For those who don’t know (or have not been inside my office), I LOVE TO READ. I found a book at a used book store with my fiancé a few weeks back called “The Anxious Investor” on the shelf and figured now would be a good time as any to read it. One of the main topics it covers is market crashes. Based on studies, it seemed crashes weren’t just a breakdown in financial engineering; it was human psychology playing out on a massive scale. (Something we can take note of based on what’s going on today).
Here are three big takeaways from the book on why we make mistakes with our money, and how to protect yourself.
- Complicated Investments Hide Big Risks–
Back in the early 2000s, big investors wanted to make higher profits, so Wall Street created complicated bundles of home loans. They chopped these bundles into different slices. The “safe” slices got paid first, and the “risky” slices paid a higher interest rate, but they took the hit if people didn’t pay their mortgages.
When banks ran out of highly qualified homebuyers, they started giving loans to people who couldn’t actually afford them. Wall Street was so overconfident in their complicated math that they thought they had engineered risk entirely out of the system. In reality, they were just building a house of cards. When investments get too complicated, risk doesn’t disappear—it just hides.
- We Ignore the Red Flags When Everyone Else is Buying–
The 2008 crash didn’t happen overnight. It actually took about 18 months to unfold, with plenty of blaring warning signs along the way:
- February 2007: A major global bank issued warnings about home loan investments.
- April 2007: A massive mortgage lender went bankrupt.
- July 2007: Two large investment funds completely collapsed.
- August 2007: Another major bank froze withdrawals because they literally ran out of cash.
Despite all those massive red flags, the stock market kept hitting record highs that summer and into the fall. Why? Human nature. When we see everyone around us buying and making money, we assume things are safe. We follow the herd right off the cliff.
- The “Ostrich Effect” Hurts Our Wallets–
When the stock market drops, people tend to bury their heads in the sand like an ostrich to avoid the bad news. Studies looking at hundreds of thousands of retirement accounts show that people are more than twice as likely to log in and check their balances on days the market goes up. When the market rises a few days in a row, trading activity spikes.
When the market goes down, we look away because it feels emotionally safer. The problem is that ignoring your accounts stops you from taking smart actions—like buying high-quality investments while they are on sale. Eventually, the stress builds up in the background, and people end up panic-selling at the exact worst time.
Your Real Job as an Investor The book sums it up perfectly: “The job of the average investor is not to guess what the stock market is going to do next month… Instead, the job of the average investor is to assume that the market will appreciate over time and to invest in a manner appropriate for their age while working to prevent behavioral quirks and biases from hurting their returns.”
How to Protect Yourself Today
- Keep it Simple: If you can’t easily explain how an investment works or exactly what you are paying for it, you probably shouldn’t own it.
- Take Emotion Out of the Math: Set up a system to automatically adjust your portfolio when things get out of balance. This forces you to sell what’s high and buy what’s low without having to debate it in your head.
- Fight the Ostrich Instinct: Set up automatic monthly contributions to your investment accounts. This guarantees your money is going to work for you systematically, whether the news that day is good or bad.
A good saying I have always kept in my mind, especially from talking to Noel and his experience as well as Peyton is “When in doubt, Zoom out”
