The Psychology of Money

by Morgan Housel

Ken Murray, a professor of medicine at USC, wrote an essay in 2011 titled “How Doctors Die” that showed the degree to which doctors choose different end-of-life treatments for themselves than they recommend for their patients.

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. Mortgage interest rates were absurdly low when we bought our house. Any rational advisor would recommend taking advantage of cheap money and investing extra savings in higher-return assets, like stocks. But our goal isn’t to be coldly rational; just psychologically reasonable.

Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”

We also keep a higher percentage of our assets in cash than most financial advisors would recommend—something around 20% of our assets outside the value of our house.

“The first rule of compounding is to never interrupt it unnecessarily.”

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.

And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.

We invest money from every paycheck into these index funds—a combination of U.S. and international stocks. There’s no set goal—it’s just whatever is leftover after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans.

Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.