7.2 The Money Masterclass: Key Lessons from History’s Top Financial Minds
What can we learn about how to escape the money trap, from the world's best investors?
Growing wealth through assets can be done in many ways. Some people love stocks, some swear by property. Others are so risk averse that they are prepared to sacrifice higher returns for safety in cash or bonds.
There is no one size fits all. You need to escape the money trap in your own way. My way will be through equities via a single global index fund in tax efficient ISAs and Pensions, with a cash buffer to fall back on when markets drop.
But there are so many more factors to take into account when planning your escape:
How much is enough?
What is it really for?
What does wealth mean to me — security, freedom, legacy?
These issues are financial, but also emotional, psychological, and philosophical. It’s not just a numbers game.
But there are some principles which I believe transcend all these, and that we could all benefit from knowing and applying.
A few are my own. Most come from minds sharper, wiser, and more experienced than mine.
So in this chapter I’ve pulled together just some of them - because whatever our methods and motives, we’re not the first to try this. And we’d be foolish not to learn from those who’ve already made it to the other side.
You don’t need a reason to save (Morgan Housel)
In The Psychology of Money1 — a book I recommend to everyone — Housel makes a deceptively simple point:
People usually save for something specific: a house, a car, a wedding, a deposit. But even if you don’t have a clear goal in mind, you should still save.
Because the truth is, you don’t know what’s coming.
Life throws curveballs - emergencies, opportunities, and detours. And when that happens, having saved “for no reason” becomes the best reason of all.
The investor’s chief problem - and even his worst enemy - is likely to be himself. (Benjamin Graham)
Graham makes this point in The Intelligent Investor2, and time hasn’t dulled its truth.
We’re wired to chase what’s already going up (FOMO), and sell what’s just crashed (fear).
It feels rational - but it’s recency bias.
We think we’re avoiding risk, when actually we’re locking in losses.
Which is why...
You need a plan. Not the best plan, just one you can actually follow (Carl Richards)
This has been said by various people, but Richards articulated it well in “The Behaviour Gap”3.
Your plan for escape doesn’t need to generate the best returns, have the lowest risk or be the most tax efficient. Creating a plan that achieves all three of those is likely to be so complicated, that almost no investor could follow it, especially when things go south, and markets crash.
Far better to have a plan that is easy and painless for you to execute, month by month, without having to overthink it. Because…
Simple is often better
You can make your plan as complicated or as simple as you like - it’s your plan.
But often that complexity - and the time needed to formulate, execute and maintain it just isn’t worth it, or even guaranteed to work.
That there are thousands of fund managers and analysts spending thousands and thousands of hours each year concocting all kinds of complicated financial strategies, trying to eek out an extra 0.1% return.
And 90% of the time - it won’t beat a simple global index fund.
You could try, and it could work - but is the extra 0.1% really worth all the effort? Maybe you could have used that time on something you really enjoy doing. Time with your family, on a hobby, catching up on sleep.
Time doing what you actually want to do. And knowing your money is quietly doing its job in the background.
Markets reward time and staying power, not brilliance
Time in the market beats timing the market
An oft quoted saying by investors the world over. Remember that buying assets isn’t like hopping on and off buses to get to your final destination.
You don’t need just the right assets at just the right time. No-one knows what those assets are, or what that time is anyway.
It’s more like riding an escalator whilst playing with a yo-yo.
Zoom in, and it’s noise.
Zoom out - and it’s an accelerating compounding machine driving you faster and faster to your escape.
Trying to time markets has always been a fools game (90% of managers can’t beat the index). If you do try and time it, remember that..
Far more money has been lost by investors in preparing for corrections…than has been lost in the corrections themselves. (Peter Lynch)
When markets wobble, panic feels productive. You start checking forecasts, reading headlines, wondering if you should sell and wait it out.
But all that anticipation rarely pays off. More often, it takes you out of the market right before it recovers - and you miss the upside you were investing for in the first place.
More often than not the crash was not as bad as you feared anyway.
The lesson? Don’t let your fear of falling lose you more than the fall itself ever would.
React less. Stick to your plan. Let time do the heavy lifting.
No-one knows what is going to happen - you can’t research the future (Toby Newbatt)
In an edition of the Making Money Podcast4, Newbatt made this point. Most of the time, crashes and bull markets have been caused by totally unexpected events - pandemics, wars, energy shocks. Things no-one saw coming.
Study after study has shown that yearly market forecasts are no more accurate than a coin flip.
Instead of relying on an industry that consistently fails to predict the future or get even an average return, stick to your plan. As long as it’s consistent and well thought through, it’ll do the job just fine.
Tails drive returns. You can be wrong most of the time, and still win (Morgan Housel)
Housel makes this point in Chapter 6 of The Psychology of Money - and it’s one of the most liberating ideas in investing.
Whatever you invest in, odds are most things won’t perform spectacularly. Some may even flop. But a few - the rare outliers - can drive nearly all of your gains.
That’s not a flaw. It’s how markets work.
The best investors don’t try to pick only winners. They accept that a handful of tail events - rare but powerful returns - will do most of the heavy lifting.
Since no one knows which assets will deliver those results in advance, the smartest move is to stay diversified and own as much of everything as possible. Stay invested, and give your winners time to emerge.
Spend each day trying to be a little wiser than when you woke up (Charlie Munger)
Munger5 humbles us all as a lifelong learner. Learning as you go is how all the greats did it. They didn’t start with it all figured out. They just made a started, and got better as they went along.
Wealth is the gap between your income and your ego (Morgan Housel)
What really is money and wealth?
A large income by itself is not wealth, because it’s dependent on you earning it through work.
It’s really the gap between your income and your ego.
You could have a huge income, but if your desire to look rich, or feel important means you spend all of it, your wealth is actually zero.
You don’t have anything in the background to fall back on when disaster hits.
Because wealth is what you don’t see. It’s not the expensive car, or house, or the ability to buy champagne for everyone at the bar. It’s the investment account with £1m in stocks. It’s the businesses producing income for you each year.
And what does it get you?
The ability to do what you want with your time. That’s true wealth. It buys you time, and freedom.
Money itself won’t make you happy, and it’s true that the love of money really is the root of evil6.
But there is peace in freedom, and time. That’s the biggest return that really exists.
That’s what you should be aiming for - whatever number gets you there.
What this means for me
My plan is simple:
I spend less than I earn
I save for disaster (emergency fund)
I dollar cost average the rest in a single global index fund via my ISA, SIPP and workplace pension
It might not get me the best return. It might be more risky than other allocations.
But it’s a plan I can execute, has a high chance of success, and the escape calculator has shown me it gets me to my goal.
I also have learned as I go:
Which index funds I prefer (A global index fund rather than a US focussed one)
understanding tax relief in pensions
learning about currency fluctuations, or why markets are doing what they do.
Some of it affects what I do (claiming tax relief), but some of it doesn’t (not reacting to market swings, and sticking to my plan.
And that’s it.
Whatever your plan is - global index funds, property, gold, bonds - trust it, and stick to it. And the chances are it will get you there.
It will almost definitely leave you much better off than you were without it, and your future self will be forever grateful.
Disclaimer: This content is for informational and educational purposes only. It does not constitute personal financial advice. Everyone’s situation is different - if in doubt, speak to a qualified, regulated financial adviser.
Morgan Housel, The Psychology of Money (Harriman House, 2020).
Benjamin Graham, The Intelligent Investor (HarperBusiness, 2003).
The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money (Portfolio, 2012).
Charlie Munger, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, ed. Peter D. Kaufman (Donning Company Publishers, 2005).
1 Timothy 6:10 - The Holy Bible