With Money, What You Do Matters More Than What You Know

Even the smartest, most well-informed retirement savers can lose a boatload of money if they don’t have their heads on straight. An interview with the author of “The Psychology of Money” reveals some interesting insights on how to build and maintain your wealth.

A young man holds his chin with a skeptical look on his face.
(Image credit: Getty Images)

As a financial planner and retirement podcast host, I regularly engage with a lot of money experts. I’ve interviewed hedge fund managers, award-winning financial authors and CEOs of giant investment firms, and have gained incredible insights from those conversations.

But a recent interview on the Stay Wealthy Retirement Show (opens in new tab) taught me that all the financial education in the world doesn’t matter if your actions don’t align. The conversation I’m referencing is with Morgan Housel, partner at the Collaborative Fund (opens in new tab) and a winner of a New York Times Sidney Award.

Housel recently came out with a new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness (opens in new tab), which aims to explain why how we act matters more than what we know. Listening to his words, I came to the realization that what he says about the psychology of money is absolutely true, but the same philosophy also applies to other aspects of our lives, like our health and our habits.

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The Psychology of Money

There are people out there in the world who have no financial training, no financial education and no experience with money, says Housel, yet they manage to do quite well. Many, in fact, manage to morph into the “millionaire next door” type many of us strive to become. They live below their means, save and invest money (opens in new tab) like it’s their job, and build real wealth that lasts a lifetime without a lot of fanfare or ups and downs.

But Housel says the opposite is also true. There are Harvard MBAs and partners at Goldman Sachs who fail during the best financial markets and go bankrupt all the time.

Why is that?

Housel insists that this is where the psychology of money comes into play.

“What matters with finances and investing is how you behave,” he says. “It’s not what you know.”

For example, can you control your relationship with greed and fear? If not, then it doesn’t really matter how many hours you spent studying finance at Yale.

Without a handle on your emotions, you might be the type of person who sells all their investments on March 16, 2020, when the Dow Jones Industrial Average fell a record 2,997 points.

Can you plan for the long-term and stay the course? If not, then you could have made any number of tragic mistakes in a year like 2020, and you may have no idea what steps to take next.

In the meantime, a long-term disciplined investor who has a handle on their emotions (and a long-term investing plan) may have done nothing during the beginning of the stock market tumble in March of this year. Some with the most discipline may have even invested more during the market’s darkest days.

“These things cannot be taught in an academic setting,” says Housel. This is the “soft behavioral side of investing” that has little to do with numbers or math and much more to do with someone’s temperament and ability to just stay the course.

You can be the best stock picker in the world, says Housel. “But if you lose your head, none of it matters.”

Why Having a Plan Matters More Than Ever

This lesson may be even more crucial right now, considering the uncertainty the pandemic has created. When this subject comes up, I find that so many knowledgeable and informed investors are rightfully perplexed by how the stock market has behaved (opens in new tab).

Housel admits there is no other similar period in our history where the stock market has rebounded so quickly in the midst of an economic disaster. After all, during some of the worst of the Great Depression from 1929 to 1932, the Dow Jones fell by 89%.

But we are not living in the 1920s, and the world is dramatically different than it was 100 years ago. Housel points out that a handful of huge tech companies make up a disproportionate share of the S&P 500, and many of them were unknowingly set up to thrive in a pandemic.

And, he’s right. As of right now, some of the biggest players in the S&P 500 include the likes of Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet Class C (GOOG), Facebook (FB) and Johnson & Johnson (JNJ).

This is where you have to realize that “the stock market is not the economy,” says Housel. The growth of technology has made the disconnect between small business and major tech companies wider than ever. So yes, thousands of restaurants may have been closed or operating at limited capacity for months. And some industries, such as travel, have been hit harder than most.

“But in July of last year, Amazon.com shipped 490 million packages in the United States,” he says.

Back in March when everything began falling apart, Housel says nearly everyone was in absolute shock. But now it’s almost as if someone snapped their fingers and we’re nearly back to all-time highs.

This is why you must have a financial plan you can stick to. What’s going on right now may have been impossible to predict, but those who had a plan to follow are doing well.

Housel says it’s impossible to not be emotional about your kids or your money, and being in touch with your emotions is OK. But your financial plan, and your ability to follow it, are what will keep you on track while helping you avoid emotional investing decisions based on fear or greed.

The Difference Between Getting Wealthy and Staying Wealthy

Housel also points out that there’s a difference between knowing how to get wealthy and knowing how to stay that way.

The author loves to tell the story of Jesse Livermore, who is known as the greatest short-term investor of all time. Livermore made a name for himself as one of the most successful stock traders of the 1910s and 1920s, and up until shortly after the Great Depression began in 1929.

When the worst day of the Great Depression hit, Livermore revealed he had shorted the stock market and made the equivalent today of $3 billion in a single day.

Unfortunately, Livermore didn’t know how to set boundaries or plan for the worst of times. He kept investing more and taking on more risk, and he eventually went broke and committed suicide.

Livermore’s story is tragic, but Housel says it goes to show that getting rich and staying rich are two entirely different skill sets. He knew how to pick stocks and anticipate big market swings, but Livermore had no idea how to hold on to what he had earned.

According to Housel, people who want to build long-term wealth need to learn how to nurture those skills separately. Getting rich requires some optimism and some skill, he says, but staying rich requires pessimism.

And that’s why you need to “save like a pessimist and invest like an optimist,” says Housel.

Ultimately, that’s why Housel himself sometimes goes against the grain when it comes to traditional financial advice. The award-winning financial writer paid off his mortgage recently even though it made no mathematical sense.

You can get a 30-year home loan with a fixed rate of 2.9% right now, and Housel says he feels confident the stock market will return a lot more than that.

But he says he’s not just trying to score the best investment returns. “I’m also trying to sleep well at night.”

In the crazy economy we’re in right now, most would agree that freedom and security are worth their weight in gold.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Taylor Schulte, CFP
Founder and CEO, Define Financial

Taylor Schulte, CFP®, is founder and CEO of Define Financial (opens in new tab), a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast (opens in new tab), teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.