Understand These 8 Psychological Tricks and Investing Your Money Will Be a Lot Easier
Purposely cop a big loss.
People think investing is easy.
Like you just buy a stock market index fund and all your dreams come true. If investing was that easy we’d all be millionaires. What makes investing hard?
Your psychology.
Your brain treats money like a game. Your brain loves to endlessly tweak and optimize stuff for shits and giggles. Mastering your brain is how you master your money.
I found my investing psychology difficult to manage recently. I had some huge investment wins. You’d think I would be happy. I am. But my monkey mind…*turns on Jigsaw voice from the Saw movies*…wants to play a little game. Muhaha.
Success in one area of your life that can make you act like a drunk. Your ego can think you’re going to rule the world. Visions of Lambos and edgeless pools can overcome your imagination.
Your psychology can play tricks on you when it comes to investing your money. Master these psychological tricks.
You will always wish you invested more.
When your investment does well you’d think everything would be wonderful. Nope. No matter how big the financial win, you will always wish you invested more money.
I see it now with bitcoin. I know people who are sitting on 6-figures of bitcoin. They’re angry trolls in diapers. Why? They wish they had invested more money when bitcoin was $1000 per coin so they could now be millionaires.
I shouldn’t admit this: I am in the same camp. I can’t help but think I should have bought more bitcoin. But then again when is enough, enough? Like if I had $10M in bitcoin, would that be enough?
The trick to understand about your psychology is you will never invest enough money in an asset that performs well.
Your mind will always come up with more reasons why you should have invested more. And they won’t all be bad. You will have noble reasons, too, like “I wish I’d invested more money in Ethereum so I could fund a school that provides financial education for free.”
Risk what you can lose.
Financial risk keeps you awake at night. You want money to buy you a good night’s sleep. It’s why you act honestly and don’t commit crimes that will send you to jail. You like sleeping at night…so do I.
The psychological trick to investing is to invest money you can afford to lose. It doesn’t mean you’ll enjoy losing your money. But if you can risk money you can afford to do without, then you’ll be far more careful with your choices.
It’s when you invest money you can’t afford to lose and risk ending up with nothing and starting again that the real problem starts (although I’d argue starting again is a superpower, but I’m weird).
If you don’t know how much money to invest then think about a number like 5% or 10% that won’t wipe you out.
A good night’s sleep is worth seven figures.
Ease your way into the asset.
A psychological investing trick is to slow down your brain.
Going all-in with an investing idea is dangerous. Slide yourself into an asset slowly using dollar-cost averaging.
Decide on a total investment dollar figure. Divide that number by twelve months. Invest slowly each month to even out the ups and downs.
Take out the initial investment.
I used this trick with bitcoin. When the price exploded I took out my initial investment. Now all I have invested is the upside, so I couldn’t give two hoots if it goes to zero like the doomsdayers predict.
When your investment does well you have an opportunity to take out the money you initially put in and reset your psychology at the same time.
If your psychology is free, your money is free to do its thing.
Don’t chase big gains.
“I plan on paying my house off in the next twelve months with this investment.” I heard a dude says this. It scared me.
Investing for big gains is a loser’s game.
You will lose if you try to go big and you’re not a professional. And even if you are a professional investor with a finance degree you’re still highly likely to make one bad decision that wipes you out.
You don’t get rich overnight. You get rich slowly.
Rewire your psychology to think over the long term. Let patience guide you to financial freedom, not desperation.
When the price drops more than 10% you’ll be tempted.
The March 2020 crash in the financial markets was a psychology test.
The weak hands sold. The over-invested were forced to sell assets to cover their margin calls (demands for money). The long-term investors utilized a different psychological trick: they bought the dip. They bought the dip because they understood what they bought. They took the time to understand the underlying value of the asset based on the data available.
Buying the dip is double-edged advice. On the one hand you could be getting a discount. On the other hand there could be a dramatic shift in economics and the constructs of society. Here’s what I mean:
- A drop in asset prices could mark the end of a country’s dominance.
- A drop in asset prices could mean the recreation of a nation’s currency.
- A drop in asset prices could lead to a 1930s style Great Depression that requires a person to be able to ride out the winter.
- A drop in asset prices could pop a stock market bubble in one area of the world that never recovers — like what happened to Japan with “The Lost Decade”
- A drop in asset prices could mark the end of one asset class and the start of another. (Negative yielding bonds is one example. Bitcoin replacing gold is another controversial example.)
When prices go down you will be tempted. The psychological trick is to go back to basics. Why did you invest? What does the data say about your investment? Has something fundamentally shifted? What does history say?
The best way to beat temptation is to do nothing. Doing nothing is underrated.
You will become a preacher.
We’re herd animals. Winning alone isn’t fun.
You like to invest your money with other people so you can feel socially connected. When your investments do well you want to talk to other people who own the same assets. It’s in your nature.
The psychological trick to master is to understand you will preach about what assets you buy. The way to overcome this problem is to consume content from people who think you’re crazy. I regularly consume content from Peter Schiff who says cryptocurrency is worthless and will go to zero, despite his young son and all his friends believing it is the future. I want to have his logic beat me up.
The easiest person to trick is yourself.
Don’t let your belief about what assets you own blind you. Purposely inject the opinions and advice of people you disagree with into your daily life.
Purposely cop a big loss.
Wait, what?
*Ducks for cover*
Yup, I said it. The unconventional psychological trick to investing your money is to cop a giant loss.
Wins make you a smart ass. Losses humble you.
If you want to test your psychology then purposely make a big loss. It’s only money after all. Money won’t make you happy. You can’t take US dollars with you to the afterlife. The love of your life won’t stay with you for your money.
I had to lose a lot of money before I ever made a single dollar as an investor.
Thankfully, I got to work in finance and see trust fund babies in Porches lose their daddy’s money. Brats are good financial teachers. I should know — I was a brat for the first 25 years of my life.
Losses teach you more than wins.
Don’t be a sucker with your money. Understand how your psychology tricks you into doing dumb stuff with your money.
When you master your psychology you can invest money calmly without losing the lot and thinking you’re Warren Buffett.
The only guarantee with investing is you will lose.
Some unexpected situation (like a mystery virus) will forever change society and you won’t be able to predict it or see it coming. That’s why you always diversify what assets you invest in — in case your research is off or you’re wrong about the future of the countries you invest in.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.