As computing power and connectivity increase at a dizzying pace every day, it seems we are now deluged with statistics and metrics. Perfect examples include the “Fit Bit” (measures our steps and calories throughout the day), chip timing in long distance races and up-to-the-minute text delivery alerts from Amazon!
The number-centric nature of our investments and finances plays right into the hand of this phenomena as we now have access to instantaneous market trends, daily emails (or texts, tweets, etc.) on our portfolio performance and high-level statistical analysis all with the intention of optimizing financial returns or return on investment (ROI).
In light of this, I believe we should also consider an under-appreciated concept that seemingly contradicts ROI. However, I believe this concept should be considered alongside the black and white world mathematical returns. I call it Return on Sleep (ROS). In short Return on Sleep (ROS) is that subjective “gut feeling” or sense of serenity that comes along with knowing we made the right decision for you and not necessarily the decision that mathematically optimizes the potential for returns or savings.
Now the difficulty with this concept lies in the fact this can’t be measured with spreadsheets or high-level analytics and data-mining. No, this must be discussed in depth and thoughtfully weighed over time in order to conclude what’s best for a particular scenario. As we know, patience, in-depth discussion and subjective consideration are things number-crunching computers and fast networks don’t do well.
Let’s look at some examples:
Should we pay off the mortgage? This is the most common ROI vs. ROS scenario I encounter. And I must say with today’s mortgage rates (historically low) and tax policy (deductions for mortgage interest) the ROI usually spits out a calculated conclusion that most people should NOT pay off their mortgage, assuming ample available funds. However, this must be incorporated with some peoples’ strong urge to not have a mortgage payment, whether it makes optimal financial sense or not. So in our analysis and discussion, I simply present the current facts and projections. Usually the calculated conclusion is the ROI trumps the ROS. In fact, I even explain that sometimes you can have a higher ROS by NOT paying off the mortgage (better liquidity, etc.). However, some folks just won’t sleep well with a mortgage and for them, we strike a balance and devise a strategy that optimizes their financial ROI in the context of their need for ROS.
How aggressive should our investments be? This one is a little tougher, especially since we haven’t really felt the angst associated with a significant market downturn since 2008 (even with the recent pullback). Generally speaking, most people know stocks have higher returns on bonds over the very long term. However those higher historical returns come with a price- higher short term volatility and therefore lower ROS. Much like the mortgage payoff, my role is to present the facts and coach clients NOT to react impulsively to market downturns, etc. For some, the course of our discussions and analysis leads us to the conclusion that higher ROS at the expense of not maximizing ROI (i.e. more conservative portfolios), may make sense for them. If that’s the case, we then integrate those assumptions into the broader financial plan.
How much life insurance do we need? As most know, I don’t sell life insurance and when I discuss this topic with clients, we always bring in a licensed (and low cost) provider to consult and fulfill if necessary. However, our discussions sometimes conclude that some folks are actually OK with paying additional premiums for over-the-top death benefit coverage that may not be technically necessary. In fact, the insurance agent and I sometimes conclude we could save the client money by not renewing what we believe could be an unnecessary policy. However, if the client’s ROS trumps the ROI of the lower premiums, then it could be worth paying those premiums when taking a much higher level view of a family’s financial lives.
Bottom Line: As I work with individuals and families, I integrate both sets “metrics” in order to balance both ROI and ROS. Sometimes the ROI is so compelling that it outweighs the ROS and sometimes it’s the inverse. If ROS is higher than ROI, we then work together to account for financial inefficiencies (statistically speaking) and plan accordingly.
Cold hard numbers don’t always capture the reality of our real-world financial lives. If our financial lives are technically optimized but we lay awake all night staring at the ceiling fan, worried about so many “what ifs” then our ROS is close to zero. For most people, a good balance is what works well for them and that can’t be captured in a spreadsheet or fancy graph. Sleep tight…..