Weekend Reading: The Psychology Of Money Edition

I’ve been reading Morgan Housel’s work for years and sharing his thoughtful lessons about money and investing. He has the rare ability to tell stories that connect the past with the present, while unpacking all the useful tidbits that apply to our own lives and personal finances.

That’s why I was excited to read Mr. Housel’s new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. This terrific piece of writing reads like a collection of stand-alone short stories, brilliantly woven together by Mr. Housel to explore our relationship with money and how that connects with life’s bigger picture.

I can’t do the book justice with a simple review. Instead, I’ll say that The Psychology of Money is a highly enjoyable read with 238 pages full of incredible insight, history lessons, and wisdom.

I’ll also highlight two of the ideas that really resonated with me.

The first has to do with stock picking. Mr. Housel points out that most public companies are duds, a few do well, and a handful become extraordinary winners that drive the vast majority of the stock market’s returns. He cites data from the Russell 3000 Index that shows, since 1980, forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered.

Effectively all of the index’s overall returns came from 7% of the companies that outperformed by at least two standard deviations.

The percentage of companies experiencing catastrophic loss across industries from 1980-2014 included:

  • Technology – 57%
  • Telecom – 51%
  • Energy – 47%
  • Consumer discretionary – 43%
  • Health care – 42%
  • Industrials – 35%
  • Materials – 34%
  • Consumer staples – 26%
  • Financials – 25%
  • Utilities – 13%

Yes, even boring public utilities had a failure rate of more than 1 in 10.

The example shows just how difficult it is to pick winning stocks. But the important takeaway is that the Russell 3000 index increased more than 73-fold since 1980. The 7% of companies that drove the returns were more than enough to offset the duds.

We see this happening today as large technology companies such as Amazon, Apple, Facebook, and Microsoft have been driving the stock market recovery while the vast majority of stocks are still down and struggling. 

This lesson isn’t about trying to identify the 7% of stocks that will outperform in the future. No, it’s to simply buy the entire index so you don’t have to guess which individual stocks will be future winners.

The second lesson from The Psychology of Money that stuck with me is about change:

“An underpinning of psychology is that people are poor forecasters of their future selves.”

Think about where you’ll be five years from now or even 10. There’s a good chance you believe the future will look very much like the present. Now think about where you were five or 10 years ago. What changed? Probably a lot.

What about our future career aspirations? We may dream of one day becoming a doctor or lawyer, but after putting in years of work you may find the career isn’t as rewarding as you’d hoped. 

Only 27% of college grads have a job related to their major. 29% of stay-at-home parents have a college degree. The key is to acknowledge that someone in his or her 30s may think about life goals in a way their 18-year-old self would never imagine.

It’s important to make long-term financial plans. But both you and the world around you are going to change. Acknowledging this makes it easier to adapt. Breaking down your long-term financial plan into 5 or 10 year blocks of time may be more useful and practical.

That’s just a taste of the many lessons the author explores in The Psychology of Money. Do yourself a favour and pick up a copy today.

This Week(s) Recap:

Last week I wrote about VRIF – Vanguard’s new retirement income ETF. I received a ton of comments and emails about this product.

This week I shared three easy ways to build an investment portfolio on the cheap.

Over on Young & Thrifty I wrote a quick start guide to trading Bitcoin, and also looked at the history of Bitcoin.

As part of my research for those two posts, along with other future cryptocurrency assignments, I opened a Wealthsimple Crypto account (don’t do this) and bought $100 worth of Bitcoin and Ethereum (don’t do this either).

I needed to find out why Wealthsimple launched a cryptocurrency trading platform – the first regulated exchange in Canada – and understand how these coins are traded and why.

While it was extremely interesting to study and test drive the crypto platform, my takeaway is that trading Bitcoin and Ethereum (as well as other crypto assets) is extremely risky and volatile. This is not a replacement for stocks, gold, or fixed income in a portfolio. It’s pure speculation and should be treated as such.

Promo of the Week:

Canadian Financial Summit 2020

The Canadian Financial Summit is back! This year’s online personal finance conference takes place from October 14 – 17, 2020. 

Where else can you see 25+ of your favourite Canadian personal finance experts (including yours truly) in one place?

It’s also completely, 100% FREE – and you don’t have to get out of your pyjamas to check it out!

I’m joining speakers such as Kevin McCarthy (creator of the TFSA), Rob Carrick, Ellen Roseman, Kristy Shen & Bryce Leung (the dynamic early retirement duo) and more.

[see the full speaker list to look for your favourites]

You can catch me on October 16th speaking about how to identify major gaps in your financial plan. In addition to my session, you can watch these great sessions throughout the week on:

  • How to retire early and on your own terms
  • How to invest better, easier, and more efficiently
  • How to earn more money by creatively advertising innovative side gigs
  • How to see through financial jargon meant to confuse you
  • How to check your “retirement readiness”
  • How to avoid crippling fees and terrible advice
  • How to legally avoid Canadian taxation when you move for work or retirement
  • How to use Financial Technology (FinTech) to save major cash
  • How to drawdown your nest egg in retirement & what a safe withdrawal rate is

The Summit will kick off with a live webinar on October 14th and is absolutely free to view for that weekend.

If you want to check out the videos after their free window has passed (and get access to a whole smorgasbord of bonus resources and video sessions) then you’ll want to sign-up for the All Access Pass. Don’t miss out on the Early Bird Pricing, as the price jumps as the Summit begins.

How do you sign up?

Just click here to claim your free tickets and browse this year’s fantastic speaker line-up.

I hope to see you there!

Weekend Reading:

Credit card issuers seem to be ramping up their offers and our friends at Credit Card Genius have put together a list of first year free credit card deals. This is one of the key promos I look for when signing up for a new card.

Here’s Morgan Housel with a look at obvious things which nobody ever observes and that are easy to ignore.

The Irrelevant Investor Michael Batnick offers a more detailed take on how much money you should have saved for retirement.

Morningstar’s Holly Black also looks at how much money you should be saving – and shares the popular 50-30-20 approach to budgeting and saving.

I really enjoyed this gem from blogger Nick Maggiulli on how much lifestyle creep is okay:

“Once you spend more than 50% of your future raises, then you start delaying your retirement.”

The Canadian Couch Potato Dan Bortolotti shares his take on Vanguard’s new VRIF Retirement Income ETF. It looks like he’ll have much more to say on this topic as well.

Millionaire Teacher Andrew Hallam explains how to help your children become financial powerhouses. I like the idea of setting up an informal trust for your child.

Here’s PWL Capital’s Ben Felix explaining why a small number of large-cap growth stocks are dominating stock returns and what to expect from these companies over the next decade:

Fortress Real Properties convinced 14,000 investors to pour nearly $1 billion into its syndicated mortgages between 2009 and 2017 – promising double-digit returns. Fortress was accused of misleading investors, who lost big on projects that were never completed. After years of investigation, Fortress got away with a $250,000 administrative fine – even after pocketing $320 million in fees and commissions.

Michael James shared his own experience with Fortress, explaining how a friend asked for advice about the promised 12% annual return.

A Wealth of Common Sense blogger Ben Carlson wonders if the Ford F-150 is partially responsible for the retirement crisis

Finally, a look at billionaire Chuck Feeney who has donated $8 billion to charity in his quest to die broke.

Have a great weekend, everyone!

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1 Comment

  1. Kristen on September 27, 2020 at 6:46 am

    Thanks for reviewing The Psychology of Money, Robb! I had recently listened to Morgan Housel on a podcast and added his book to my reading list. After reading your review, I am certain that I will enjoy the book. Thanks again.

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