CHAPTER 20



The psychology of my own money.

Sandy Gottesman, a billionaire investor who founded the consulting group First Manhattan, is said to ask one question when interviewing candidates for his investment team: “What do you own, and why?”

Not, “What stocks do you think are cheap?” or “What economy is about to have a recession?”

Just show me what you do with your own money.

I love this question because it highlights what can often be a mile-wide gap between what makes sense—which is what people suggest you do—and what feels right to them—which is what they actually do.


Half of all U.S. mutual fund portfolio managers do not invest a cent of their own money in their funds, according to Morningstar. This might seem atrocious, and surely the statistic uncovers some hypocrisy.

But this kind of stuff is more common than you’d think. 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.

“[Doctors] don’t die like the rest of us,” he wrote. “What’s unusual about them is not how much treatment they get compared to most Americans, but how little. For all the time they spend fending off the deaths of others, they tend to be fairly serene when faced with death themselves. They know exactly what is going to happen, they know the choices, and they generally have access to any sort of medical care they could want. But they go gently.” A doctor may throw the kitchen sink at her patient’s cancer, but choose palliative care for herself.

The difference between what someone suggests you do and what they do for themselves isn’t always a bad thing. It just underscores that when dealing with complicated and emotional issues that affect you and your family, there is no one right answer. There is no universal truth. There’s only what works for you and your family, checking the boxes you want checked in a way that leaves you comfortable and sleeping well at night.

There are basic principles that must be adhered to—this is true in finance and in medicine—but important financial decisions are not made in spreadsheets or in textbooks. They are made at the dinner table. They often aren’t made with the intention of maximizing returns, but minimizing the chance of disappointing a spouse or child. Those kinds of things are difficult to summarize in charts or formulas, and they vary widely from person to person. What works for one person may not work for another.

You have to find what works for you. Here’s what works for me.


How my family thinks about savings


Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.”

We can leave aside rich, but independence has always been my personal financial goal. Chasing the highest returns or leveraging my assets to live the most luxurious life has little interest to me. Both look like games people do to impress their friends, and both have hidden risks. I mostly just want to wake up every day knowing my family and I can do whatever we want to do on our own terms. Every financial decision we make revolves around that goal.

My parents lived their adult years in two stages: dirt poor and moderately well off. My father became a doctor when he was 40 and already had three kids. Earning a doctor’s salary did not offset the frugal mentality that is forced when supporting three hungry kids while in medical school, and my parents spent the good years living well below their means with a high savings rate. This gave them a degree of independence. My father was an Emergency Room doctor, one of the highest-stress professions I can imagine and one that requires a painful toggling of circadian rhythms between night and day shifts. After two decades he decided he’d had enough, so he stopped. Just quit. Moved onto the next phase of his life.

That stuck with me. Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.

And achieving some level of independence does not rely on earning a doctor’s income. It’s mostly a matter of keeping your expectations in check and living below your means. Independence, at any income level, is driven by your savings rate. And past a certain level of income your savings rate is driven by your ability to keep your lifestyle expectations from running away.

My wife and I met in college and moved in with each other years before we got married. After school we both had entry-level jobs with entry-level pay, and settled into a moderate lifestyle. All lifestyles exist on a spectrum, and what is decent to one person can feel like royalty or poverty to another. But at our incomes we got what we considered a decent apartment, a decent car, decent clothes, decent food. Comfortable, but nothing close to fancy.

Despite more than a decade of rising incomes—myself in finance, my wife in health care—we’ve more or less stayed at that lifestyle ever since. That’s pushed our savings rate continuously higher. Virtually every dollar of raise has accrued to savings—our “independence fund.” We now live considerably below our means, which tells you little about our income and more about our decision to maintain a lifestyle that we established in our 20s.

If there’s a part of our household financial plan I’m proud of it’s that we got the goalpost of lifestyle desires to stop moving at a young age. Our savings rate is fairly high, but we rarely feel like we’re repressively frugal because our aspirations for more stuff haven’t moved much. It’s not that our aspirations are nonexistent—we like nice stuff and live comfortably. We just got the goalpost to stop moving.

This would not work for everyone, and it only works for us because we both agree to it equally—neither of us are compromising for the other. Most of what we get pleasure from—going for walks, reading, podcasts—costs little, so we rarely feel like we’re missing out. On the rare occasion when I question our savings rate I think of the independence my parents earned from years of high savings, and I quickly come back. Independence is our top goal. A secondary benefit of maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with the Joneses. Comfortably living below what you can afford, without much desire for more, removes a tremendous amount of social pressure that many people in the modern first world subject themselves to. Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.” I like that.

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.

I don’t try to defend this decision to those pointing out its flaws, or those who would never do the same. On paper it’s defenseless. But it works for us. We like it. That’s what matters. 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. Perhaps we just have a lower risk tolerance than others.

But everything I’ve learned about personal finance tells me that everyone—without exception—will eventually face a huge expense they did not expect—and they don’t plan for these expenses specifically because they did not expect them. 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.”


How my family thinks about investing


I started my career as a stock picker. At the time we only owned individual stocks, mostly large companies like Berkshire Hathaway and Procter & Gamble, mixed with smaller stocks I considered deep value investments. Go back to my 20s and at any given point I held something like 25 individual stocks.

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.

I don’t have anything against actively picking stocks, either on your own or through giving your money to an active fund manager. I think some people can outperform the market averages—it’s just very hard, and harder than most people think.

If I had to summarize my views on investing, it’s this: 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.

That doesn’t mean index investing will always work. It doesn’t mean it’s for everyone. And it doesn’t mean active stock picking is doomed to fail. In general, this industry has become too entrenched on one side or the other—particularly those vehemently against active investing.

Beating the market should be hard; the odds of success should be low. If they weren’t, everyone would do it, and if everyone did it there would be no opportunity. So no one should be surprised that the majority of those trying to beat the market fail to do so. (The statistics show 85% of large-cap active managers didn’t beat the S&P 500 over the decade ending 2019.)

I know people who think it’s insane to try to beat the market but encourage their kids to reach for the stars and try to become professional athletes. To each their own. Life is about playing the odds, and we all think about odds a little differently.

Over the years I came around to the view that we’ll have a high chance of meeting all of our family’s financial goals if we consistently invest money into a low-cost index fund for decades on end, leaving the money alone to compound. A lot of this view comes from our lifestyle of frugal spending. If you can meet all your goals without having to take the added risk that comes from trying to outperform the market, then what’s the point of even trying? I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one. When I think of it that way, the choice to buy the index and hold on is a no-brainer for us. I know not everyone will agree with that logic, especially my friends whose job it is to beat the market. I respect what they do. But this is what works for us.

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.

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

It doesn’t need to be more complicated than that for us. I like it simple. One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. The reason is because the world is driven by tails—a few variables account for the majority of returns. No matter how hard you try at investing you won’t do well if you miss the two or three things that move the needle in your strategy. The reverse is true. Simple investment strategies can work great as long as they capture the few things that are important to that strategy’s success. My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. I spend virtually all of my investing effort thinking about those three things—especially the first two, which I can control.

I’ve changed my investment strategy in the past. So of course there’s a chance I’ll change it in the future.

No matter how we save or invest I’m sure we’ll always have the goal of independence, and we’ll always do whatever maximizes for sleeping well at night.

We think it’s the ultimate goal; the mastery of the psychology of money.

But to each their own. No one is crazy.



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