I readThe Psychology of MoneybyMorgan HouselonJun 23rd, 2024


I agree with Olive’s comment on this book: it is more geared towards the common sense of money instead of the psychology of money. You would be disappointed if looking for the irrationality and subconscious bias in the financial market, —- this book focuses mainly on the personal investment strategy and fallacies.

Path Dependency

We tend to make decisions based on our past experiences. But our personal experience with money making is highly skewed by the times when and where we live. As I lived in China and the United States, I am more optimistic about the economy forecasting, thus I would like to take more risks. My mom was severely burned by the Chinese stock market in 1990s, she was more risk averse and invested more conservatively.

As Ray Dalio pointed out in his work, Principal, the long-term cycle usually last 120 - 140 years. No human being could outlive it to observe the whole picture. This conscious bias could not be better underscored by Chinese’s fixations on real estate in the economy downturn.

The right goal and assumption

What is your investment goal, try to maximize your return of investment, or achieve the financial freedom to gain the control of your time? The goal defines your strategy, and your strategy shapes your tactics for the investment.

For example, if your goal is to maximize your return of investment; the anxiety of FOMO, fear of miss out, becomes inevitable. Considering the financial institutions gather thousands of great minds, and spend millions dollars to seek the alpha, it is hard to compete with them in a leveled playground as an individual investor. If your life objective is to pursue happiness, and the investment helps you to gain control of your time; maybe a good enough return would suffice.

Another import factor is your risk manifest: what is the baseline assumption for the economic down turns? Do we need to prepare the global depression, apocalypse? The more resilient your investment portfolios are, the less return of investment in the sunny days.

People do not want the mathematically optimal strategy, they want to the strategy that maximizes for how well they sleep at night.

It is OK to be wrong

Retirement is a nascent endeavor for Americans, the 401K didn’t exist until 1978, and the Roth IRA was not born till 1998. We still lack of the expertise to manage personal finance for our retirement life. It is OK to be wrong.

More importantly, investment is long tail. A small portion of investment contributes significant gains, we just don’t have the crystal ball to pinpoint which portion. The failures are the attempts to contribute the success.

Be frugal

It’s much easier to save 1 - 2 percent from frugal lifestyle than outperform 0.1% in the financial market. Happiness is just results minus expectations. We can achieve the goal from either approach.

Closing thoughts

With all the lesson learned above, here are my take away for the investment manifests:

  • Assume the United States will continue leading the global economic growth, and stay as the #1 unified marketplace, we should continue invest on the US stock markets.
  • If our life style can be curbed less than 100k USD per year, we can rely on the passive incomes for 2M assets and 5% return(such as bonds).
  • Since I would continue work for another 20 years, I might be able to survive the stock crash like 2008. Continuous investing on SP 500 index fund might have a good enough return in the long run.