, people think they are richer. They think they can spend more. And when markets correct, they start worrying about their vacation budget.
A Wiser Way to Live
Pay less attention to the prices of assets and more to the income they generate. A well-diversified properly allocated portfolio should generate a reasonable income stream of 3-4% over time. During a market correction, the companies you are invested in aren’t necessarily making less money for you. The key here is the sustainability of their income stream.
If this sounds radical, think about real estate. Suppose you have just retired and downsized to a house that you plan to live in until you pass away. Then a flood of exuberant buyers comes into the neighborhood, and the valuation of the house doubles. Does this make you better off? NO. Your income (the right to occupy the house in this case) is not higher.
I certainly don’t want to discount the fact that a prolonged market downturn that kills corporate profitability would hurt portfolios and the income they generate. A Wall Street panic attack or a correction, on the other hand, does not.
Corrections happen for many reasons, tend to be short in time frame, and banner an overburdening story that soon becomes the forgotten story. The key here is to not let market corrections and volatility overshadow the sustainability and corporate profitability of the companies generating the income stream being used to live on every month.
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