One-Sentence Financial Rules

There are 56,956 personal finance books on Amazon.com. In aggregate, they contain more than 3 billion words. This seems absurd, because 99% of personal finance can be summarized in nine words: Work a lot, spend a little, invest the difference. Master that, and the other 2.999 billion words are filler.

The most important finance topics don't require details. Most can be, and should be, summarized in a sentence or two.

Here are some I've learned.

1. Dollar-cost average for your entire life and you'll beat almost everyone who doesn't.

2. Only invest in products and companies you can explain to a six-year old.

3. Every five to seven years, people forget that recessions occur every five to seven years.

4. You're twice as biased as you think you are (four times if you disagree with that statement). 

5. Read more books and fewer articles.

6. Read more history and fewer forecasts.

7. It's strange that you go to the doctor once a year, but check your investments once a day.

8. Be careful when reading about how stupid investors can be and not realize you're reading about yourself.

9. Your circle of competence is probably 90% smaller than you think it is.

10. You're only diversified when some of your investments perform worse than others.

11. Big risks will always be disregarded; small risks always blown out of proportion.

12. Check your brokerage account as infrequently as it takes to prevent rash decisions.

13. When in doubt, choose the investment with the lowest fee.

14. Emotional intelligence is more important than book intelligence.

15. The more you learn about the economy, the more you realize you have no idea what's going on.

16. Start saving for college before your kid is born, and start saving for your retirement before you graduate college. You'll feel silly when you start and like a genius when you finish.

17. The most powerful way to grow your money is learning to live with less, since you have complete control over it.

18. Singer Rihanna nearly went broke and fired her financial advisor, who described her situation well: "Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?"

19. You have no obligation to have an opinion about anything. 

20. You have a strict obligation to not have an opinion about things you don't understand. 

21. No one attending private school should be on student loans. Most should utilize community and state schools, which provide just as good an education for a fraction of the price.  

22. You shouldn't feel strongly about any investment you haven't spent at least a week thinking about.

23. Holding 60% of your assets in stocks and 40% in bonds isn't perfect for everyone; but I can think of a thousand worse strategies.

24. Respect the role luck has played on some of your role models. 

25. Don't take out $100,000 in student loans for anything other than medical school (if that).

26. Change your mind as often as the facts change. 

27. Ignore people who refuse to change theirs when the facts change. 

28. Read last year's market predictions and you'll never again take this year's predictions seriously.

29. Warren Buffett's folksy talk misleads people into thinking that what he's accomplished is easy. It's not.

30. Sleep on every investment decision for a week, then run it by a trusted friend before acting.

31. Two things you can do to make yourself a better investor are increase the amount of time you're investing for and the humility you put into your ideas.

32. Just as you should dress appropriately for your age, you should spend appropriately for your income, and not a penny more. 

33. Warren Buffett has the best explanation of dumb risk-taking: "To make money they didn't have and didn't need, they risked what they did have and did need. And that's foolish. It is just plain foolish."

34. You can probably afford not to be a great investor -- you probably can't afford to be a bad one.

35. You're twice as gullible as you think you are.

36. Learn more from your bad investments than your good ones. 

37. Judge investors by the quality of their arguments, not the performance of their last trade.

38. You can realistically afford probably half the home the mortgage broker approves you for.

39. Teach your kids about money before they're old enough to earn their own. 

40. Admit when you are wrong. 

41. Imagine how much stuff you'd have to make up if you were forced to talk 24/7. Remember this when watching financial news on TV.

42. There is, and always will be, more money to be made providing investment advice than receiving it.

43. Assume the worst, hope for the best, accept reality. 

44. Save for your own retirement; assume Social Security and private pensions won't be around (even though they probably will).

45. Annuities: A product mixing the complexity of high finance with the sales tactics of used-car salesman has an entirely predictable outcome.

46. The correlation between confidence and future regret is incredibly high.

47. During the last 100 years, there have been more 10% market pullbacks than Christmases. Everyone knows Christmas will come; think of volatility the same way.

48. Don't attempt to keep up with the Joneses without realizing the Joneses aren't any happier than you are.

49. Predictions, opinions, and forecasts should be discounted by the number of times the person making them is on TV each week.

50. Not taking advantage of an employer match on your 401(k) is no different than declining a raise.

51. Don't let Washington sway your investment decisions. Congress has been a dysfunctional swamp of disappointment since 1789, and stocks have done well ever since.

52. To quote Larry Summers: "A good rule of thumb for many things in life holds that things take longer to happen than you think they will, and then happen faster than you thought they could."

53. Another Larry Summers gem: "THERE ARE IDIOTS. Look around."

54. "Invest in what you know" is dangerously simplified. 

55. Quit day trading, and donate your money to charity instead. Same financial result for you, and a better outcome for society.

56. Most people's biggest expense is interest, which comes from living beyond your means, and buying things they think will impress others, which comes from insecurity. Avoid these two and you'll grow richer than most of your peers.

57. Reaching for yield to increase your income is often like sticking your hands in a fire to warm them up -- good in theory, disastrous in practice. 

58. Your devotion to a political party or economic philosophy is directly proportional to your tendency to think irrationally about how politics affects your investments.

59. Most people need a financial advisor, but everyone needs a financial counselor, or someone to talk them off the ledge before making a dumb decision.

