The Psychology of Money — a comprehensive dissection of the mind’s relationship with investing
The Psychology of Money by Morgan Housel is a book about investment, finance, and business. Financial decisions are frequently taught as a mathematical discipline in which data and formulae tell us what to do. In reality, people do not make financial decisions using spreadsheets. At the dinner table or in a meeting room, personal history, unique worldview, ego, pride, marketing, and strange motivations are all scrambled.
Housel explains one of life’s most important themes by demonstrating how people think strangely about money.
They talk about retirement. Social Security was established in the 1930s, but many people did not reach the age of 65 until the 1960s. By 1960, 40% of people worked past the age of 65. 20% of people over the age of 65 work. With the introduction of 401ks in the late 1970s and the Roth IRA in 1998, more people are able to retire. There are $36 trillion in retirement funds waiting to be spent.
Life, Liberty, Happiness, and Compounding
In one chapter, Housel discusses time and compounding. Take, for example, Warren Buffett. Buffett is worth $84.5 billion. Notably, after turning 50, he earned $84.2 billion. $81.5 billion after 60 years. Buffet started working when he was ten, and he saved and invested early on to make the most of his money. By his 30s, he had saved $1 million. He became wealthy by investing frequently and early.
It’s true that if you start saving between the ages of 25 and 35 and stop at any point before retirement, you’ll end up with more money than if you start saving in your 30s and keep going. Early savings are important because of compounding.
Compounding isn’t everything; so is how you invest. Indices outperform individual stocks. Consider the Russell 3000 Index. It has grown 73 times since 1980. 40% of the Russell 3000 companies went bankrupt. 7% of the index’s companies outperformed the remaining 40%, more than offsetting their losses. This is a strong argument for putting your money into the index instead of picking individual stocks. Technology stocks were uncommon in the 1950s. They already account for more than a fifth of the S&P 500. When compared to oil and gas, technology equities are outperforming.
Withdrawals from recession-related investments
To illustrate recessions, Housel provides three investment scenarios. These examples show how important it is to stay the course and not pull out of investments or change how you invest when the market goes down.
They talk about how the media uses scare tactics to make people afraid of investing. Keep your cool in uncertain times.
Rich vs. wealthy
Even if they live lavishly, wealthy people may be impoverished. The Millionaire Next Door by Thomas J. Stanley is about people who live within their means, save, and become wealthy. Wealth gives us control over our time, which becomes currency. It enables you to spend your money wisely.
Long-term investing can be volatile. Long-term investment portfolios are necessary for success.
What should I do with my savings? Your savings should not pay you. Having enough savings allows you to choose a new job, make home or car repairs, and so on. Savings are your safety net.
