ON MONEY

Why I Am Reasonable, Not Rational: How I Take Financial Decisions Based on the Psychology Of Money

Why only 25% of my money is invested in Index Funds and ETFs and why I’m okay with that

My heart is pumping at 180 bpm. Then I press the “buy” button and it is done — purchasing my first share. I feel a rush of dopamine through my body and am weirdly reminded of the feeling of gambling.

And somehow it is nothing else but gambling. Of course, lower risks and there is more to consider than mere chance, but it means giving your cash away in the hope it will multiply while being aware that you could potentially lose everything.

My journey into investing is marked by anxiety and insecurity, even though I knew all the rational arguments for Index Funds and ETFs:

The chance of losing money by long-term investing in the S&P 500 goes against zero and even if it goes down, it will mean the world economy will go down and when that happens, we will have other problems, than the money we might lose. Every second you wait compounds against you and inflation will eat away at your cash slowly, but surely.

This chatter went through my mind day and night, while I was struggling to invest more. I knew that the cash in my bank account was decumulating due to inflation and that I needed to start investing to escape that.

I had all the arguments I needed but was still blocked. Until I read a sentence in “The Psychology of Money” that explained my struggle:

Reasonable > Rational: Aiming to be mostly reasonable works better than trying to be coldly rational. Being reasonable means including emotions and stress.

The arguments for investing are mostly rational. They are calculations.

However, we are more than just rational beings. We have emotions such as stress, anxiety and fear. By ignoring them and just going with the “best, rational” decision, we create more unhappiness, than happiness. The stress which is caused by not knowing whether you will lose all of your savings, will not be compensated by the dividends you might receive.

Our health is the greatest asset we have and stress deteriorates it.

Until today, only 25% of my net worth is invested in low-cost index funds and ETFs. The rest lies in cash in my bank accounts. I don’t own an immobile or a car, not even an expensive watch or other valuable assets. Why?

Because I am comfortable with this ratio. And I continue investing. Every month another 15% of my income goes directly into index funds, without any involvement required. I automated the whole system, so I would not have to go through the emotional turbulence every month. And it worked out well.

I don’t think a lot about my investments and I stopped checking my online broker every day. I do it once a month now, for my “financial Check In”.

I sleep very well at night and my stress goes against zero. On the one hand, I know that my money will not be eaten away by inflation completely, on the other hand, I am comfortable with 25% invested and the knowledge that I could lose everything.

That is my current plan and I am sure it will change over the years.

What is your investment strategy?

Have a great day.

Matteo