Is the Wealth Effect Making You Think You’re Rich?

“How are you feeling?” As a physician, that phrase, or something close to it, may have been one of the first questions you ask of a patient.

It works in finance, too. Much of the economy is driven by consumers’ confidence in their current situation and their outlook for the future.

And you can certainly have a rosier assessment of your financial position than the numbers would actually bear out. But is there actual wealth behind that feeling of “being rich?”

Is the Wealth Effect Making You Think You’re Rich?

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The Wealth Effect refers to the fact that people spend more when their assets increase in value, such as a run-up in stocks and real estate prices.

What Is the Wealth Effect?

Assuming a long-term investment horizon, the reality is that at near bull market tops, you have lower expected future returns and lower yields from your portfolio. 

Bull Markets and the Wealth Effect

Lots of investors, including many physicians I know, sold out at the market lows of 2008-2009. They looked at their recent losses and compared their balances to how much they used to have and how much they needed in retirement.

Should You Cut Your Losses and Sell Out at Market Lows?

The reason that market timing is so difficult is that not only do you have to figure out what will happen in the future, but you also have to time two events at least relatively successfully—an exit and an entrance.

Should You Try to Time the Market?

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