The Wiser Wealth Roundtable team provides a book review of The Psychology of Money by Morgan Housel. In the book, Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics. The team discusses their favorite insights from the book and how we apply many of the best practices Housel recommends in our investing decisions.
Listen on Apple Podcasts
Or through YouTube:
“Slow and steady wins the race.” – Casey Smith
The Psychology of Money by Morgan Housel is a book about investing, personal finance and business decisions. Housel describes how financial decisions are typically taught as a math-based field, where data and formulas tell us exactly what to do. But in the real world, people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your own unique view of the world, ego, pride, marketing and odd incentives are scrambled together.
Housel provides examples that explore the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.
The Wiser team start by discussing the concept of retirement. Social Security began in the 1930s and it wasn’t until the 1960s where the idea of retiring at age 65 became a reality for people. By 1960, 40% of the population continued working past the age of 65. Today, around 20% of people work past the age of 65. With the advent of 401ks in the late 70s and the Roth IRA in 1998, these funds help supplement pensions and social security, making retirement a reality for more people. So much that today there is approximately $36 trillion in retirement assets waiting to be spent down.
Life, liberty, the pursuit of happiness and compounding.
Housel devotes a chapter to the power of time and compounding. Take Warren Buffett as an example. Buffett’s net worth is $84.5 billion. The interesting thing to note is that he accumulated $84.2 billion of that after the age of 50. And $81.5 billion came after the age of 60. Buffet started working early (at age 10), saved early and invested a large portion of his earnings, allowing it to compound. By his 30s, he had over $1 million in savings. By investing early and staying investing, he was able to accumulate large amounts of wealth.
The lesson here is that if someone starts saving between the ages of 25-35 and stops, they will have more money than someone who started saving in their 30s and continued until retirement. Saving more early has major implications due to the power of compounding.
It is not just about compounding but also about HOW you invest. Using index funds is preferred to picking individual stocks. Take, for example, the Russell 3000 Index. It has increased 73x since 1980. Interestingly, 40% of companies in the Russell 3000 index have failed. However, 7% of the companies in the index performed well enough to offset the losses from the 40%. This is a very good case for buying the index vs trying to pick stock wins. Technology stocks were virtually nonexistent 50 years ago. Today, they are more than a fifth of the S&P 500 index. And the share of technology stocks is bringing up the average vs the decline of oil and gas.
Withdrawing investments during a recession
Housel provides his perspective on recessions by providing three different scenarios of investor behavior. These scenarios describe how staying the course and not withdrawing or changing your investment behavior when the market drops is critical to long-term success.
The group discusses the power of fear on investor psychology and how the media uses fear to scare investors into making irrational decisions about their investments. Keeping your cool during uncertain times is key.
Rich vs. wealthy
Someone can be rich, live lavishly and still not be wealthy. The Millionaire Next Door by Thomas J. Stanley is another great book that describes those that live less lavishly and are wealthy because they live within their means, save and thus achieve wealth. When we have wealth, we can control our time and time becomes the currency. It provides you with an opportunity to use your money in the ways it benefits you.
The cost of investing for the long-term is that you may experience some volatility. Building investment portfolios with a long-term approach is critical for success.
A question we sometimes hear from clients is what do I do with my savings? Your savings is not supposed to pay you anything. Having enough money in savings gives you the freedom to make different decisions about a new job, house/car repairs, etc. Building savings and having a reserve is your safety margin.
For more information, you can read a blog written by Morgan Housel in 2018 that provides a good summary of his book.