Kurt Vonnegut brought his good friend Joseph Heller to a party on Shelter Island off the coast of Long Island in New York. Shelter Island is a popular and expensive location for second homes of the wealthy. At the party Kurt Vonnegut commented that the hedge fund manager hosting the party made more money in a single day than Heller had ever earned from his hit novel Catch-22.

Joseph Heller turned to his friend and said, “Yes, but I have something he will never have – enough.”

To some this quote is an indictment of capitalism and materialism. That isn’t how I see it. I see it as a blueprint for getting the most out of investing. And I think about this quote a lot. To me it is the secret to successful investing. And this association is not original. Vanguard legend John Bogle liked this quote so much he titled one of his books “Enough”.

I think about this every time an investor tells me that their goal is to have the most money possible. And this is not a rare occurrence. I have a sneaking suspicion that a lot of the people that give me a different answer think the same thing but are too polite to say otherwise. This common goal leads to common outcomes where investors sabotage their future by never having enough.

Never having enough makes us lose sight of how to accomplish our goals

If your circumstances change and you can save more money it makes sense to change your goal. But investors should be careful about changing future expectations based on short-term market returns. Especially if market returns cause changes in behaviour.

Equity markets are volatile. Some years will see returns significantly exceed historical averages. Some years returns will lag significantly behind. It all evens out over the long-term. There are two traps that investors fall into when behaviour is influenced by strong markets.

The first arises from something called recency bias. Recency bias is our tendency to place greater importance on recent events. If the share market has recently done well we expect it to continue to do well. This is one reason that investors tend to chase investments that have recently had high retruns. 

After several years of strong returns investors believe the market is less risky. A change in the short-term pattern appears more and more incomprehensible. This attitude defies logic. Years of above average returns can’t help but lead to below average returns. That is how we get back to average. The market becomes riskier as valuations rise even if we perceive it as safer.

The issue with short-term returns is that they change investor behaviour. Growing more confident that future returns will be strong means many investors adjust their asset allocation into more growth assets. Some investors take on increasingly risky bets using leverage or migrating into speculative investments. These are all signs of risk seeking behaviour which stem from overconfidence.

During these same periods investors can succomb to the second trap by falling victim to the wealth effect. The wealth effect is the tendency for our spending to increase when our assets increase in value. Even if that increase is temporary. Credit card giant Visa studies the wealth effect. They found in 2022 that for every dollar of increase in the value of assets people spend 34 more cents. That increased funding comes from a combination of decreased saving and taking on more debt.

On a fundamental level falling victim to these two traps is moving the goal posts and changing your financial plan. This is the case if you’ve set goals and have a financial plan and strategy to achieve it or if you are just drifting along without much direction.

We can model out how this typical behaviour may impact an investor’s ability to achieve a long-term goal. A 35-year-old investor named Natalie has a $260,000 portfolio with a goal of earning an 8 percent annual return and saving $1000 a month. This plan sets Natalie up to achieve her goal of $4,000,000 with a little room to spare by the time she turns 65.

Natalie may not have broken down the goal into components. But the growth of the existing portfolio would result in $2,616,290 at 65. Saving $1000 a month and the 8 percent return would total $1,408,550 at 65. Natalie sets her goal and focuses on her saving and her investment strategy. Then something happens to throw her off. For two years returns are well above 8 percent and Natalie instead earns 15 percent a year while maintaining a consistent savings rate.

At 37 Natalie is feeling pretty good about herself. She looks at her portfolio value of $371,000 and feels wealthier. But her day-to-day life has not changed at all. In fact because of inflation she is actually having to make some sacrifices in her spending to maintain her saving goal of $1000 a month.

She may not be doing it intentionally, but she starts projecting her success into the future. If she earns a 10% annual return she would have more than $7,000,000 at 65. Given her investing success she starts to think she was too conservative with her goal.

Natalie also starts to reconsider how much she is saving given the cost-of-living pressures and her desire to have her increase in net worth make her current life a little better. Natalie’s best friend just had an incredible family trip to Bali. Natalie wants to create the same family memories that she saw on Instagram. Instead of saving $1000 a month she decides to put $500 a month into a family trip fund. Next year she will be on the beach in Bali.

Natalie is also growing more confident about her investing ability. And she enjoys talking more about investing with her mates. She wants to share her success to encourage others to invest. And while she doesn’t like to admit it - she is also bragging a bit too.

One day at the pub she is talking about how much her portfolio has grown with her mate James. Natalie invests mainly in low-cost index ETFs. When Natalie started investing, she decided that the best way to get ahead was minimising fees and taxes instead of trying to constantly find the ‘best’ investments. She likes the fact that she doesn’t have to put too much time into following markets because of how busy she is.

James has taken a different approach and he has been investing in an AI ETF. He explains that AI is going to change the world and is a once in a lifetime investment opportunity. What James is saying echoes what Natalie is reading on the internet. And when James tells her his portfolio is up 30% annually over the last two years it seems obvious that this is the right approach. If Natalie had followed James’ lead two years ago her portfolio would have over $100,000 more in it.

