Our brain. We know it is the most important organ of our body, but for many people, so little of it is seemingly understood as to how it affects our thinking, particularly when it comes to investment. This is because investment, as I have come to learn, is often counter-intuitive. This has created many myths which if not recognized, may impede us from achieving more out of life. Awareness of the myths does not guarantee that we will not let our innate psychology interfere with our decision-making. However, it offers us the choice to act early, and these steps may have compounding implications as we progress through life. This shifting of mindset is not going to be easy – it is never going to be when they seem to run contrary to what we have been used to and what has served us well thus far. This is where I think it is so important for us to open our minds to entertain the possibilities beyond some deeply entrenched beliefs.
Mathematics is my favourite subject in school. I think part of the attraction is the certainty that comes with it. Either you get a question right or wrong. And with practice, more than in any other subjects, I seemed to be able to achieve higher marks. To me, the result equals effort in Math, and a Mathematics score is not an ambiguous result where subjectivity is involved. It is objective, verifiable, and commensurate with the effort put in. Investing seems to involve a lot of numbers as well. There are ratios that can be calculated, and measures that we can compare, so it bears a lot of resemblance to Mathematics. Translating the certainty of mathematics across to the investment arena is unhelpful, however, because it is anything but. “Can you guarantee that investment will not make me lose money?” is equivalent to asking, “Can you guarantee that you will score full marks in the upcoming Math examination?” to which most people will probably answer “Of course not, who can guarantee that?”
Just as nobody can guarantee a perfect score in an upcoming Math examination (assume fairness in the conduct of the examination of course), nobody can guarantee an investment will not lose money. However, as we will see subsequently, the odds are high that starting early in a broad-based index fund (such as the S&P500 ETF) comes as close to having the guarantee of not losing money as any.
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