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HAPPINESS FUNDS: DOING WELL WHILE DOING GOOD
Charlie Turner
These comments are extracted from my working manuscript, Simply Enough: The Economics
of Happiness and Abundance.
Economics is rigorously logical and empirically validated in many ways. Economics is
generally understood to be the study of the production and distribution of goods and services. It’s
focus is on market transactions for goods and services. If you grant the assumptions of
economics, then generally, you will need to accept the conclusions unless you are illogical.
However, at least two of those assumptions are misleading in the extreme. In analyzing welfare
in economics, the two basic assumptions that mislead are:
Wrong Assumption 1. The more you consume, the happier you will be.
Wrong Assumption 2. You can determine your welfare independently of the welfare of
others.
It seems from various psychological studies that having more consumption or income is
weakly associated with greater happiness. In one sense, the first assumption holds true if indeed
everything else remains the same. However, in the world we live in, all else is not held constant
and part of what changes is one’s own belief. The psychologists also tell us that people who are
focused only on themselves and on making more money are less happy and more prone to
disease and other ailments. “Economic Man” is a psychologically sick man. Also, from the
perspective of virtually all of the wisdom traditions (Judeo-Christian, Muslim, Buddhist, Hindu),
“Economic Man” is the opposite of the “Wise Man”.
In a simplified fashion, remember the somewhat cynical saying” In the game of life, the one
that dies with the most toys, wins”? This expression, while crude captures some of the thrust of
economic theory. I suggest some wiser revisions:
The one that most enjoys their toys, wins.
The one that learns to share their toys, wins.
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The one that is most grateful for their toys, wins.
The one that is most grateful for enjoying and sharing their toys, wins.
It is not really about the toys.
It is not really about winning.
The assumptions made by economists work, of course, in building empirical models of human
social behavior and that is why they are maintained. In addition to the two wrong assumptions
above, in market oriented economies we generally assume that firms are competitive profit
maximizers, labor markets are free and competitive, and governments act to benefit their
citizens. Sub-disciplines of economics have developed to analyze the effects of relaxing any of
these general assumptions. Much of economics develops the mathematical analysis of the
distribution of goods and services when these assumptions hold.
The perverseness of the two basic wrong assumptions comes if they are adopted as personal
philosophical positions or as guides to social action. The first assumption leads to the
formulation of “economic scarcity”. Thus, modern economic textbooks refer to humans as
having unlimited wants and limited means. This is one reason economics is frequently called the
dismal science. How can you have a sense of abundance and gratitude if by definition you will
never have enough? The second assumption leads to a sense of isolation since it is only the
wants and needs of the individual or family that is analyzed in making individual decisions even
though the results may be aggregated over all the individuals in the society. This certainly
makes analysis easier, but encourages people to act in a selfish manner.
A friend of mine in Public Administration gave me an article from the Economist magazine
fifteen years ago which reported results of a survey of economics students. It found that students
became more selfish after taking an economics class. I understand why this would happen.
After all, we economists tend to emphasize that all works out for the best, in a social sense, even
if people act in their own self interest. Yet, psychologists and health studies show that social
connection is very important for both physical and psychological health. An undue focus on
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money and self interest is harmful to individuals. Yet, this is all too often the effect of economic
study.
Instead of these wrong assumptions, it is my belief that an individual is wiser and is more
likely to achieve happiness and a sense of abundance by accepting the following assumptions in
making their economic choices:
Wise Assumption 1. Beyond a limited amount, extra consumption will bring very little if
any additional happiness.
Wise Assumption 2. In making choices, I should consider the impact on others as well as
myself.
If we accept wise assumption 1, then the question remains, of course, what is the limited
amount of consumption that will significantly contribute to our happiness? The answer depends
upon our individual circumstances and history.
As Andrew Tobias says, someone making
$20,000 a year will feel good about it if last year they made $19,000, but bad if last year they
earned $40,000. He makes the point that our level of satisfaction with our consumption depends
upon our outlook and our history of past consumption.
