‘Tis the season to gather and celebrate with friends and family. Each year, old traditions are remembered and new traditions are made. We reconnect with the family members we see frequently and long-lost relatives alike. Reliability has become an evasive quality in today’s busy world. In the craziness and uncertainty of our day-to-day lives, we take solace in some of the certainty that these events provide.
In some families, it is a holiday tradition to attend church or temple together. In others, Grandma will play the piano while everyone else sings along. And in still others, it’s virtually guaranteed that everyone will get their year’s-worth of invaluable “wisdom” from that one goofy brother-in-law.
Celebrating with relatives is a wonderful thing, but especially this time of year, we must all be more conscious of the unrelenting human desire to compare ourselves and our decisions to those of the people around us.
In his book, Predictably Irrational, author Dan Ariely writes that “humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.” He continues, concluding that “we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable – and avoid comparing things that cannot be compared easily.”
In other words, we often use completely irrelevant benchmarks to gauge our success and make decisions. We make comparisons about the car we drive or the clothes we wear relative to what our siblings have. We draw comparisons about how our children act relative to the neighbors’ kids. We decide how much to spend on our holiday shopping after we figure out how much our friends or family members are going to spend on theirs.
None of these comparisons make any rational sense. However, it is far easier to take a shortcut and pursue something easily comparable than it is to really figure out what makes sense in our own lives. After all, these comparisons provide a simple, concrete (but irrelevant) answer, while the question about how things best fit into our own lives seems far more abstract.
For example, clients will often lament how they refinanced their mortgage at 4 percent while their brother got 3.75 percent. The interest rate provides a simple comparison for people, but misses the big picture. Digging a touch deeper, we find out that the brother paid closing costs and they didn’t. The monthly savings earned by that 0.25 percent difference would finally cover the closing costs after 10 years, but the client only wants to stay in their home for five. Indeed, the brother’s rate is lower, but that same rate would end up costing them more in the end. Nowhere is benchmarking more prevalent and more irrelevant than in the investment world. How your investments perform against the S&P 500 has no bearing on your financial well-being. I am guessing almost everyone reading this “beat” the S&P 500 in 2008. I am also going to surmise that each of you didn’t feel very good about that. Earning returns that are merely better than -37 percent hardly provides a reason to celebrate. If you are diversified, you almost certainly lagged the S&P 500 in 2014. A good advisor should have told you not to worry and to ignore the headlines. At the end of the day, the S&P 500 is not trying to accomplish the same thing that you are trying to accomplish with your money.
Your portfolio is (or should be) designed to provide you with the lifestyle you want to live. In most cases, that does not result in a blind effort to maximize returns. Comparing it to an arbitrary benchmark (especially in short time periods) tells you nothing about whether or not it’s going to allow you to achieve your life goals.
As it pertains to holiday spending, your holiday budget should reflect your own budget, not that of your relatives. Your relatives are trying to accomplish very different things in life than you, things specific to their own individual situations. As these comparisons begin to creep into your mind, ask yourself if they are relevant to your bigger picture.
Last year, my wife and I did not exchange gifts. We had just moved into a new home and spent our Christmas in the hospital after delivering our second child on Dec. 23. This year, we plan to spend more on gifts for our 3-year-old son than our 1-year-old daughter. We aren’t doing it because we love him more, but because the things a 1-year-old needs and wants are quite different and less expensive than a 3-year-old. We do not feel a need to force it for the sake of equality, and that’s what fits our life and budget.
Invariably, year-end provides a time for reflection on the past 12 months and an opportunity for looking forward at the year ahead. We find ways to take comfort in the opportunity to “start over” again, to try new resolutions or to retry those we set and failed to meet the year before. So take comfort in the certainty surrounding your family traditions, and set a goal to ignore those irrelevant comparisons you drag around with you in your day-to-day life.
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