Reverse Wealth Effect?

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Caduceus
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Reverse Wealth Effect?

Post by Caduceus » Thu Nov 14, 2019 8:08 am

I've noticed that I tend to become more frugal as my portfolio increases, and less frugal as my portfolio decreases. This is exactly the opposite as what financial theory might predict, and I wonder if other people on this board experience this too.

For example, when I see substantial increases in my investment accounts, I actually start counting pennies more tightly. I will skip the more expensive take-out, refuse to buy electronic items, etc. But when my portfolio goes down, I treat myself more to things.

Maybe someone should write about the reverse wealth effect.

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Sandtrap
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Re: Reverse Wealth Effect?

Post by Sandtrap » Thu Nov 14, 2019 8:22 am

Refusing to squander what we have once counting our blessings?

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Broken Man 1999
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Re: Reverse Wealth Effect?

Post by Broken Man 1999 » Thu Nov 14, 2019 9:21 am

Caduceus wrote:
Thu Nov 14, 2019 8:08 am
I've noticed that I tend to become more frugal as my portfolio increases, and less frugal as my portfolio decreases. This is exactly the opposite as what financial theory might predict, and I wonder if other people on this board experience this too.

For example, when I see substantial increases in my investment accounts, I actually start counting pennies more tightly. I will skip the more expensive take-out, refuse to buy electronic items, etc. But when my portfolio goes down, I treat myself more to things.

Maybe someone should write about the reverse wealth effect.
Perhaps when you see your portfolio declining, you fear you won't have enough to buy what you want, so you buy before it declines further. When it is rising, you figure there is no rush to buy something. Or not.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

CoastalWinds
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Re: Reverse Wealth Effect?

Post by CoastalWinds » Thu Nov 14, 2019 9:26 am

I’ve experienced this too. It’s because I realize that what I want to buy with my hard-earned money - equity index funds - have become more expensive, so I cut my spending elsewhere.

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JoMoney
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Re: Reverse Wealth Effect?

Post by JoMoney » Thu Nov 14, 2019 9:32 am

I've noticed something that may be similar among some personalities playing poker and gambling in general, when they've taken some big losses to their bankroll they seemingly play with more reckless abandon, and when they've been on a hot streak they tighten up as if expecting to see the sudden good fortune reverse itself quickly and horribly.
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fourwheelcycle
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Re: Reverse Wealth Effect?

Post by fourwheelcycle » Thu Nov 14, 2019 9:46 am

CoastalWinds wrote:
Thu Nov 14, 2019 9:26 am
I’ve experienced this too. It’s because I realize that what I want to buy with my hard-earned money - equity index funds - have become more expensive....
I find I am also doing this. I don't want to call it timing the market, but since the market is so high I am looking for rationales to increase my cash reserves - need a new snowblower?, upcoming home renovation?, next grandchild coming with need to fund 529? As a result my cash reserves are up right now. If I don't spend some reserves soon I will have to break down and buy more VTSAX.

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plannerman
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Re: Reverse Wealth Effect?

Post by plannerman » Thu Nov 14, 2019 9:51 am

Not me. When the market goes up (like this year) I feel richer and am more inclined to buy things I want but may not need. When it goes down (like 2008) I feel poorer and am less likely to purchase unnecessary stuff. Having said that however, my actual spending differences are probably in the noise.

plannerman

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rocket354
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Re: Reverse Wealth Effect?

Post by rocket354 » Thu Nov 14, 2019 9:55 am

JoMoney wrote:
Thu Nov 14, 2019 9:32 am
I've noticed something that may be similar among some personalities playing poker and gambling in general, when they've taken some big losses to their bankroll they seemingly play with more reckless abandon, and when they've been on a hot streak they tighten up as if expecting to see the sudden good fortune reverse itself quickly and horribly.
Yes, this is very true. Spending becomes a salve for the wounds.

You get a lot of your feelings of self-worth and accomplishment from doing well. When you are doing well you feel good and as a result you do more of the same (saving money) to keep feeling good.

When you're doing poorly, you lose that sense of accomplishment and need to remind yourself that the day-to-day fluctuations don't matter, and regain some sense of control over your finances. So you spend to both feel better and retain a feeling of control.

However, in both the stock market and in gambling you really have very little control in the short-term; all you can do is put yourself in the position that is most likely to yield positive results in the long-term.

stoptothink
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Re: Reverse Wealth Effect?

Post by stoptothink » Thu Nov 14, 2019 9:56 am

I've lost the majority of my life savings twice early in life (real estate crash and divorce), I have no interest in going through that again. As we have increased our wealth, the wife has definitely opened up spending, but it has had the opposite effect on me.

rich126
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Re: Reverse Wealth Effect?

Post by rich126 » Thu Nov 14, 2019 10:04 am

I wouldn't exactly agree with that but I am getting more conservative as the portfolio size grows. 10% of 100,000 is $10K and I can recoup that in a year or so. 10% of $1M is $100K and that would be much more painful to recover from. In most cases you only recover from that loss by the market recovering and not from increasing savings. The max on 401K savings is ~$25K w/o matching.

SQRT
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Re: Reverse Wealth Effect?

Post by SQRT » Thu Nov 14, 2019 10:10 am

Not me. More money=more spending (within reason). In 2008-2009 we cut back somewhat until the market recovered.

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