Page 116 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

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Markowitz is neither rational or irrational. He’s reasonable.

What’s often overlooked in finance is that something can be technically true
but contextually nonsense.

In 2008 a pair of researchers from Yale published a study arguing young
savers should supercharge their retirement accounts using two-to-one
margin (two dollars of debt for every dollar of their own money) when

buying stocks. It suggests investors taper that leverage as they age, which
lets a saver take more risk when they’re young and can handle a magnified
market rollercoaster, and less when they’re older.

Even if using leverage left you wiped out when you were young (if you use
two-to-one margin a 50% market drop leaves you with nothing) the
researchers showed savers would still be better off in the long run so long as
they picked themselves back up, followed the plan, and kept saving in a
two-to-one leveraged account the day after being wiped out.

The math works on paper. It’s a rational strategy.

But it’s almost absurdly unreasonable.

No normal person could watch 100% of their retirement account evaporate

and be so unphased that they carry on with the strategy undeterred. They’d
quit, look for a different option, and perhaps sue their financial advisor.

The researchers argued that when using their strategy “the expected
retirement wealth is 90% higher compared to life-cycle funds.” It is also
100% less reasonable.

There is, in fact, a rational reason to favor what look like irrational
decisions.

Here’s one: Let me suggest that you love your investments.