How to Maximise both happiness and wealth

Markets are unpredictable, risk management is not

Applying the 4 rules of thumb

Risk is more important than return​

Think in % of wealth​

Never over bet​

Add your happiness curve​

Important definitions that apply to Merton’s share formula:

κ̂ (kappa hat): your allocation to risky assets

The proportion of your wealth invested in risky assets.

  • Example: 

    • 0.60 = 60% in risk assets 

    • 0.30 = 30% in risk assets 

The “hat” means this is an estimate, not a perfect number

μ (mu): expected return on risky assets

The return you expect from risky assets (shares or investments).

  • This is your best estimate, not a guarantee 

  • Think: long-term return assumption 

μ – r: excess return (the reward for risk)

How much extra return you expect for taking risk.

  • This is the incentive to invest in shares instead of cash/bonds

γ (gamma): risk aversion

How uncomfortable you are with risk.

  • Higher γ → you dislike losses more → take less risk 

  • Lower γ → more comfortable with ups and downs → take more risk 

R: risk-free rate

The return you can earn without taking risk.

  • Typically government bonds or cash 

  • Think: “what I can earn safely” 

σ² (sigma squared): variance (risk)

How unpredictable the returns are.

  • Higher σ² → more volatile, more uncertain 

  • Lower σ² → more stable 

In practice, think:

“How much does this investment move around?”

The Merton’s formula in English

Let’s work out your risk preference. Fill in the quiz below to give you an estimated rating.

Quiz: Work out your happiness number :-)

Everyone has their own happiness curve

Always bet a constant percentage of your wealth

The secret to investing well is not just finding good opportunities. It is sizing them so they serve your life.​

Robert, Emma and Miles​

We referenced this book in creating this page and the ASA speech for 2026 and we highly recommend it. Thanks to Robert C Merton and the authors of this book

Disclaimer

Past performance is not a reliable indicator of future results, and there is no guarantee of any return. All investments carry risks, and the value of shares and any income from them may go down as well as up. You may not get back all of your original investment. ​

Shares in Staude Capital Global Value Fund Limited (ACN 168 653 521) (GVF) may not be appropriate for all people. Please consider whether they are suitable for you, and before making a decision about GVF shares please read the prospectus available at www.globalvaluefund.com.au or by calling +61 3 8689 9997. GVF has provided this information, which is general information only and hasn’t taken your circumstances into account. We strongly recommend you seek your own advice from a licensed provider in relation to any investment decision.This information is for Australian residents, only.