Reviewing The Psychology of Money

Introduction

The Psychology of Money is a finance book by Morgan Housel that describes the psychology behind money, as the title suggests. The book mostly focuses on how you, as an individual, invest and what happens in your mind, when you do it.

This book is not a technical book. It does not describe how investing works or any technical things that you should do. Rather it tries to make you understand why people make the investments that they do, and Morgan Housel does a good job at this. But when reading I did not quite learn anything new. The book succeeded at wording the concepts that you often passively get an understanding of after some time investing.

The Psychology

My investing strategy has always been to invest in global index funds and ETF’s. When you invest in this way, you are betting that the top companies around the world will keep doing better. In a way, you are betting that the world keeps improving. I have been reading and watching a lot of content about investing, and the most common advice is to just invest in broad index funds and ETF’s*. These investments have historically been more profitable than most professional investors. Some investment management firms have even started just using index fonds because they are more profitable - and also way cheaper - than hiring people to do the work*.

The book states that you should let your investments compound for as long as possible. Investing has small fees, but should be profitable in the long run, why else would you do it? The real price is the volatility of the stock market. The emotional toll of watching your hard earned money decrease in periods is the price of what is hopefully some good returns in the long run. If you pick the most solid investments, then you will relieve yourself from this price by lowering risk. If you pick individual stocks that you think will blow up, you could probably just go to the casino and start gambling.

Another good thing about global index funds and broad ETF’s is that you save time by not having to research and analyze data about every invididual stock that your portfolio should consist of. This is a big relief in itself and should not be underestimated.

What should you be doing with your money?

Letting money stay in savings is not good, if the rates are bad. Your money will basically dissappear because of inflation. Inflation is typically held at around 2% by the central banks. This means that money is basically designed to be decreasing in value. This incentivizes spending which helps the economy, but this also means that you should be owning assets that are not depreciating instead.

Global index funds and ETF’s are assets that historically have been very profitable. These types of assets are also a lot easier to get into, when you do not have as much money in the sense that it does not require as much as real estate investing. But it is important to remember that historical data cannot predict the future, which is true for every investment.

The book also makes some good points about the psychological part of investing in global index funds and ETF’s:

• they are easier to manage than investing in individual stocks
• they are easier to leave alone
• they are not as risky as managing individual stocks

These are all points that allow for time in the market and therefor the most optimal compounding. But as the risk is a bit lower, the possible return will also be it. When investing in individual stocks, you can get lucky and hit the next huge thing. You just have to keep in mind that that is more than likely not to happen.

Summary

The main points I got from the book is that you should:

• keep your investments simple
• let your investments compound as long as possible
• keep a margin for error
• understand that every other investor is a person living their own life

So all in all the book was good. But if you already know the basics of personal finance and investing, then I would recommend you to get another book or save the money and invest it.