How you think and what you believe create the raw materials for your investment outcomes. Your beliefs, even if they aren’t well grounded in reality, are a central part of your mindset; and your mindset determines your behavior. Your behavior is the single most important element of investing.
If your mindset is off track, eventually your financial life will be off track as well.
A good first step toward a healthy money mindset is to replace myths with facts. This requires that you let go of stereotypes and negative beliefs that often govern your money mindset.
Focusing on your most important life values and long-term goals helps you foster a healthy money mindset.
There are many reasons why investors have an unhealthy money mindset, but the financial media deserves a large portion of the blame. When you’re constantly bombarded hour after hour with shrieking about market volatility, an uneasy mindset is understandable.
WHY A HEALTHY MONEY MINDSET MATTERS
A healthy money mindset builds mental muscles that come in handy when the inevitable financial surprises occur. Things that you haven’t experienced previously can happen at any time. How you react to surprises can be an incredibly important driver of your long-term outcomes.
Your money mindset also helps set the framework for how you deal with money stresses. Financial wants are often unlimited, while resources are scarce; there are always money situations that involve stress.
Your money mindset is made up of stories about money combined with preferences for dealing with financial trade-offs. For instance, do you have a preference for stability over higher returns or are you willing to accept more risk as a trade-off for higher returns?
HOW EXPERIENCES FORM YOUR MINDSET
Your personal experiences with money, both positive and negative, contribute to your money mindset. It’s useful to examine more closely why some of your financial decisions worked out well and others did not. Without a reasoned understanding of your money history, you can easily perpetuate errant beliefs that can impact ongoing decisions.
For most investors, their personal experiences with money are all they really know. You can counter this by becoming more familiar with how money works beyond your limited individual interactions. If you want to read just one book to help, The Psychology of Money by Morgan Housel is a good choice.
Part of developing a healthy money mindset involves comprehending that every financial decision has a cost; nothing is free. Your mindset provides signals for how willing you are to accept the cost.
Some investors search for strategies that promise to provide investment returns without any risks. These are nothing more than tricks that usually lead to mistakes. A good money mindset keeps you grounded and helps you avoid big mistakes.
Your money mindset is like the operating system on your computer or device; it’s in the background, but keeps everything running smoothly. You need to keep your money mindset healthy and up to date. Your financial future will thank you. Start there.
Related: Do You Need an Investment Philosophy or a Market Forecast?