The happiness measures across countries indicate very little gain in reported levels of
happiness after about $10,000 (in 1999 dollars) per capita (see Frey and Stutzer 2002). In the
United States, happiness measures historically peaked in the 1960s, but was little changed from
the mid 50's. Happiness measures for the U.S. have fallen some since then even though real
income has increased more than threefold. For my purposes of illustration, I will use the real
per capita income figures for the US in 1999. Since current income in the United States is much
higher than this, we should feel a great sense of abundance in this country, and yet we do not by
and large.
We tend to suffer from the delusion that having more will make us happier or more secure or
better off, regardless of the level of consumption that we have actually achieved. There are also
other aspects of money, especially as earned income, that affect our state of mind. We see the
amount of our pay raise, for instance, as a sign of our successful contribution to the firm or
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organization where we work. We all want to be valued for our contributions. Our relative
position in society is of importance to most of us. If we can’t keep up with the Jones’s then we
feel deprived. Today, with mass international marketing, it is not only the Jones’s many want to
keep up with but the characters we see on television and read about in the newspapers and
magazines. When we get a raise, we tend to feel validated as to the quality of our social
contribution. These issues are of great importance to us, but have little to do with our overall
level of consumption.
I could put forth a lot of arguments and evidence to try to convince you that more
consumption or income will not make you substantially happier, but that is not my purpose in
this book. I refer you to books by Seligman, Kinder, Myers, Frey and Stutzer, and the Dalai
Lama to better understand the nature of authentic happiness. Many of us think at one time or
another that a raise, a small inheritance, or some other windfall would make our lives easier and
happier. If you want to pursue that illusion and dedicate your life to making and spending more,
that is your choice. If you decide that the wisdom traditions are right and that happiness lies
elsewhere, then what are the consequences for us. These are the issues that I wish to explore in
this book.
International Capital Flows
The United States trade deficit in Goods and Services is running at about $800 billion dollars
annually. This means that the rest of the world is financing our consumption, investment and
government spending this much every year. Such an inflow of capital to the wealthiest or by any
standard, one of the wealthiest countries shows how far we are at the present time from a world
in which the achievement of happiness is followed rather than consumption for itself. The
international surveys on happiness show that rising incomes clearly raise the level of happiness
in poorer developing countries, but does not raise happiness levels nearly as strongly in rich
countries (Frey and Stutzer, 2002, p. 90). Thus, from a happiness perspective, capital should
flow to those countries that are poorest (say less than $15,000 per capita). The United States
should be experiencing a capital outflow not an inflow. Instead, we have massive consumption
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which contributes little to our authentic happiness level.
Virtually all of the wisdom traditions promote the connection with others and stewardship
over the resources of the earth. If we are in tune with this "inter-being" of all of us, then as we
try to pursue happiness, we will try to alleviate the suffering of others. In economics, we often
assume efficient capital markets with the same borrowing and lending rates to all participants.
This would allow, the poor to borrow what they need to invest in their education and nutritional
needs so as to be more productive. The crushing poverty in the world would not exist in this
efficient world of theory. So, in this since, major capital transfers to the undeveloped world
would be a correction of inefficient markets.
Part of the inefficiency comes about because of the uncertainties of health and outcomes in
the developing world. Also, humans are not subject to ownership in the same way that
equipment is. So, the investment in physical capital is sometimes much closer to optimal levels
in poor countries than is the investment in human capital or education and health measures.
Enlightened people pursuing happiness rather than maximum income will make provision to
overcome some of these deficiencies in our present system. I will discuss this at greater length in
chapter 11 on International Ramifications. The end result will be for the United States to run a
large trade surplus and transfer funds to the developing world. Once all the countries of the
world enjoy a high enough level of consumption ($15,000 per capita), then the greater good and
happiness will not matter so much in regard to capital tranasfers.
