5 Takeaways from “The Psychology of Money”

“The Psychology of Money” by Morgan Housel is a mandatory read for anyone entering the stock market or the larger world of investing. So much of how we perceive our investing life comes from our mindset.

The book gives us reasonable parameters to frame our investing goals and successes. The basic rule is to invest however can “allow us to sleep at night.”

A disproportionate amount of our successes will come from sporadic “one-off” events that we cannot predict or control. For example, yesterday, one of my favorite stocks (VGR) created a spin-off company (DOUG). I don’t know whether the spin-off will perform well, but I had no control over these actions. I am just along for the ride. 

As we invest, we need to know our goals and what drives us. This level of self-awareness is vital because everyone has their vision of how investing looks. If we let someone else’s vision invade ours, we may doom ourselves to a fate we don’t anticipate. 

1) Every person has their own money beliefs, goals, and fears. Understanding yours is one of the first steps to building long-term wealth.

2) Compounding is the key to financial success. Time is the factor that determines the rate of compounding. We need to give our investments time to compound, without interruption, if we plan to see the fruits of our “labor.”

3) Our savings rate best determines how much success we can achieve in the markets. If we aim for 10% annual gains but spend 90% of our income, we may lose. However, if we invest 60% of our income and earn 5% gains, we may do better in the long run. 

4) The goal of investing is to buy back our time. We want to have freedom of time, location, and finances. We are financially free once we achieve enough investment income to cover our expenses.

5) Our brains are naturally pessimistic because it helps us survive. However, we need to teach ourselves to become optimistic. Optimism means that we believe there is a higher chance of something good happening than bad. It doesn’t mean the world is all roses and rainbows. 

The price we pay for investing is volatility; as long as we understand the cost (or fee) for investing, we can sleep much better at night.

This anecdote means that our stock market returns will travel up and down, but chances are, over time, they will move along an incline. If we can understand that daily fluctuations are the fee we pay for investing, we can convince ourselves that it is part of the game.

Traders who attempt to avoid the fee by constantly moving money around will suffer in the long run. We can earn above-average returns by letting our money sit in the market and compound exponentially.

This book can help even the most fearful human put their first few dollars into the market. The first few transactions are the hardest for people to endure, so I will begin to recommend this book to all new investors. A must-read, even if you have already started your investing journey. 

This link is to a physical product. The link above is to the digital book. Sorry. I get no credit for digital product links.

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