The "Wealth Effect" And Investing

Do You Consider Yourself Wealthy or Not? Your Answer Could Be Harming Your Investments

Wealthy ArticleDo you perceive yourself as wealthy?  Your answer might be influencing how you invest.  Coined as the “wealth effect”, this is when your perception of how wealthy you are leads to either an increase or decrease in your investing habits (USA Today).

With how the stock market is performing lately, many are wondering how the wealth effect will come into play. 2016 led off to one of the worst market starts in recorded history, and many investors are seeing themselves as being less wealthy, since their portfolios took a major hit. This negative perception may in turn have a larger outcome of reducing spend across the board and modifying investing habits moving forward.

According to Frank Stafford, a professor at the University of Michigan, “[I]t’s too soon to see if investors will be spending less, but if the pattern continues to persist, then spending will likely be curtailed.”

If this does occur, investors are likely to take their money out of the stock market and let it sit as cash, especially those near retirement age who fear the volatile market. While portfolios should maintain some cash standings, too much can hurt portfolio growth due to inflation. Therefore, investors who are near retirement should look to other asset classes to generate the capital they need to fund their retirement.

Where to Invest

Financial advisors frequently recommend diversifying your portfolio, and there are numerous places to grow your capital.  One of the best options for investors that are skeptical of the market and are on a shorter time line is real estate.

With the benefits of monthly cash flow, appreciation, equity growth, and a hedge against inflation, real estate is a wise choice that isn’t dependent on the stock market for growth.  Investors can use real estate as part of their overall investing strategy to help them achieve the retired life they have been planning on.

Ready to learn more? Schedule a call