Morgan Housel’s book, The Psychology of Money, recently surpassed 1 million copies sold in just over a year. It’s been applauded as one of the best personal finance books of 2020 and a timeless read that will likely end up alongside some personal finance greats like Rich Dad Poor Dad by Robert Kiyosaki and The Wealthy Barber by David Chilton.
Howard Marks, Co-founder and Co-chairman at Oaktree Capital Management, put it best: “Housel’s observations often hit the daily double: they say things that haven’t been saying before, and they make sense.”
Housel, a former columnist at the Wall Street Journal and Analyst at the Motley Fool, has developed a knack for taking complex topics and breaking them down into easy-to-digest, bite-sized pieces. In his book, he takes readers through a journey of 19 short stories designed to help you truly feel and understand some of the most critical lessons on wealth, greed, and happiness. Towards the end of his book, Housel offers readers a clean summary of 9 steps they can take to make better decisions with their money:
“Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.”
Nothing is ever as good or bad as it seems, and unfortunately, we do not have as much control over financial outcomes as we might believe. The world is big and complex, Housel writes. As we look out over our financial successes or pitfalls, we would be wise to remember that while we can try and set ourselves up for success and position our finances for the optimal outcome, sometimes fate has another plan. By understanding that there will be ups and downs, you can position yourself to roll with the punches, stay invested for the long term, and avoid major setbacks.
“Less ego, more wealth.”
Throughout his book, Housel explores the idea that your savings are the gap between your income and your ego. The bigger your ego, the less you have to save. He also instructs readers that wealth is what you don’t see. It is the cars and homes not bought. Real wealth is hidden on balance sheets in the form of retirement accounts and appreciating assets. By reducing the ego, one can begin to save and build real wealth.
“Manage your money in a way that helps you sleep at night.”
It does not matter if you have the best financial plan in the world—if it does not allow you to sleep at night, it’s not a good fit. The best strategy is one you can stick to and feel comfortable with. One of the first steps in crafting a plan that works is to understand your unique risk tolerance—are you comfortable with dramatic swings in the stock market, or do you need to tamp down the volatility by adding less volatile assets?
“If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.”
In his book, Housel explains that increasing your time horizon is the most surefire way to achieve your investment goals. He writes that it is better to sustain average returns for an above-average period than to sustain above-average returns for an average or below-average period. Historically, long-term investors are heavily rewarded, while short-term investors are subject to the whims of volatility.
“Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.”
As an investor, this is one of the most beautiful things about diversification: you can be wrong half the time and still make a fortune. For example, Forbes recently reported that just 15 companies in the S&P 500 accounted for 96% of the gain since the end of 2017. Housel instructs readers to view their portfolio as a whole, focusing on total gains rather than highlighting the specific winners or losers in an investment portfolio.
“Use your money to gain control over your time.”
Your money can buy the ability to have complete control over your time—a universal boost to happiness and quality of life. One of Housel’s most essential quotes from the book centers around this concept of time freedom: “The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.”
“Be nicer and less flashy.”
A few of Housel’s stories center around his time as a valet in ‘flashy LA’ during the 2000s. Housel writes that anytime he saw someone pulling up a nice car, he would imagine himself driving that car rather than glorifying the person driving it. It was a lesson for Housel that people aren’t focused on you and how nice your things are. Instead, they simply imagine themselves with such nice things. So, if you seek respect and admiration from others, you are better off being nicer than being flashier.
“Save. Just save. You don’t need a specific reason to save.”
While many choose to save for a specific goal such as a car or the downpayment on a house, Housel writes that saving should become a default state of mind to make better decisions with your money. In addition, savings can help provide a buffer between you and the unexpected ups and downs in life. Life is full of surprises, and Housel posits that savings can provide a healthy hedge against surprising twists at inopportune times.
“Define the cost of success and be ready to pay it.”
One of Housel’s most unique ideas in the book is that, like most things in life, successful investing comes with a price to pay. That price is the volatility, anxiety, uncertainty, and doubt that investors must experience in the short term to be rewarded with healthy gains over the long run. Housel says that these costs are no different than paying a fee to get into Disneyland—they are your price of admission. One of the keys is to embrace that there is a fee to pay, rather than viewing these costs as a fine or penalty that you are trying to avoid.
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