Town Builders

Block 15: Psychology

Now onto arguably the most important block: psychology. Wait I thought this was investing, what does psychology have to do with that?

 

A whole lot actually. Investing is very emotional. As you know, the stock market goes up and down a lot, which is called volatility. But how come? Well, because people are involved! I’m only slightly kidding. The lure of money can make people very emotional. When everyone is “getting rich” from the stock market, UBER drivers suddenly start giving you stock tips and your great-grandma asks you if she should start investing. On the other hand, when the market is down 50%, like in 2008, the words “stock market” are treated like profanity and no one wants to talk about it.

 

These are just facts. Notice the world around you and you might just see it. People, the same people who love to analyze economics, try to “time the market.” (what are we doing? first we’ve excluded MBAs and now economists!). Anyway, they use their fancy models to predict when the market will crash and then when they should buy in again. The same principle remains; there are so many factors at play! Our view is that it is a fool’s errand to try to time the market. For every one person it works out for, 886 go crazy from it (psa - not a reliable stat, but reliable in spirit).

 

So what should you do if you can’t time the market? Well, we say just stay invested and worry about what you can control. Immensely easier said than done though. It is tempting to pull your money out and wait for the market to go down and then put it all back in but here’s the thing: what is too high and what is too low? It is all based off of anchoring. And this is our first encounter with what is called a psychological bias. We are excited to explore more of these with you…