Your money: better to be reasonable than rational

In the world of personal finance and investing, many think it’s all about the math. Yet while math plays a powerful role, in Morgan Housel’s recent book, “The Psychology of Money,” Housel argues that financial success is more a lesson in psychology than math.

Housel believes it’s better for investors to be reasonable enough rather than coldly rational, because ultimately behavior and emotions end up driving much of an investor’s success or downfall.

To demonstrate his point, Housel tells the story of Julius Wagner-Jauregg, a 19th century psychiatrist who won the Nobel Prize in Medicine for his work on treating neurosyphilis.

Wagner-Jauregg specialized in patients with severe neurosyphilis, who at the time had a survival rate of about 3 in 10. Through his work, he began to recognize a surprising result: patients with severe neurosyphilis. high fever due to a separate illness seemed to have a greater chance of survival. So he started to test his theory. Wagner-Jauregg began injecting patients with mild strains of typhoid, malaria, and smallpox to induce fever and fight syphilis.

As you can imagine, this was an incredibly dangerous trial and many of the patients treated have died. However, after much trial and error, his hunch was confirmed.

Wagner-Jauregg had opted for a mild version of malaria which he could easily treat after a few days of high fever. He later reported that “6 out of 10 syphilis patients treated with ‘malariotherapy’ recovered, compared to 3 out of 10 patients left alone.”

Housel writes about the impact of this breakthrough at a time when fevers were feared and largely misunderstood. He said: “… Wagner-Jauregg was on to something. Fevers are not accidental nuisances. They play a role in the body’s path to recovery. We now have better scientific evidence for the usefulness of the disease. fever in the fight against infection. Increasing body temperature by one degree has been shown to slow down the replication rate of some viruses by a factor of 200. “

But, Housel laments, this is where science stops and reality takes over. Still to this day, fevers are mostly considered a bad thing and are usually treated as quickly as possible to get rid of them.

If we know that fevers are a vital part of fighting disease, why are we so quick to treat them?

Housel says it’s simple: “The fever hurts. And people don’t want to be hurt.”

“The goal of a physician is not only to cure disease. It is to cure disease within the limits of what is reasonable and tolerable for the patient.… It may be rational to want a fever if you are have an infection. But that’s not reasonable, “he added. he keeps on.

This same logic applies to your money: it doesn’t matter if you’ve found the mathematically optimal investment strategy, if it doesn’t get you to sleep at night, you’re not sticking to it.

Housel writes: “What is often overlooked in finance is that something can be technically true but contextually absurd.”

Although this is a completely rational and mathematically optimal strategy, no investor will be able to resist volatility.

He goes on to say, “The researchers argued that when using their strategy, ‘the expected retirement wealth is 90% greater than that of life cycle funds.’

“It’s also 100% less reasonable.” Housel jokes.

For those looking to develop a sensible financial plan that resolves to sleep well at night, here are some keys to consider.

Humans are wired to avoid loss, and some are wired harder than others.

Part of a successful financial plan comes down to understanding your tolerance for risk. Risk tolerance is your ability to weather the ups and downs of a market while still getting a good night’s sleep. Markets go up and down, and as an investor you need to be mentally prepared to deal with this volatility.

The benefits of a financial cushion often outweigh the curb of inefficiency.

From a mathematical standpoint, cash and bonds are generally not the most efficient use of capital at the present time. That said, they are less volatile than stocks and allow investors to create some stability in their financial plan. During lean years or a downturn, they can be as valuable as oxygen. Investing in 100% stocks may be the most rational strategy, but it is not always the most reasonable.

Invest in the things you love.

There is a common sentiment among investment professionals that you should be coldly detached from your investments, ready to cut the ties and get off the ship if something underperforms. On the flip side, consider this: if you invest in things that you love, you’ll be more likely to survive the tough years rather than selling yourself at the first sign of trouble. This allows you to stay fully invested and capture the returns that may result.

TrueNorth Wealth is here to help.

If you want to develop a reasonable financial plan that matches your unique goals, we’re here to help.

At TrueNorth Wealth, one of Salt Lake City’s premier wealth management companies, we strive to help our clients build long-term wealth while maximizing the enjoyment they get from their money. We do this by matching our clients with a dedicated CFP® professional backed by an incredible team. We understand that it can be difficult to maintain a long-term investment mindset, which is why we help our clients create an investment strategy that matches their risk tolerance and specific goals.

For our team at TrueNorth, it’s about more than money. It’s about serving families across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a toll-free consultation, visit our website at TrueNorth Wealth or call (801) 316-1875.