How to find true happiness in your investing

By Jerry Wagner

Most of us spend a lot of time chasing happiness, yet rarely pause to consider what it actually means. This time of year often invites that kind of reflection, as many people begin thinking about what they want to change, improve, or do differently in the months ahead in hopes of finding greater happiness.

Psychologists tell us that happiness is a state of “subjective well-being” (SWB). It is a sense of feeling good about yourself and your life in whatever context you experience it. In that way, it is not based on one absolute definition but rather on each person’s subjective state.

Still, there seems to be agreement on what does not result in true happiness. Being rich and accumulating possessions, while satisfying in the short term, does not appear to lead to lasting happiness.

Some psychologists believe that happiness is closely tied to progress. In a blog post for Psychology Today, Timothy Pychyl explains that “progress on our goals makes us feel happier and more satisfied with life (our subjective well-being, SWB, increases).”

He adds that “the research on goal pursuit and well-being reveals an interesting cycle between progress on our goals and our reports of happiness and life satisfaction.” This cycle is shown in the following illustration.

This image conveys the concept that as we make progress toward our goal, we reinforce and expand our sense of well-being—and as our sense of well-being increases, it enhances our ability to progress and reach our goals.

How does happiness fit into investing?

While investing is only one part of our lives and our broader pursuit of happiness, the realities of modern life make it an important one. So, how does the “happiness is progress” concept fit into the investing context?

We all seek progress in our investing, but we define it in different ways. Many investors assume progress means maximizing returns. By that logic, buying a lottery ticket would be the ultimate strategy: invest a dollar for the chance at an almost infinitely large payoff. The problem, of course, is that you are far more likely to lose your entire investment.

So something more than returns alone must be considered when evaluating investment progress. Risk and probability are essential parts of the equation.

Many years ago, I co-wrote a paper for the Journal of Portfolio Management that demonstrated that, in judging the efficacy of market timing, you had to assess returns in light of the risk taken. Today, risk-adjusted returns sit at the core of modern portfolio theory and the growth of liquid alternatives.

Progress in investing, therefore, should be judged by achieving the desired level of risk-adjusted returns.

The role of risk

The “desired level” is the subjective part. It is determined by one’s suitability profile. What level of risk can you live with and afford? It’s different for everyone, and it changes as one’s wealth rises and falls, and as the market stirs emotions that fluctuate from fear to greed and back again.

This is why we regularly ask investors to use our suitability questionnaire to inform us of any changes in their profile over time or when they want to change strategies.

We use quantitative analysis to supply the probability part of the “investment–progress equation.” We think of “probability” as the odds of winning. But essential to giving the “odds” any meaning is the concept of repeatability. Flipping a coin yields odds of 50/50. But the results are random.

With quantitative investing, one seeks a repeatable process that has an edge over the random outcomes of a coin flip. That does not mean that it will be right every time, but rather that it will be right more often than a coin toss, or generate more returns for the risk taken than a game of chance.

That’s why we develop computer-driven strategies. Having a computer follow a formula of commands yields a repeatable process. Being able to test that formula over history yields a probability of success.

You can’t have “progress”—and, thus, investment happiness—without a meaningful, manageable goal

The psychological definition of happiness found that the pursuit of a goal was essential to the concept of progress. But others have found that pursuing just any goal won’t necessarily lead to happiness. Just as the mere acquisition of wealth and objects is not likely to be satisfying, the pursuit of goals that stem from lowered expectations may not be challenging enough to evoke happiness.

Nor is requiring peak performance all of the time. That is simply not attainable. Life is made up of a series of peaks and valleys—as are the financial markets.

So simply making progress toward any goal is not enough to find happiness. Instead, we need to seek meaningful, manageable goals.

I often get the impression, when talking to investors and advisers, that their goal in turning to active managers is to find a strategy that captures all the gains of the S&P while suffering none of its losses. That’s not a manageable goal. It will lead to disappointment, not happiness.

A more realistic outlook is to first realize that the markets regularly have peaks and valleys. A manageable goal, then, is to end up with more dollars than you began with at the end of a full market cycle—while managing risk along the way. History has shown that this kind of discipline can leave investors in a stronger position than a purely buy-and-hold approach, particularly during periods marked by volatility and drawdowns.

We help investors focus on the more meaningful goal by providing a chart of their time invested with us and our OnTarget Monitor in their quarterly statements. The monitor uses the time horizon investors provide when they begin working with Flexible Plan Investments to project the range of probable outcomes for their combination of strategies.

In addition to this monitor, each quarter we track the performance toward the probable, attainable goal of each investor’s portfolio over the time horizon of their choice. Green means the portfolio is deemed OnTarget. Red indicates a change is in order.

Flexible Plan Investments offers many different strategies and suitability profiles, so if your portfolio is in the red, a better fit for the current environment is always just a strategy change away.

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Happiness, as we’ve discussed, is not something that can be guaranteed or engineered through a single decision. More often, it emerges from making steady progress toward goals that are realistic, meaningful, and manageable.

For investors, that kind of progress does not come from chasing returns or searching for a “Holy Grail” strategy. It comes from setting attainable goals that reflect the level of risk one can comfortably and affordably accept, and from staying disciplined through the inevitable ups and downs along the way.

Progress, however, is not the same as constant motion. Moving simply to create the feeling of progress is rarely the answer. True progress is supported by understanding yourself, documenting that understanding through a suitability profile, and monitoring your progress toward a goal that is personal to you and your portfolio.

By keeping the focus on process rather than outcomes, investors can work toward a more durable form of investment happiness.