Timeless lessons on wealth for retail investors

Taking your first steps in the world of investing can be daunting, whether because of a limited knowledge, confidence, or fear of missteps. However, a wealth of information awaits those who know where to look. One of the highly most recommended books is “The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness”, by Morgan Housel, a New York-based economic analyst specializing in behavioral economics.

Published in 2021, the book challenges readers to question their relationship with money and to delineate their true aspirations. Over 20 chapters, Housel divulges timeless insights into the psychology of money, unveiling habits and behaviors that help not only to generate wealth, but also to keep it. Here are the key takeaways:

• Everyone is different

Personal circumstances have an enormous influence on our worldview: growing up in a time of high inflation is not the same as growing up in a period of stagnant prices, just as experiencing abrupt market plunges contrasts starkly with times of robust stock market growth. These factors shape our risk tolerance.

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works,” explains Housel. “We see the world from different perspectives”.

• Control greed

Comparisons to individuals with different life circumstances may fuel a desire to amass more wealth than your investments yield, potentially leading to unethical actions, as seen in the cases of Bernard Madoff or Rajat Gupta.

“There is no reason to risk what you have and need for what you don’t have and don’t need. As obvious as it may seem, this is one of those things that is often overlooked,” notes the author, adding the importance of realizing when you have “enough.”

• Patience is your greatest asset

Maintaining a long-term perspective is essential in investing, particularly in equities, an asset that has been proven that the longer you stay invested, the better the returns. In fact, Warren Buffett, chairman and CEO of Berkshire Hathaway, amassed $81.5 billion of his $84.5 billion net worth after turning 65.

The secret? Compound interest—reinvesting the profits generated by the initial investment instead of cashing out. “Buffett's fortune isn’t due to just being a good investor, but being a good investor since when he was literally a child,” adds Housel. “Had he started investing in his 30s and retired in his 60s, few people would have heard of him.”

• Getting wealthy vs. staying wealthy

Amassing money involves taking risks, and at times, the challenge isn't just generating positive returns on investments, but conserving that wealth. “Keeping money requires the opposite of taking risk. It requires humility, and fear that what you've made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you've made is attributable to luck, so past success can’t be relied upon to repeat indefinitely,” the economic analyst asserts.

That’s why financial planning is essential, but equally essential is having contingency plan in case something goes wrong. “It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift,” says Housel. This underscores the importance of having a financial safety net: saving a bit each month will help you deal with any unexpected challenges.

• Never underestimate the role of luck (and don’t forget risk)

Bill Gates, the co-founder of Microsoft, was fortunate to attend a school equipped with a Teletype Model 30 computer, a rarity in 1968. Gates participated in an independent study program where he learned to use the computer. The rest is history.

Risk is the other side of the same coin. According to Housel, "They are so similar that you can't believe in one without equally respecting the other.” “If you give luck and risk their proper respect, you realize that when judging people's financial success, it's never as good or as bad as it seems,” he emphasizes.

This article offers additional recommendations from MAPFRE experts to guide you in taking your first steps into the world of investing.