As a financial planner and retirement podcast host, I regularly engage with a lot of money experts. I’ve interviewed hedge fund managers, award-winning financial authors and CEOs of giant investment firms, and have gained incredible insights from those conversations.
But a recent interview on the Stay Wealthy Retirement Show taught me that all the financial education in the world doesn’t matter if your actions don’t align. The conversation I’m referencing is with Morgan Housel, partner at the Collaborative Fund and a winner of a New York Times Sidney Award.
Housel recently came out with a new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, which aims to explain why how we act matters more than what we know. Listening to his words, I came to the realization that what he says about the psychology of money is absolutely true, but the same philosophy also applies to other aspects of our lives, like our health and our habits.
The Psychology of Money
There are people out there in the world who have no financial training, no financial education and no experience with money, says Housel, yet they manage to do quite well. Many, in fact, manage to morph into the “millionaire next door” type many of us strive to become. They live below their means, save and invest money like it’s their job, and build real wealth that lasts a lifetime without a lot of fanfare or ups and downs.
But Housel says the opposite is also true. There are Harvard MBAs and partners at Goldman Sachs who fail during the best financial markets and go bankrupt all the time.
Why is that?
Housel insists that this is where the psychology of money comes into play.
“What matters with finances and investing is how you behave,” he says. “It’s not what you know.”
For example, can you control your relationship with greed and fear? If not, then it doesn’t really matter how many hours you spent studying finance at Yale.
Without a handle on your emotions, you might be the type of person who sells all their investments on March 16, 2020, when the Dow Jones Industrial Average fell a record 2,997 points.
Can you plan for the long-term and stay the course? If not, then you could have made any number of tragic mistakes in a year like 2020, and you may have no idea what steps to take next.
In the meantime, a long-term disciplined investor who has a handle on their emotions (and a long-term investing plan) may have done nothing during the beginning of the stock market tumble in March of this year. Some with the most discipline may have even invested more during the market’s darkest days.
“These things cannot be taught in an academic setting,” says Housel. This is the “soft behavioral side of investing” that has little to do with numbers or math and much more to do with someone’s temperament and ability to just stay the course.
You can be the best stock picker in the world, says Housel. “But if you lose your head, none of it matters.”
Why Having a Plan Matters More Than Ever
This lesson may be even more crucial right now, considering the uncertainty the pandemic has created. When this subject comes up, I find that so many knowledgeable and informed investors are rightfully perplexed by how the stock market has behaved.
Housel admits there is no other similar period in our history where the stock market has rebounded so quickly in the midst of an economic disaster. After all, during some of the worst of the Great Depression from 1929 to 1932, the Dow Jones fell by 89%.
But we are not living in the 1920s, and the world is dramatically different than it was 100 years ago. Housel points out that a handful of huge tech companies make up a disproportionate share of the S&P 500, and many of them were unknowingly set up to thrive in a pandemic.
And, he’s right. As of right now, some of the biggest players in the S&P 500 include the likes of Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet Class C (GOOG), Facebook (FB) and Johnson & Johnson (JNJ).
This is where you have to realize that “the stock market is not the economy,” says Housel. The growth of technology has made the disconnect between small business and major tech companies wider than ever. So yes, thousands of restaurants may have been closed or operating at limited capacity for months. And some industries, such as travel, have been hit harder than most.
“But in July of last year, Amazon.com shipped 490 million packages in the United States,” he says.