Happiness Fund
During the transition phase where greater capital flow to the developing world is important,
there are likely to develop mutual funds to facilitate such a transfer of resources. As people
began to care more about the general welfare and feel a level of abundance themselves, they are
likely to develop a sense of generosity. This is also a way to feel their own abundance and
happiness more completely. Some of this generosity may express itself in charitable acts
including donations of time and money. Expressions of personal attention and caring are
generally warmly accepted and desired by all who are in need. They also tend to greatly benefit
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the givers by making them aware of their connection to others. Donations of money can also be
very effective at helping other people. There are some very good charities that help those who
can still benefit a great deal from having more goods, services and opportunities. Besides
donations, it is also very effective to make investments that are aimed at increasing the flow of
capital resources to those that need it the most rather than only maximizing return to the investor.
If we want our investment dollars to do more than bring us expected future income, then we
will use our personal goals and ethics as a guide for how our savings are employed. Below, I
provide some ideas on how a mutual fund family of what I call Happiness Funds might be
organized to facilitate the increase in well being and happiness of the less well off in our society
nationally and internationally.
We might diversify our investments to reduce the risk for a particular level of return
according to modern portfolio theory so that we have a certain portion of our savings in short
term money market funds, a portion in longer term debt instruments, and a portion in stocks.
Your individual risk characteristics will determine what mix of these assets you are most
comfortable with. My expectation is that as people feel less dependant on high levels of
consumption for their happiness, they will be more comfortable with a higher level of investment
risk.
Money Market Funds
Money market funds are essentially cash with a small return that may not be as high as
expected inflation. According to the Ibbotson Associates 2006 Yearbook, Stocks, Bonds, Bills,
and Inflation, the geometric average return on U.S. Treasury bills was 4.6 percent from 1926 to
2005. The geometric average of inflation was 3.0 percent over the same period. The interest rate
on short term debt of corporations would be more. The primary advantage of such funds is that
they have no significant interest rate risk and the default risk is usually fairly well understood
because the maturity of the loans is very short. If a large number of small loans are pooled, then
the probability of default can be arrived at for the particular asset class. A short term Happiness
Fund would probably hold short term debt of companies or organizations that provided services
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to the poor in this country and abroad. It would also invest in the short term debt of companies
that provide employment to relatively unskilled workers while providing reasonable working
conditions.
Before the Happiness Fund develops a money market fund, one might support banks and
organizations that support micro lending to the poor in the developing world. The Grameen
Bank is one such group.
In the United States, Prosper allows individuals to participate in loans
to individuals for many purposes. You can choose whether to back a person with a good credit
rating building a real estate empire or a person with a bad credit rating to put her kid through
junior college or many other stated purposes. They provide a rating system, credit collection and
data on default risk. By spreading your money over many borrowers, you can reduce the risk to
your portfolio and have a good idea of what your expected rate of return will be. If you have a
lot of money to invest short term (usually less than three years), such investing might provide a
high rate of return, but it would be fairly expensive in terms of your time. However, for
relatively small amounts, it is a pretty interesting way to earn some interest income and at the
same time, to feel like you are actively assisting others even though you don't know them
personally. The internet has made this business model work. In the United Kingdom Zopa
provides such loans.
There is also an organization called KIVA that makes loans to small business owners in
developing countries and allows individuals to participate in the loans. However, this is strictly a
feel good kind of operation. You pick who to support, you can loan a small portion of the funds
they ask for and thus diversify. You get a history of their payments so you have some feedback
on how the business is doing, but you earn a zero interest rate. This, of course, makes the loan to
the small business cheaper, but the best you can do is get your money back. Some loans will
default and so your expected return is slightly negative. So far, the default rate has been low. It
may be the best way to make your donations go the furthest and it is interesting to choose who to
help, but there is no financial incentive to participate.
