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Going Soft

Anika Hedstrom  |  December 10, 2020

MORGAN HOUSEL’S new book, The Psychology of Money, covers a host of topics related to money and emotion. I was especially drawn to his notion that “how you behave is more important than what you know.” I’ve been a student of behavioral finance for some time and know this to be true academically—but it also made me think of my father, Ole.

My father was born in 1948 into extreme poverty. His family of seven lived at times with no running water or electricity. They also shared an outhouse, which was not particularly warm in the cold Montana winters. My grandfather had dropped out of high school and worked on the railroad. My grandmother was a grocery store clerk.

Would you believe me if I told you that Ole grew up to be better at investing than 85% of active mutual fund managers? In other words, better than professionals with fancy educations and privileged upbringings?

That’s the funny thing about finance. It’s taught—and largely regarded—as a hard science, incorporating a plethora of complex formulas, concepts, jargon and rules. But if this were truly the ticket to financial success, why would individual investors like Ole, with no training, background or connections, outperform experts?

The answer: Because so much of financial success is actually related to behavior. That’s exactly the premise of Housel’s book. In it, he argues that financial success is less a hard science and more a soft skill. There were two soft skills that Ole possessed that set him up for financial freedom.

Wealth is what you don’t see. Ole was both a sports enthusiast and a total nerd. During the work week, his attire would mainly consist of Clarks dress shoes, Wrangler pants, a belt—which often missed at least one belt loop—and a collared shirt. He was the king of brown bag lunches and DIY. Ole’s fashion sense reflected his unassuming nature.

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Wealth accumulates by not spending money you could. This behavior shows up by practicing restraint and discipline, even as your income rises. It’s about forgoing upgrades and more stuff.  It’s choosing Wrangler and Clarks over more expensive brands at one level of income, and choosing two homes over four at another. It’s intentionally living a simpler life.

What you didn’t see about Ole was his savings, contributions to charity and freedom from debt. You also didn’t see an ego.

Victory lies in humility. As a tenured veterinary pathology professor, Ole earned a good living. Despite his academic and professional achievements, he never forgot his humble upbringing. He insisted that colleagues and students call him by his first name, forgoing the doctor and professor prefix.

By all accounts, he had already hit the lottery. He bootstrapped his way out of poverty and abuse into a stable, loving environment. He had a career he loved and daughters who looked up to him. He didn’t need or want to jeopardize what took so long to build. So he played the long game financially, beginning with what he knew best—research.

This took him to Jack Bogle, founder of Vanguard Group. Bogle was the pioneer of low-cost investing, benefiting the everyday investor by drastically reducing unnecessary fees and barriers. Ole dug into the costs associated with investing, and the research and evidence on which Vanguard was built. He was able to construct a portfolio with low-cost index funds. That not only earned him returns that outpaced the vast majority of active fund managers, but also gave him more time with his family and less time pretending to know more than he actually did. Simple, but not easy.

Ole was able to build financial security for his family through his prodigious savings rate and his investment humility. As Housel notes, when it comes to investing, perhaps the most important behavioral concept to understand is “that there is little correlation between investment effort and investment results.”

Anika Hedstrom, MBA, CFP, is a personal finance expert and advisor. Her previous articles include Make the ConnectionEffort Counts Twice and Stay in Your Lane. Anika writes on motivational and behavioral aspects of financial planning, and has been featured in USA Today, MarketWatch, Huffington Post, Business Insider and NPR. Always up for adventure, Anika can be found exploring new countries, whitewater rafting and chasing after her twins. Follow her on Twitter @AnikaHedstrom.

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