Morgan Housel, financial writer and best-selling author of The Psychology of Money, has a knack for simplifying challenging financial topics. In his book, he takes readers through a series of short stories that can help explain why we do what we do with money while keeping readers interested and engaged.
Housel explains the power that fear and greed have within financial markets, why having enough is one of the most challenging but critical money skills, and how an essential aspect of your financial plan — saving — is entirely within your control.
Towards the end of his book, Housel explains how he and his family think about and manage their money, and the simplicity is striking.
From Stock Picker to Low-Cost Indexer
Housel began his career as a stock picker, focusing on mostly value investments and holding roughly 25 individual stocks at any given time. During his 20s, he owned companies like Berkshire Hathaway and Procter and Gamble, mixed with some other smaller stocks.
“I don’t know how I did as a stock picker. Did I beat the market? I’m not sure. Like most who try, I didn’t keep a good score. Either way, I’ve shifted my views and now every stock we own is a low-cost index fund.”
Housel explains that he doesn’t think stock-picking is bad and that he believes some people can actually outperform the market, at least for a short period. But, over the years, he realized that stock picking is a losing game for most investors.
“If I had to summarize my views on investing, it’s this: Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.”
Housel and his family aren’t trying to outperform the market but rather capture as much of the market’s return as possible by limiting fees and avoiding costly mistakes. Their investment portfolio is as simple as it gets, consisting of a few different Vanguard low-cost index funds. As someone who has studied markets and interviewed some of the greatest investors, Housel has concluded that he doesn’t need to be fancy with his investment portfolio. By keeping costs low, consistently buying through dollar-cost-averaging over time, and avoiding selling during market downturns, he can easily reach all of the financial goals he and his family have.
Next, let’s discuss Housel’s most controversial financial decision.
“The worst financial decision we ever made, but the best money decision we ever made.”
A key feature of Housel’s financial plan is that he owns his home mortgage-free. Housel writes:
“We’re so far committed to the independence camp that we’ve done things that make little sense on paper. We own our house without a mortgage, which is the worst financial decision we’ve ever made but the best money decision we’ve ever made.”
He explains that the decision to pay off his mortgage gives him a sense of freedom and security that outweighs any of the benefits he would get from leveraging his assets with a cheap mortgage.
This can provide a powerful lesson for readers: sometimes the best money decision is not the best financial decision — and that’s okay. Part of the reason people can have opposing viewpoints about what to do with their money is because math and financial optimization are only part of the equation. Of equal importance is understanding how a decision will make you feel and optimizing for what’s important to you. Sometimes that’ll be making the most money, but sometimes it will be providing a sense of freedom and security.
And an important part of having financial success is realizing that others may disagree with your decisions — and that’s also okay. On this topic, Housel writes:
“I don’t try to defend this decision to those pointing out its flaws, or those who would never do the same. On paper, it’s defenseless. But it works for us. We like it. That’s what matters. Good decisions aren’t always rational. At some point, you have to choose between being happy or being ‘right.’”
Lastly, the third key feature of Housel’s financial plan is that he keeps an above-average amount of cash on hand.
Having Ample Cash Reserves
Though Housel never explicitly states a dollar amount of cash he keeps on hand, he writes: “The few people who know the details of our finances ask, ‘What are you saving for? A house? A boat? A new car?’ No, none of those. I’m saving for a world where curveballs are more common than we expect.”
Although it’s not financially optimized, this is another decision that provides a great deal of freedom and security. Housel views his cash reserves as a buffer between his family’s finances and life’s unexpected curveballs.
In the end, Housel writes:
“And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds. It doesn’t need to be more complicated than that for us. I like it simple.”
If You Want to Simplify, Truenorth Wealth Is Here to Help
If you’re interested in working with the best financial advisors in Utah to help simplify and optimize your financial life, complete with a custom investment portfolio to deliver your financial goals, then TrueNorth Wealth is here to help.
TrueNorth Wealth is among the top wealth management firms with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, we focus on helping our clients build long-term wealth while maximizing the enjoyment they receive from their money. We do this by pairing our clients with a dedicated certified financial planner in Idaho and Utah.
For our team at TrueNorth, it’s about so much more than money. It’s about serving families all across Utah and Idaho and helping them achieve freedom and flexibility in their lives. To learn more or schedule a no-cost consultation, call (801) 316-1875.