The Psychology of Money

A financial bubble is when the price of an asset quickly increases in a way that cannot be sustained long-term. When the bubble “bursts,” the cost of the asset decreases sharply. For example, a real estate “bubble” would mean that the price of houses in a certain area regularly rises until it suddenly decreases. Housel defends investors’ actions during bubbles, claiming that short-term investors are acting logically when they purchase and resell such assets to make a profit.

A bull market is when the stock market makes strong gains as stocks become more valuable. Housel refers to bull markets when discussing investment strategies, noting that investors do not want to miss out on opportunities presented by a bull market.

In finance, compounding refers to continually reinvesting the profits of an investment, thereby generating more profits to reinvest. Housel considers compounding a crucial feature of financial strategies for the average person. Throughout The Psychology of Money, he reminds the reader of the role that compounding plays in long-term savings and encourages people to leave their investments and savings uninterrupted for as long as they can to reap the most benefits from compounding.

For Housel, being “rich” means that someone has a steady, high income that they regularly spend on expensive items such as cars, clothes, and jewelry. This ensures that they appear rich to others. However, not all rich people are really wealthy, since they may not save or invest their money wisely or have a long-term financial plan.