Application of The Psychology of Money
One of the timelier books I had the opportunity to read lately was Morgan Housel’s The Psychology of Money. From a high level, this book attempts to bring humanity to our financial decisions. Despite most people generally understanding the correct financial decisions to make, we often choose an option that is clearly irrational. Housel argues that our financial decisions need not be coldly rational; just psychologically reasonable.
As we begin to apply this psychological framework to our current economic landscape, we begin to find explanations for seemingly erratic behavior in the market by fellow investors. Our current economic environment can be described in one word: uncertainty; and Mr. Market hates uncertainty. This uncertainty, a result of the recently paused tariffs, has brought the S&P500 down by over 10% from its recent highs. For a market that has done nothing but make new all time highs since 2020, this comes as a big hit. It seems to have made people forget the historical performance of the market, something Housel reminds us of. For the past 170 years, the stock market has experienced the following events:
· 33 recessions that lasted a total of 48 years
· The stock market fell more than 10% from a recent high at 102 times
· Stocks lost 33% of their value at least 12 times
Correspondingly, this 10% decline is just 1 of 100-plus declines we have seen over the history of the market. So, what should you as a psychologically reasonable investor do during this time of economic uncertainty?
First, understand—based on the data presented—that this decline is historically common and will likely continue to be a regular occurrence throughout the entirety of your investing horizon. Second, take advantage of a 10% sale in the stock market. During these pullbacks, investors are given the opportunity to find great businesses at discounted prices, do not take this for granted. If you have been dollar cost averaging into low cost index funds, continue to do just that. Now is not the time to panic along with the crowd and sell everything you own at a loss. To be an “investing genius”, Housel directs us to do the average thing when everyone else is going crazy. Right now, everything is going crazy, and the average thing would be to buy stocks like you always have.
Housel’s Book: https://www.amazon.com/Psychology-Money-Timeless-lessons-happiness/dp/0857197681
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