The Psychology of Money

by Morgan Housel

Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.”

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. 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. The independent feeling I get from owning our house outright far exceeds the known financial gain I’d get from leveraging our assets with a cheap mortgage. Eliminating the monthly payment feels better than maximizing the long-term value of our assets. It makes me feel independent.

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. This is also close to indefensible on paper, and I’m not recommending it to others. It’s just what works for us. We do it because cash is the oxygen of independence, and—more importantly—we never want to be forced to sell the stocks we own. We want the probability of facing a huge expense and needing to liquidate stocks to cover it to be as close to zero as possible.

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. Not being forced to sell stocks to cover an expense also means we’re increasing the odds of letting the stocks we own compound for the longest period of time. Charlie Munger put it well: “The first rule of compounding is to never interrupt it unnecessarily.”

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.

And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.