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Bond Funds
Bond funds provide a specified monetary return for a relatively long period of time. If the
interest rate changes, the value of such funds will change. Higher interest rates will cause the
price of the assets in such a fund to decline. The longer the time period for the bonds in the
fund, the greater will be magnitude of immediate price changes from a given change in long run
interest rates. Also, because of the longer period of time before the bonds mature, there is more
uncertainty about how conditions for the borrower may change. This makes for greater variation
in the expectations of default risk. Generally, bond funds will have a higher expected return than
short term money market funds. Of course, the realized return can be lower if something
adverse, like a rise in interest rates, happens. According to Ibbotson Associates, the geometric
average return of long term government bonds in the United States from 1926 to 2005 was 5.5
percent. Long term corporate bonds earned an average 5.9 percent for the same period.
A Happiness Bond Fund could invest in long term debt instruments of companies that are
located in low income countries or that provide services to low income countries. It could also
invest in domestic companies that provide services to low income individuals or who employ a
significant number of low income individuals. The Happiness Bond Fund could also invest in
debt instruments of international institutions that provided funds or services to those below the
$15,000 per capita level whether the individuals are domestic or foreign. There could also
eventually be a special lending facility to facilitate student loans in low income countries
somewhat similar to the United States student loan program. The Happiness Bond Fund could
also hold debt instruments of governments of less developed countries or of public entities within
those countries. The need for low interest long term loans in developing countries is great and
the opportunities are great as well.
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Because the Happiness Bond Fund is focused on promoting economic growth where the level
of income is not yet at the level where more consumption contributes little to happiness, it may
not achieve as high a return as possible. It may be necessary to take on more risk for a certain
expected return. Still, if the loans are well diversified within this area, the risk should be
relatively low regarding political risk, etc. It will only be those events that affect all low income
people or a large share of them that will create major fluctuations in excess of the market as a
whole. Because of these special risks, though, it may be advisable for individuals to only
allocate a portion of their bond portfolio to something like the Happiness Bond Fund. Those
willing to face somewhat greater risk to accomplish more beneficial results, could allocate a
larger share of their assets. My personal preference is to allocate capital assets across
populations about the same. This is based on the idea that people around the world have pretty
much the same capabilities. Thus, if they had the same resources available, they could achieve
about the same income levels. This would mean that more than half of all bond funds would
flow to the developing world as well as half the equity funds. Of course, the present allocation is
far below this in most of the investment portfolios of the world.
Before the Happiness Bond Fund is established, some of the same objectives could be
achieved by investing in developing country debt issues. The ideal instrument would be to buy
an exchange traded fund that invested in debt in emerging markets. According to the American
Stock Exchange ETF Marketplace, ETF bond funds had an expense ratio of .20 percent
compared to 1.09 percent for bond funds. However, I could not find an ETF that dealt in
emerging market debt. However, there is a closed end mutual fund, The Templeton Emerging
Market Income Fund (TEI), that trades in emerging market debt. One could also buy bonds sold
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by the IMF, World Bank, United Nations, and even internationally active Banks like Citicorp
and HSBC.
Equity Fund
An equity fund invests in stocks in various companies. Stocks represent residual ownership
rights after the satisfaction of all debt instruments owed by the company. As such, they are
inherently riskier than bonds. On the other hand, stocks have great potential to appreciate in
value since they represent ownership rights for as long as the firm operates. Historically, stocks
have had significantly higher returns than bonds. According to the 2006 Yearbook of Stocks
Bonds, Bills and Inflation by Ibbotson Associates, large company stocks earned an average of
11.5 percent from 1926 to 2005. Small company stocks had a geometric average return of 12.6
percent over this same period.
The Happiness Equity Fund would invest in stocks of companies in developing countries and
in companies in developed economies that served the poor either by providing services or
through significant employment. The Fund could also take ownership positions in companies
that were not traded on an organized stock market. This could only be done if the Fund had
sufficient assets to provide a solid basis for supporting the necessary staff to undertake the
investigation of companies that might be of interest to the Fund. This type of investment could
be of considerable importance in some of the least developed economies. These kinds of
investments would be difficult to manage and would have a lot of company and country risk, but
it is probably in these situations where the present flow of capital is most woefully lacking.
