The Psychology of Money

I’d like to launch this new section of the website by referencing one of the best articles on retirement investing (or any kind of investing, actually) I’ve read in years. The author is Morgan Housel of The Collaborative Fund, and his writing focuses on the part of investing that gets scant attention: what’s going on in our heads as we make investment choices.

The Psychology of Money is the title of the article. My favorite part is where Morgan discusses the underappreciated effects of compound interest:

When compounding isn’t intuitive, we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.

There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.” But we know that’s the key to the majority of his success; it’s just hard to wrap your head around that math because it’s not intuitive. There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called “Shut Up And Wait.” It’s just one page with a long-term chart of economic growth.

The counter intuitiveness of compounding is responsible for the majority of disappointing trades, bad strategies, and successful investing attempts. Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that kill your confidence when they end. It’s about earning pretty good returns that you can stick with for a long period of time. That’s when compounding runs wild.

If you’re an investor, this is an article to save, print out and refer to over and over IMHO. Here’s the link again.

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