Why only numbers are not enough for managing your money

Whenever I meet elders in the extended family at any family gathering or function, we end up talking about Personal Finance and money management. And they (unsurprisingly) tell me Mutual Funds are risky, and that FDs and Gold are the way to go.

I used to get annoyed with their arguments, because I always go by numbers, and it is very evident that Mutual Funds have given way better returns than Real Estate or gold (or FDs, for the love of God!). But these uncles never agreed.

I've been reading this book called "The Psychology of Money" by Morgan Housel, and the first few pages of the book gave me an answer to why these uncles were not convinced even when I showed them the numbers. Turns out, they're not wrong. They've just experienced money management from a very different perspective.

Let's take three different situations. First, let's look at William, who was in his twenties in 1941, during the World War, in Germany. The stock markets were almost wiped out in Germany then, and if anyone had invested in the market before the 1940s, their finances were doomed. Now, William saw people lose a fortune in the stock market when he was in his prime, and probably lost some of his money too. He will have an opinion that the stock market is a scam, and there's a high chance that this opinion will stay with him for life. This guy is mostly going to invest only in risk-free government bonds all his life.

Now, let's look at Max, who is also in his twenties in 1941, but in the USA. The stock markets here were booming in the 1940s. Max saw people mint money, and probably made some himself too. His prime was the phase when he developed a fantastic loyalty towards the stock market, and that's probably going to be his primary mode of investment throughout life. Max is going to swear by equity all his life!

Now, let's look at Zane, born in Africa in 1980. He comes from an underprivileged and poor family where they barely make 2 meals a day. He's neither educated or smart, but wants to provide for his family and children.

Zane regularly buys lottery tickets to fulfill his dream. Sounds crazy, right? Someone who can barely make ends meet is buying lottery tickets!?

But most of the people who buy lottery tickets anywhere in the world, are the ones who come from low-income households. When you ask Zane why he does that, here's his answer: "I want to make sure I put my children through college. And with my current job, I can't do that. Even if I save a large chunk of my salary, I will never be able to pay for my children's college fees. So the only way to have the slightest chance of fulfilling my dream is to buy a lottery ticket in the hope that I'll win it some day."

All 3 reasons make sense now, don't they?

Can we expect all 3 of them to have similar investments in their portfolio? We cannot. Their view towards investments and money management was formed in 3 different worlds. And most people do not make make financial decisions purely with spreadsheets. They make them at the dinner table, at company meetings or after discussing with a friend, where their personal history, their own view of the world, their ego, their life goals and their own mental models play a huge role.

So while I would prefer equity over debt (even with a slightly higher risk), someone else who has lost money in the Harshad Mehta scam of 1992, may probably never put money in the stock market ever again.

And now when elders in the extended family tell me that "Mutual Funds are risky", I can understand why they say that. But I still tell them "Mutual Funds Sahi Hai".