The Happiness Equity Fund would invest in the countries with lower income in proportion to
their population. If the Fund ever reached the level of being a major player in the market, with
assets over $1,000,000,000, then it would move in a measured way into and out of positions that
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it took. In particular, when a country graduated from its investment criteria by increasing per
capita income above the $15,000 level, the Fund would liquidate its position over at least a one
year period so as not to cause an untoward slump in the market of the country in question. The
Fund could establish other criteria for companies that would help to promote responsible
corporate citizenship as to environmental, labor and other issues, but the primary criterion would
remain whether support for said company was likely to raise the happiness level of the country
involved.
In the initial stages of organization and growth, the Happiness Equity Fund would invest in
emerging market funds and various Country funds. These funds could be closed end mutual
funds, open end mutual funds or exchange traded funds. At the present time (2006), I thought it
would be interesting and instructive to see what the application of these criteria to investments
over the last 10 years would have caused. I went through the analysis of a hypothetical Global
Happiness Fund that might have been formed about 10 years ago. The only difference was that I
applied the selection of the countries criteria on 2004 income data (from the 2006 World
Development Indicators) rather than 1996. This did not substantially change the results but some
countries, such as South Korea might have been included otherwise.
The population of the world was approximately 6, 330 million people. 5, 361 million or 84
percent of people lived in countries with incomes less than $15,000 in purchasing power in 2004.
The purchasing power approach was developed by the United Nations over a period of years to
take into account the major differences in prices in different countries. They look at a basket of
goods that is consumed by most people and price it in different countries to adjust for
differences. The purchasing power dollar will buy roughly the same in the United States as one
U.S. dollar. The major result is that poor countries have considerably higher purchasing power
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than is usually indicated by their domestic income translated by current exchange rates into U.S.
Dollars. For example, China's per capita income is $1500 with an exchange rate translation but
its purchasing power per capita income is $5,890 in 2004.
Most of the world's investment capital is allocated to the developed economies. If resources
were allocated by population, these poorer countries would receive 84.7 percent of financial
investment. Instead, they receive but a small portion of the total. The Global Happiness Fund
would be investing solely in these countries initially. Eventually, the fund might invest in
individual firms in the developed economies that made a major difference to the poor in those
countries.
The ten largest countries with income below $15,000 in 2004 purchasing power were
Country
Population
China
India
Indonesia
* Brazil
* Pakistan
* Bangladesh
*Russia
* Nigeria
* Mexico
*Philippines
1,296,000,000
1,080,000,000
218,000,000
184,000,000
152,000,000
139,000,000
144,000,000
129,000,000
104,000,000
82,000,000
Purchasing Power Portion of the Happiness
Per Capita
Fund Assets
$ 5,890
.282
3,120
.270
3,480
.048
7,940
2,170
1,970
9,680
970
9,640
4,950
* did not have individual country fund weight.
The United States and Japan are larger than some of these 10 countries, but of course their
incomes were much too high to qualify for the Global Happiness Fund. I searched for all the
closed end and index funds that invested in these and other poorer countries. The result was that
some countries had individual funds devoted to investing and some did not. The poorer the
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country, the less likely it was to have a mutual fund following it. In addition, there are funds that
are designated as emerging market funds and some regional funds investing in Asia, Latin
America or Eastern Europe. The World Development Indicators-2006 break the world into East
Asia and Pacific, Europe and Central Asia, Latin America and Caribbean, Middle East and
North Africa, South Asia, Sub-Saharan Africa, and High Income Countries. The Global
Happiness Fund would spread it's investments over the first six areas and would not invest in the
high income countries. As I suggested earlier, at some future stage, investments in some selected
companies in the developed world might be undertaken if they helped the poor in those countries
in some major way. The weights given to investment in the regions based on their populations
are: East Asia and Pacific (.3488), Europe and Central Asia (.0880), Latin America and the
Caribbean (.1018), Middle East and North Africa (.0560), South Asia (.2700), and Sub-Saharan
Africa (.1354).
