The Psychology of Money

Psychology of Money

There are many folks out there who are intimidated by finance. When you turn on CNBC or Fox Business you can absolutely see why. The public, led by the media, has developed a false narrative: becoming independently wealthy requires using complicated and clever investing strategies. The reality is that personal finance is more about behavior than intelligence.  And learning to change your behavior can be tough, even for intelligent people.

I recently read one of the best books I have ever come across on the topic of personal finance. Morgan Housel’s The Psychology of Money” is an easy, quick, and insightful read that you will not regret. The first chapter points out an obvious fact that we all forget about too often: everyone is different. This is a crucial starting point when evaluating your own behavioral decisions surrounding money. Housel says that “People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into very different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.”

From time to time when I am discussing the risks involved with investments, clients will say that they understand stocks “go up and down”. To which I always reply, “Actually, they go down and up”. Understanding that price declines are a feature, not a bug, of investments is crucial to getting through the tough times. Housel explains this beautifully in a chapter titled “Nothing’s Free”:

Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. Its volatility, fear, doubt, and uncertainty - all of which are easily overlooked until you are dealing with them in real time. Market returns are never free and never will be. They demand you pay a price like any other product. The trick is convincing yourself that the market's fee is worth it. That's the only way to properly deal with volatility - not just putting up with it but realizing that it's an admission fee worth paying.

The best part of The Psychology of Money is that it doesn’t matter if you are a seasoned investor who documents every dollar spent or, you are just getting started and find all this money stuff intimidating. Every person can find some use and educational benefit out of Morgan Housel’s book.