Natalie has made what seem like rational choices. She is wealthier so she can afford to take a nicer holiday. She is changing her investment strategy because she is a more confident investor after two great years. She reasons that she should start to take advantage of these great opportunities in cutting edge technology. Natalie finds it surprisingly easy to convince herself these changes are the right thing to do.

None of us intentionally sabotage our finances. Investing is hard because we can’t avoid the emotional pull of wanting more. It is too simplistic to call this greed because we never perceive ourselves as being greedy. Greedy people are the ones that do dumb things in the pursuit of wealth they don’t deserve.

That isn’t us. We just want things to be a little easier. We just want to be generous to the people we love. We want our family and friends to respect and admire us. We want that moment when we tell our family we are going on a holiday next year and the collective anticipation of the upcoming adventure.

Natalie’s story is not an example of outlandish risk taking and unadulterated greed. It is illustrative of what each of us face going about our day to day lives. Her decisions may be understandable but can have a profound impact on her finances. Saving $500 a month less at 37 means $592,716 less at 65 with an 8% return.

Breaking from the investment strategy she was comfortable with may mean forever chasing the ‘best’ investments. And this has a real cost. Morningstar measured this cost and due to poor timing decisions investors earned 1.7% less per year than the investments in their portfolio. In Natalie’s case if her portfolio earned a return of 6.3% instead of 8% she would end up with close to $1,700,000 less at 65 even if she didn’t change her savings rate.

Not having enough makes us unhappy

I have quarterly goals to try and grow the readership of the articles on our website. In May we surpassed our quarterly goal. But I wanted more. I had a new goal of having the best month we’ve ever had. I pushed myself and the team. And guess what happened. We achieved that goal and still had time left in May. I upped the goal again. Now I wanted to hit our Q3 goal early.

On Saturday June 1st I hopped out of bed to check our stats. And we came up 933 article reads short of our Q3 goal. A wave of disappointment flooded over me. 933 was a rounding error. We came 933 reads short of our third-quarter goal and had our best month ever and I was crestfallen.

I tell this story not as an admonishment to read more of our articles. But it wouldn’t kill each of you to read a couple more a month. I tell this story because it is an example of a trap we fall into as investors by constantly moving the goal posts. That is what happened to Natalie.

There is always more. A better hotel. A nicer house. A fancier car. Living in a society oriented around consumption means we are never going to run out of things to want. And living in a society with ubiquitous access to consumer credit means much of what we perceive as better is just at our fingertips.

It would be easy for me to say just ignore it all. But it is impossible to ignore. Our social media feeds, the media and advertising create a connection with the goods and services we can buy with who we are and how we want others to think of us. True wealth is hidden away from others.

Societal impressions of success and true wealth are often two different things. We build wealth by saving and compounding over the long-term. It is boring and it is slow. Societal impressions of wealth are always owning the trendy investment and living a life that is perceived as representative of success.

Here are some suggestions to avoid the trap of never having enough.

Tip 1: Invest with a set goal other than simply trying to get as much money as possible. Breaking down that goal helps so you can see the impact of your savings and the impact of returns. You will find that it is the consistency of returns over the long-term that really matter. 

Tip 2: Have an investment strategy that you believe in. That can make it harder to deviate from the strategy when hearing about a “can’t miss” investment opportunity. Intellectually you may know that changing your investment strategy based on market conditions is wrong and almost always leads to lower returns. But that doesn’t make it any easier to avoid. Learn how to say no to investments that don’t fit your strategy.

Tip 3: Measure success against your own goals and not on short-term market returns or your perception of how other people are doing. We all are incentivised to portray our lives and our investments in a better light. None of us like to talk about things that went wrong. The part of the trip that didn’t make it to Instagram might have involved Bali belly and hours stuck in traffic trying to get around. That amazing investment might have been cancelled out by lots of mistakes. To measure your own success in a productive way you need to understand the returns and savings rates needed to accomplish your goal. That is a tangible benchmark for your own progress.

Tip 4: Come up with a trick that keeps you on track. It may seem counterintuitive that I am recommending a trick but it is an acknowledgement of how hard it is to save and invest for a long-term goal. When I was younger I saved a lot of money but it became harder as I got older. I could feel myself getting impatient and wanting a pay-off from my sacrifice. My trick is that every 5 years I take a portion of the income generated by my portfolio to pay for things I love doing. I understand that this is sacrificing future growth but it keeps me saving and maintaining my principal by having periodically rewards for my effort. What works for me might not work for you. Come up with your own trick.

Having enough is not about settling. And it is not an approach that limits the wealth you build. It may sound counterintuitive, but it is really a way to maximise your outcomes by lessening the impact of the well intentioned and ruinous ways we tend to sabotage our finances.

I would love to hear any ‘tricks’ you’ve come up with to keep on track with your plan. Email me at mark.lamonica1@morningstar.com

Goal setting and establishing an investment strategy

The impact of poor investing decisions

Wealth and happiness