Don’t link your lifestyle to stock market

One of the dictionary meanings of the word notion is “A mental image.” When the stock market is rising, our notional wealth increases. Everyday we look at stock prices and calculate our wealth. Soon we start believing that growth of our wealth is real and long term. If the stock market rally continues for long – like it has happened this time - we start feeling that our wealth will continuously keep rising.

This false state of suddenly feeling wealthy leads to change in lifestyle.

In recent past, it has been observed that many neo-wealthy investors have suddenly increased their lifestyle expenses. Individuals who use to move in Maruti Alto have purchases Honda City. Families that hardly went out of town have gone to Singapore and Malaysia for vacation. All these expenses are not because they have had phenomenal growth in their own occupation. Most of these spending happen because there is increase in notional wealth.

In year 2001 2002, reverse behavior was observed. This was the time when stock markets were in doldrums. Investors had lost heavily in tech bubble bust. General mood was so down that spending during festive season was also restricted. Those were the years when an investor would not look (READ: Calculating) at his wealth at all. S/he could not withstand daily fall in his/her wealth notionally.

Sudden increases in lifestyle expenses and/or stopping of spending even during festive season are examples of extremes. Both the situations arise because we react based on growth or fall in our notional wealth.

One of the perils of increasing your lifestyle during stock market boom is that we get used to comforts and luxuries in life. When economic situation turns bad we will then struggle to curtail our expenses.

In fact in reality while markets are rising, we should control our expenses and let our wealth grow. By spending money unnecessarily we are making the ability of our wealth to grow impotent. On the other hand when equity markets are down, our wealth is not growing in real terms. Also goods and services are generally cheaper as general spending by consumer is less. Hence, it is prudent to spend money during these times.

We all know stock markets are volatile. Both rise and fall in short run are not permanent. Usually in long run – more than 7 to 9 years – equity markets are likely to give returns that are way higher than inflation. However modifying lifestyle based on few months of stock market rally is highly injurious to financial and family life.

By all means upgrade your lifestyle if you desire, but do not link life and lifestyle of your loved to indices.

- Gaurav Mashruwala

The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com

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