Most asset classes have had gains in the last few years. Which is good, that’s why we invest. But the risk of portfolio gains impacting our day to day behavior exists: It can create Affluence Illusion.
Affluence Illusion
What is Affluence Illusion? There are several forms. Key ones occur when we take our portfolio gains or our high income as good news and forget the discipline needed to stay on course for the larger things we want to accomplish (e.g. retire).
What are some examples?
2 Key Ones
1. You log in to your portfolio and like the gains you see. Then, you continue to log in on a regular basis just to see how the gains are continuing. They keep growing. This behavior can run the risk of you forgetting that the gains were anticipated as part of the long term strategy of your portfolio.
Meaning, indeed, gains are pleasant when they happen.
But not really a surprise if your portfolio was constructed for the decades to come.
2. You get promoted. Perhaps you get a larger than expected bonus. You like how this adds cash flow to your monthly take-home pay. Perhaps you start to slip into lifestyle creep. Maybe you lose sight of the larger goals you set for yourself (e.g. retire). Earning more money through your working years was likely expected. When it actually happens though, it can create an illusion of affluence that actually isn’t there, because it was already anticipated.
Losing focus on the larger goals (e.g. retire) we have for our future selves happens when affluence illusion settles in.
The way to mitigate for it? Keep the long view. Go ahead and check your portfolio from time to time. Go ahead and celebrate that unexpected promotion or bonus or RSU award. But guard from these coming to the forefront and blocking your view of the decades in front of you.
If you do that, congratulations! You have beat the siren song of consumption that plays in so many forms on social media and in peer groups.
Ready to take the next step and work with a fee-only CFP? Reach out to schedule a Discovery Meeting to learn more.