Ideally, the Happiness Fund would have invested in each country within each region and
weight them so as to give the regional funds the right weight. However, this was not possible
because not all countries had individual country mutual funds. So, the countries that had funds
following them were over-weighted to bring the total investment in the region to the appropriate
level. For example, in East Asia and Pacific, there were closed end country funds for ten years
or more for China, Indonesia, Malaysia, and Thailand. The population of these four countries
was 86.0 percent of the total population of East Asia and Pacific. Therefore, each country was
treated as a larger share of East Asia and Pacific than population alone would justify. So, China
had a weight of .696 X (1/.860) X .3488 = .282 of the Happiness Fund. Where .696 is the
proportion of population of China relative to all of East Asia and Pacific. .860 is the proportion
of population of East Asia and Pacific that had individual country funds, and .3488 is the
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proportion of East Asia and Pacific of the total population of countries with income below
$15,000 per capita on a purchasing power basis. Similarly, Indonesia was .0476 of the
Happiness Fund; Malaysia was .0052; and Thailand was .0138 of the Happiness Fund. The
combination of these country weights is approximately .3488 which is the weight for East Asia
and Pacific.
There were a number of funds for Russia and Eastern Europe, they were weighted at .0649 of
the Happiness Fund. The only other country Fund for Europe and Central Asia was the Turkey
Fund and Turkey was weighted at .0232 of the Happiness Fund. These combined give
approximately the .0880 of the Happiness Fund allocated to Europe and Central Asia. India was
the only country in South Asia that was covered for 10 years by a mutual fund and so those funds
were weighted as .2700 of the Happiness Fund. The only countries covered for the 10 years in
Latin America and the Caribbean was Mexico and Chile, since the Brazil Fund was recently
liquidated. There were two Latin America funds that had coverage that was closer to the
population of the region than using only Mexico and Chile. So these two funds were given the
weight of Latin America (.1018) in the Happiness Fund. The Middle East and North Africa and
Sub-Saharan Africa did not have any country funds following them for the 10 years.
Consequently, for simulation purposes the Emerging Market Fund return was used for the .1914
weight that they had in the Happiness Fund.
Using the weights derived above, I then calculated the total return to the hypothetical
Happiness Fund over the last ten years if it had been invested as noted. I used information from
ETF Connect to perform these calculations. ETF Connect has current and historical information
on closed end and exchange traded funds. The result was that the total return to the Happiness
Fund would have been 17.1 percent. This is the geometric average for the fund. In other words,
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if $10,000 had been invested in the fund in about September of 1996 with all dividends
reinvested, it would have grown to about $48,641 by September of 2006. In comparison, the
Vanguard 500 Index Investor Shares, which tracks the S&P 500, would have had a total return of
8.51 percent. In other words, $10,000 invested in this S&P index fund, with all dividends
reinvested, would have grown to about $22,630. The Happiness Fund would have far surpassed
the return achieved by investing in the United States stock market or in other advanced country
markets. It also would have far surpassed the return of most emerging market funds that were
weighted by market capitalization rather than population. These funds earned around 10 percent
for the last ten years.
Of course, it is generally well known that China and India have been experiencing very rapid
growth lately. Mutual Funds that follow them have been very successful over this time period.
India funds have returned about 24 percent per annum over this period. Chinese funds earned
about 14 percent over the period. On the other hand, funds following Malaysia, Thailand, and
Indonesia, have actually had negative returns over this ten year period. This is because the Asian
financial crisis hit in about 1997. The markets in these countries suffered severe losses and are
just now close to recovering those losses. This underscores the risk, as usually measured, of
investing in emerging markets. Earlier in 2006, the India Fund declined 20 percent or more, but
then recovered. Nevertheless, it seems apparent that pursuing the Happiness Fund strategy can
do very well for the investor at the same time as the investor is doing good by promoting the
happiness of the people in the poorer countries of the world.
