February 3, 2018

Food for Thought – Book of the Month

#1 Why Smart People Make Big Money Mistakes

In 1999, Gary Belsky, a former writer at Money magazine, and Thomas Gilovich, a psychology professor at Cornell University, published Why Smart People Make Big Money Mistakes.

It was a revolutionary way at looking at how we deal with money.

The book revealed the psychological impulses that propelled seemingly very intelligent people into irrational behaviour.

Belsky and Gilovich explained why so many normally clever people make dumb financial choices.

For instance, they looked at why investors too quickly sell winning stocks and too slowly sell failing shares, why homeowners underachieve when selling a house, why housebuyers don’t get enough for their money and why some pay too much credit card interest and others don’t put away as much money as they should.

There were several key takeaways from the book that still serve all investors.

  • Don’t rush. Be patient when it comes to money. Don’t spend on impulse, use a “cooling-off” period with “extra” money, (such as tax rebates), and choose slow but safe investments.
  • If you don’t want any kind of risk, use low-cost index funds to invest in the stock market.
  • Automate as many good habits as possible: bill-paying, tax payments contributions, etc. Automation circumvents the weakest link in the chain: you.
  • Don’t obsess over your investments. “For most investors — frankly, for all investors who don’t trade professionally — a yearly review of your portfolio is frequent enough to make necessary adjustments in your allocation of assets,” the authors suggest. Their logic is that infrequent checks stop rookie investors from sabotaging the markets’ work.
  • Perfect is the enemy of good enough — making good decisions is adequate. Waiting for perfection could be costly.
  • Go long. Don’t be impressed by short-term success. Instead, look to the long term.
  • Ask questions. Don’t be over-confident of your financial prowess. There’s always someone who can help you. Ask questions of the better-informed, get the facts and make informed decisions.
  • Be a maverick. Pay no attention to the latest “hot” investments. Rely instead on historical trends to make your decisions.

Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.