There are a ton of books on personal money management. And I’ve read many of them. But the best book I’ve ever read on this topic is The Psychology of Money by Morgan Housel.
Here are 5 of the best concepts in the book…
No One is Crazy When I started in this industry, I used to think that clients who didn’t follow my recommendations were crazy. To be sure, some were, but not because they held a different opinion than I did. As Housel puts it, “people from different generations, raised by different parents, and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives with different degrees of luck…learn very different lessons.” Proverbs says that “Every man’s way is right in his own eyes”. So instead of jumping to judgement, I’ve begun to look for (and find) very understandable reasons how they arrived at these conclusions. And this has helped me help others with more empathy.
What it Takes to Stay Wealthy When I was growing up watching entrepreneurs, I used to think that getting wealthy and staying wealthy required the same disciplines. Then I came into this industry and watched how truly wealthy people live. As Housel puts it, “If I had to summarize money success in one word, it would be ‘survival’.” It’s still amazing to me how the skills that got you here, don’t get you there. Successfully wealthy people simply weather many storms. A view of longevity, consistency and patience are key characteristics required to stay wealthy. They are what differentiate the winners and contenders from the pretenders.
Tails Drive Everything When I was growing up studying finance, I used to think that an investor needed to be right most of the time. But as Housel points out, tail events (low probability but high impact) drive everything. The S&P 500 had a spectacular first 6 months of 2024, but most of that was driven by a handful of tech stocks. In fact, three companies posted a combined 49.3% gain for the first half of 2024*, and 38% of the names in the S&P were negative to the same point in the year.** So now I remind my clients to diversify, not because I’m afraid of the downside if we don’t, but because neither of us can predict which companies will win big. So we buy a lot of them.
Wealth is What You Don’t See When I was younger, I used to think you could tell a wealthy person by their house or their car. But as you probably know by now, truly wealthy people behave much differently. As Housel points out, spending a million dollars is literally the opposite of being a millionaire. This poses a challenge for those wanting to learn from wealthy people because they are harder to spot in everyday life. You know this intuitively in business. Everyone can brag about revenue, but if they ignore profit, they’re just blowing smoke. Managing personal wealth is no different.
Room for Error When I ran my first financial plan, I ran numbers as if everything went according to projections. But as Housel says, “The most important part of any plan is planning for your plan not to go according to plan.” This has reminded us to build very specific stress tests into our financial plans: premature death, social security crashing, businesses selling for much less than anticipated… And this focus on creating margin for error is designed to help our clients weather some pretty rough patches in the market. This book has helped me help clients prepare for their plans not to go according to plan.
Those are a few of my favorite pieces from the book. I’m curious if you’ve read it and have other thoughts, or if you have a different book that we absolutely must read on the topic. Thanks in advance for your thoughts!
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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