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The neighbourhood-wealth syndrome

Date: Nov 16th, 2015

It could be tagged the neighbourhood-wealth syndrome: when our neighbour spends money on a costly new car or major renovations, some of us may feel an urge to somehow compete with our spending.

Falling into the trap of trying to “keep up with the Joneses” – as it always used to be called – can be highly destructive for our personal finances. Indeed, it is one of the detrimental behavioural patterns documented by behavioural economists.

US financial planner and personal investment author Carl Richards writes in a New York Times column – headed Staying out of your neighbour’s business – gives the example of a neighbour driving up in a new Porsche Panamera Turbo. (For those with an interest in cars, that’s basically a four-door Porsche.)

Richards believes that most people would jump to the conclusion that this neighbour is doing extremely well financially yet the opposite might be true.

“Your neighbour may be rich,” he adds. “He could be leveraged to the hilt. You just don’t know. So what’s the point of comparing and feeling competitive without knowing the full story?”

Richards’ bottom-line: Mind your own financial business.

Smart Investing has previously written about a classic personal finance book, The millionaire next door, by late US academics Thomas Stanley and William Danko.

Research by Stanley and Danko confirms what many of us may suspect: exotic cars and grand houses are not accurate indicators of wealth.

Their research suggests that “prodigious accumulators of wealth” tend not to be conspicuous in their spending and are content to progressively build their wealth.

In other words, they are not in a hurry to either make money by taking excessive risks or to spend their money (or borrowed money) on unaffordable lifestyles, say Stanley and Danko.

Watch out for the neighbourhood-wealth syndrome.

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2015 Vanguard Investments Australia Ltd. All rights reserved.

Any information provided by Vanguard Investments Australia Ltd detailed above is separate and external to AMPFP and our Licensee, AMP Financial Planning Pty Limited. Neither AMPFP, nor AMP Financial Planning Pty Limited take any responsibility for their action or any service they provide.

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