If all firms were perfectly competitive in developed and developing countries, then we would
expect the return to capital to be higher in the developing countries as long as the capital labor
ratio was lower than in the developed world if the quality of labor was the same. Investments in
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companies in developing countries should yield a higher return until the amount of capital per
worker was equal in China as it is in the United States. Reducing trade and investment barriers
should raise wages and consumption levels in developing countries. We see some of this
scenario playing out and it encourages investment flows into rapidly growing countries like
China and India.
However, the world of oligopoly is more complicated. For the long run success of firms in
China, India, and other developing countries, they must establish their position in the global
market place. If they only produce in competitive industries, they will, in the long run, earn zero
economic profits. In other words, they will only earn a normal rate of return on their capital if
they can not maintain their market power in an open setting. When the price earnings ratio in a
developing country is lower than it is in the United States, you can expect higher gains from
investing in the developed country. When the price earnings ratio is higher than in the United
States, then the developing country market is probably overpriced. This is on the assumption
that the developing country does not have more companies with monopoly power than the
United States has.
In order to be effective, a mutual fund has to have a substantial asset base so as to lower the
administrative cost of the fund. Investors today may be able to accomplish some of the purposes
of The Happiness Fund by following a strategy of investing in existing exchange traded and
closed end mutual funds. In the future, as more and more people accept that having more
consumption is not the most important contributor to their happiness, the Happiness Funds may
come into being.
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Recommendations for Investing before the Global Happiness Fund is
Established
If you are interested in pursuing this type of investing and would like to get started before
the Global Happiness Fund is established, this is what I recommend you do. Invest in the
exchange traded and closed end funds that I present below. I have a preference for the exchange
traded fund when it is available. The reasons for using this type of mutual fund are the low
transactions and administrative cost. The tax cost is also usually fairly low. The closed end fund
will generally be invested in the appropriate country, but they often buy and sell to try to beat the
market, which raises management, transactions and tax costs.
Buy and hold these funds. Don't try to do market timing since even the pros usually don't do
very well at that type of investing. I present the recommended funds with percentage weights
attached. If you only want to invest a small amount, you might just buy shares of the funds with
the highest weights first and then add other funds later. There is no need to have exactly the
weighting that I show here. The weighting is based on population of those countries with
income in 2004 of less than $15,000 as explained earlier.
Investing in these emerging markets funds is riskier than investing in the S&P 500 index or
similar developed economy funds. They are more volatile. Be prepared for something of a roller
coaster ride. Still, I believe these investment will do more good than investing in advanced
industrial countries, and you will probably be rewarded with a higher than average return over
the long haul. Over the last 10 years, these funds earned approximately 17 percent per annum as
opposed to about 10 percent on market weighted emerging market funds and 8.5 percent on the
S&P 500.
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Recommended Mutual Funds in lieu of the Global Happiness Fund
Country or
Region
Weight
China
India
Sub Saharan Africa
Latin America
Russia & E. Europe
Mid East & N. Africa
Indonesia
Turkey
Thailand
Malaysia
Stock
Mutual Fund
iShares FTSE/Xinhua China 25 Index Fund
India Fund
iShares MSCI South Africa Index Fund
iShares S&P Latin American 40 Index Fund
Morgan Stanley Eastern Europe Fund, Inc
Spdr S&P Emerging Mid. E. & Africa
Indonesia Fund
Turkish Investment Fund
Thai Capital Fund
iShares MSCI Malaysia Index Fund
Percent
Symbol
FXI
IFN
EZA
ILF
RNE
GAF
IF
TKF
TF
EWM
28.2
27.0
13.5
10.2
6.5
5.6
4.8
2.3
1.4
0.5
The funds are listed in descending order of the percentage weights. So, I would suggest you
start with the China (FXI ) fund, then buy the India Fund (IFN), and proceed buying the
additional funds and extra funds in China and India until you have approximately the weights
given in the table. If you are strongly risk averse, only put what you can accept emotionally into
these volatile stock markets. If you are relatively risk neutral and strongly motivated, then you
can put a substantial portion of your stock market assets into these stocks. You should still
maintain some developed country stocks in order to diversify some of the risks since these
markets do not correlate strongly with the developed economy markets. If you have most of
your retirement assets in developed market stocks, then you could put all of your discretionary
investments in these funds.
