This article is an excerpt from the Shortform book guide to "The Psychology of Money" by Morgan Housel. Shortform has the world's best summaries and analyses of books you should be reading.
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Does fear of uncertainty hold you back from investing? Are you nervous about putting your money in a long-term investment account, not knowing how much it will grow?
According to Morgan Housel, the author of The Psychology of Money, investment uncertainty holds many people back. However, the longer you put off investing due to fear, the smaller your returns will be.
Here’s why accepting uncertainty is key to achieving long-term investing success.
Don’t Be Put Off by Uncertainty
In The Psychology of Money, Morgan Housel shares one key to reacting well to bad news: embrace investment uncertainty. He argues that in order to achieve long-term investing success, you must accept that you’ll feel uncertainty as the market fluctuates. Otherwise, you won’t be able to endure the uncertainty long enough to let your returns compound.
Housel explains that investing inherently includes some measure of uncertainty—and the higher the potential gain, the more uncertainty you feel. For example, the longer you let your stocks compound, the more money you can gain, but the longer you have to feel the uncertainty of not knowing exactly what will happen to your money. Conversely, if you hold low-value bonds, you won’t accrue much value—but since bonds are far less volatile than stocks, you won’t feel much uncertainty, either.
(Shortform note: Housel assumes that this uncertainty or discomfort is inevitable when investing—and while some discomfort may be normal, constant discomfort is not. Several experts recommend strategies to decrease the anxiety you feel around your investments, like checking them once a quarter at most.)
According to Housel, most people try to limit the uncertainty they experience by timing the market—but since timing the market is impossible, they end up losing money. As an example, Housel points to the fact that tactical mutual funds, which bounce between stocks and bonds in an attempt to strategically avoid market risk, generally do worse than more traditional stock-bond funds that stick to steady investments regardless of market fluctuations. In other words, nobody can successfully time the market—not even professionals.
(Shortform note: Ironically, in The Intelligent Investor, Graham suggests that some people time the market not due to fear of uncertainty but due to overconfidence: They have an arrogant presumption that if you’re smart enough, you can predict how the market will move.)
Therefore, Housel recommends, instead of trying to avoid uncertainty, accept that uncertainty is inevitable when investing. Remind yourself that you’re trading your short-term peace of mind for potential long-term investing success, and use that knowledge to endure the market long enough to let your returns compound. (Shortform note: In his book, Housel focuses exclusively on the toll that investing in the stock market takes on your peace of mind. But in the blog post he based the book on, Housel discusses other financial areas as well, arguing that every financial reward you achieve takes a toll on some aspect of your life, and you can only achieve the reward if you accept each of those tolls. For example, you may patent an invention that earns you millions—but you can only develop that invention by accepting the toll working on it takes on your social life.)
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Here's what you'll find in our full The Psychology of Money summary :
- Why the key to financial success lies in understanding human behavior
- How to make better financial decisions
- How chance plays a bigger role in our financial lives than we think