Last Updated on November 21, 2020 by Mark P.
A growth mindset is what you must adopt when it comes to your finances. A fire spark inside of you will only fuel you with Growth two, even ten years down the road.
According to a study published called “The Neuroscience of Growth Mindset and Intrinsic Motivation,” it states, “growth-minded individuals perceive task setbacks as a necessary part of the learning process, and they bounce back by increasing their motivational effort.”
How can a growth mindset develop your ability to grow your finances or wealth?
First, it will allow you to take on more risk. Do you have an extra $5,000? Try learning everything about long term wealth building.
On the other hand, you could start trading stocks and options. But first, you must learn everything there is about the subject matter.
Let’s spin back to Bill and Charlie and see how each of them would approach building wealth.
Bill: The “Victimhood” Mindset
Constantly frustrated, scared, and nervous, Bill keeps being self-critical about his significant retail investor losses. Bill invests in ETFs, long-only stocks, and dips his toe into the bond market. However, Bill hates research, does not want to stay on top of the news, and does not self-educate himself.
For example, Bill wanted to get into long-only options investing. He believes company X will skyrocket without even proper education due to stable free cash flow and earnings beat within the next five months.
What is Bill’s action? He buys a call option out of the money. Why would Bill purchase a call option out of the money? Because call options out of the money are a ridiculously cheap option, they may seem attractive. However, he overlooked the strike price, which was $20 more than the current stock price!
Fast forward five months later, the stock does well, but the stock price never exceeded the strike price (if stock price > strike price, Bill can exercise or sell the call to profit). Analyst projections were wrong, and the stock backfires significantly. Bill loses a ton of money on the bet.
Bill goes into a rage, frustrated, and gives up. He does not want to admit he failed due to his actions. In the beginning, Bill thought he knew precisely what he was doing. In the end, he was defeated due to no proper planning. Hence why his mind always says, “why me? Why me?” Bill has a fixed mindset.
Related: Option Basics
Charlie: The “I Can Do it No Matter What Happens” Mindset
On the opposite side of the spectrum, Charlie invests the same way as Bill. For an hour each day, he will read the stock market and economic news to stay abreast of his holdings. Charlie is a long-only investor with a portfolio consisting of bonds, stocks, commodities, ETFs, and cryptocurrencies.
Recently, Charlie made a few mistakes. He bought a stock that was undervalued, with outstanding earnings per share, trading at healthy multiples. Instead of executing a limit order to buy a security at a specific price or lower, on his purchase of 1,000 shares, Charlie runs a market order, the current price of the stock.
Immediately, he researches the different types of buy orders on stocks. He quickly realizes he paid more for the stock before the market opened. He takes a mental note saying to himself, “next time, I’ll execute a limit order between 9:00 AM – 9:30 AM when the market opens so I can get possibly buy at a more reasonable price.”
Boom! Charlie made a mental note, wrote down his mistakes, and will learn the next time he makes such a decision. Later that day, he goes about his day without worrying and can continue his investment journey. Charlie has an impeccable growth mindset.
Two different mindsets can determine how much wealth you will accumulate or how you handle your investments.
In the end, a growth mindset will benefit you in the long run. A fixed mindset will only keep you back from your potential.
No matter how many times you fail to invest, the key does not give up. No matter how long it takes to grasp the concept, you keep pushing forward.