Another issue that may trouble a number of people that are investing, in part for humanitarian
or social responsibility reasons, is that some companies in poorer countries will not maintain the
labor or environmental standards that are best practices in today's world. The difficulty is that
searching out the best companies in terms of such practices requires considerable research. The
cost of such research would require higher management fees. Still, if the Global Happiness Fund
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ever achieved asset size of more than $100 million, it would be advisable to start a new fund
with the objective of only investing in those companies in poorer countries that pursued the best
labor and environmental policies. In the interim, I believe a lot of good is accomplished by
providing additional capital resources to workers in poorer countries.
One might ask, how buying stock in mutual funds traded in U.S. markets makes a difference
in capital goods provided to poorer countries? Let's go through the process and see some of the
possible effects:
1. An individual investor in the United States buys a China index fund.
2. The index fund buys additional shares in the Chinese market.
3. The higher price in the Chinese market for these shares:
a. encourages the Chinese company to issue more shares to finance capital growth or
b. gives more financial resources to the previous Chinese owners of the company
stock which will either be invested or used in consumption expenditures.
The actions of the investors in developed markets to invest in emerging markets are thus
transmitted to encourage capital growth in those emerging markets even when the investment is
in an intermediary financial holding company. If the Chinese seller of the stock uses the
proceeds for additional consumption, this promotes the domestic market of China and will lead
Chinese companies to produce more for such domestic consumption as well as encourage
exports to China.
The Chinese economy will grow and the Chinese workers will have more capital available for
them to work with and thus the wages of the Chinese will also rise. At some point in time, the
process will lead to Chinese per capita income exceeding $15,000 on a purchasing power parity
basis and the Global Happiness Fund will stop making additional purchases of Chinese stock. At
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that point, a greater share of the resources of the Global Happiness Fund will go to buying shares
in countries that still fall below the $15,000 level. Eventually, all the countries in the world will
rise above the $15,000 per capita level, at which point all should be able to share in the
abundance that our tremendous technological growth with restrained population growth makes
possible. All poverty at that point should be localized in nature and various social welfare
policies of individual countries should be able to alleviate the distress that is caused.
Some might say that this is a Utopian dream, but I believe that it is quite within the realm of
possibility. In 2004, China's purchasing power parity per capita was at $5,890 as mentioned
earlier. So, their income would only have to grow 255 percent to be $15,000 . At their present
growth rate of about 9 percent, it would only take them 11 years to reach that level of income.
This is not to say, that everyone in China would be happy. As we know all too well, happiness
requires more than a high level of consumption since our level of income is more than twice this
level and we are not happier than we were in 1960. The point is that the major contribution that
consumption can make to happiness would have been achieved. We can live in a world where
all people have an abundant level of consumption and economic security. Choosing to live well
and being happy will be up to individuals but absolute poverty and scarcity will be a thing of the
past.
Of course, these projections are dependent on the vast majority of people ridding themselves
of the illusion that having more income and consumption will make them happier. Even though
the evidence is becoming clear that more "stuff" does not make us happier, most people still
believe that having more income, power, and prestige is what they want. It still seems to be what
most people seek. That may never change. The poor may always be with us and so might such
delusions always be with us.