The power of financial role models

But what about your financial position? Do you have someone that you compare your financial well-being against?

If so, are you ahead or behind?

For people approaching retirement a sense of financial security is important not just in monetary terms but also in terms of their overall sense of happiness and well-being.

Stepping off the employment treadmill can be both liberating and a recipe for heightened levels of anxiety.

At Morningstar's annual adviser conference in Chicago this month, Sarah Newcomb, their senior behaviour scientist, gave a presentation on what she terms "the comparison trap" and looked at research that shows where people believe they rank relative to others has a greater effect on happiness than their absolute level of income.

Interestingly, she also pointed to research that people who spend a lot of time on social media sites can have lower levels of well-being and life satisfaction.

The glib answer to this is to stop comparing ourselves to others – and perhaps cut down the social media time – but the counter to that is a body of research that identifies what Newcomb says is an innate need as humans. To assess our social and personal worth when there is no objective means to do so, we look to people similar to us to inform an assessment.

In common parlance we know that phenomenon as "keeping up with the Joneses".

What is interesting about this discussion is that it is not simply about the dollars. There is a significant emotional component involved when we are discussing financial well-being. Newcomb says we all probably know someone who is financially well off but not as happy or content with their lot as you would expect.

Rather than saying stop to the natural human trait of comparison, what the Morningstar research has tried to do is look at ways investors – and their advisers – can reframe the mindset to make it a more positive process. Because our tendency is to compare ourselves to people who have more, in Newcomb's words most of us appear to be actively making ourselves feel bad about our own financial circumstances by always looking up at people who have more.

While the concept of a role model/mentor is something that is positive overall, what the Morningstar research is pointing to is the need to thoughtfully pick the person you are going to measure yourself against.

As Newcomb says, by changing the target and direction of our social comparisons, we can create more positive emotions with our finances. "This might not change your economic reality, but it could improve your quality of life. And feeling more secure with your financial well-being could have beneficial long-term effects by eliminating fear-based behaviours, such as performance-chasing and panic selling, which could put you in a better position to achieve long-term investing success."

 
Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
26 June 2018
www.vanguardinvestments.com.au