The Kitchen Table and the Spreadsheet

Morgan Housel often writes about the idea that rational decisions that look great on a spreadsheet can break down in real life. A spreadsheet is logical and mathematically optimises outcomes. Sitting around the kitchen table are the emotions of real life, hopes and fears. 

We’re not robots. 

People panic sell in downturns even though staying invested is massively likely to be the better long term outcome. 

The right level of savings can be abandoned when other priorities arise. The spreadsheet says to keep saving but the word on the street might be that job security has fallen through floor.

Morgan’s argument is that the best strategy is not the one with the highest expected return, but the one you can stick to when everyone around you is saying something different. Fear is the enemy. 

This might mean taking slightly less risk than you should with your investments (thus reducing long term returns) or holding a bit more than is necessary in cash. 

If that means that you stick to the strategy when it’s all hitting the fan then that makes perfect sense. Your ‘future self’ will thank you.