60. There's a strong negative correlation between flaunting money and being rich. 

61. Investors were probably better informed 20 years ago when there was 90% less financial news. 

Add your own in the comment section below. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

 


Read/Post Comments (44) | Recommend This Article (101)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 26, 2014, at 3:49 PM, EnigmaDude wrote:

    Don't believe everything you read!

  • Report this Comment On March 26, 2014, at 4:15 PM, Mathman6577 wrote:

    63. If it seems too good to be true it is.

    64. There are no get rich quick investments.

  • Report this Comment On March 26, 2014, at 5:03 PM, JamesBrown wrote:

    Some of those are more than one sentence.

    ;)

  • Report this Comment On March 26, 2014, at 5:22 PM, The1MAGE wrote:

    I really like 20.

    Mathman6577, I like what another person say's, "If it sounds too good to be true, do more homework."

    Then get rich quick really depends on your definition of rich, and quick.

  • Report this Comment On March 26, 2014, at 6:09 PM, daveandrae wrote:

    67. There is absolutely, positively, no correlation whatsoever between "Investment performance" and Investor Return. In fact, when juxtaposed, the two are wildly diametrical.

  • Report this Comment On March 26, 2014, at 6:31 PM, darrellquock wrote:

    68. Read Morgan Housel's articles every Tuesday and Friday...

    Morgan, your articles are to the point, informative, and practical. When are you going to complie your articles into a book?

  • Report this Comment On March 26, 2014, at 9:17 PM, bru5ce wrote:

    darrellquock, please see:

    50 Years in the Making: The Great Recession and its Aftermath

    Everyone Believes It; Most Will Be Wrong: Motley Thoughts on Investing and the Economy

  • Report this Comment On March 26, 2014, at 10:14 PM, stockdissector wrote:

    69. Legendary investors aren't perfect...and neither are you.

  • Report this Comment On March 27, 2014, at 1:43 AM, sliderw wrote:

    I stopped reading after "5. Read more books and fewer articles."

  • Report this Comment On March 27, 2014, at 3:20 AM, chairmanwow wrote:

    A company's dividend payment history is a much more reliable guide to stock selection than analysts' projections of future earnings.

  • Report this Comment On March 27, 2014, at 3:27 AM, chairmanwow wrote:

    ^To clarify, dividend payment history includes not just the size of past dividends, but also growth in the dividend and the payout ratio.

  • Report this Comment On March 27, 2014, at 9:19 AM, XXF wrote:

    Totally ignoring the pithy sayings about how stupid we all are here are four that are just blatantly wrong:

    2. Only invest in products and companies you can explain to a six-year old.

    You go ahead and explain Berkshire Hathaway or P&G to the next 6 year old you meet. Either because that 6 year old isn't qualified to understand such complexities or because you did a terrible and truncated job explaining it that 6 year old is going to leave the conversation similarly uninformed to how it entered it.

    14. Emotional intelligence is more important than book intelligence.

    Emotional intelligence is only important when paired with "book intelligence" while being learned is individually valuable. EI might have a multiplier effect on the value of other skills and knowledge, but it isn't valuable on its own.

    21. No one attending private school should be on student loans. Most should utilize community and state schools, which provide just as good an education for a fraction of the price.

    This is just wrong. There is an individual value proposition for each person attending university and private schools can in many cases provide a superior value (value being a function of utility and cost). That said I don't want to hear people whining about student loan debt anymore than anyone else, so make your decision and if it involved taking out loans pay them back like every other responsible member of society does.

    42. There is, and always will be, more money to be made providing investment advice than receiving it.

    I hold index funds in what is basically the lowest cost portfolio that can be put together without institutional class shares, but in no way do I believe that there is a massive conspiracy to make investment advice worthless. Every other industry on the planet has discovered that providing value to customers is the best way to build a valuable product or service, but some people continue to believe that those giving investment advice are all in league to strip you of your profits. That is absolute hogwash written to appeal to the lowest common denominator.

  • Report this Comment On March 27, 2014, at 10:32 AM, ryanalexanderson wrote:

    > You go ahead and explain Berkshire Hathaway or P&G to the next 6 year old you meet.

    Proctor and Gamble makes stuff like detergent and diapers. They make it for less than they sell it. They keep the difference, and that's their profit.

    Berkshire Hathaway buys companies like Proctor Gamble, who have figured out how to make money safely. They don't try to run the companies themselves.

    ...compare that to:

    JP Morgan - well, they, uh... Collateralized Debt Obligations....commodity speculation, you know...uh...interest rate derivatives...ah, screw it, lets go get ice cream!

  • Report this Comment On March 27, 2014, at 10:39 AM, ryanalexanderson wrote:

    Also:

    >There is, and always will be, more money to be made providing investment advice than receiving it.

    >...but some people continue to believe that those giving investment advice are all in league to strip you of your profits. That is absolute hogwash written to appeal to the lowest common denominator.

    Classic strawman fallacy. Morgan's statement implied no conspiracy nor even rapaciousness.

  • Report this Comment On March 27, 2014, at 11:12 AM, DS31 wrote:

    Morgan,

    Sometimes I have a hard time believing you are under 30 years old!

    Well done.

    Dan

  • Report this Comment On March 27, 2014, at 12:10 PM, jpanspac wrote:

    Number 53 is priceless. I consider Summers to be one of the idiots.

  • Report this Comment On March 27, 2014, at 12:11 PM, KayakerRW wrote:

    As an English teacher, I encourage my students to read good writers in many areas in addition to classic literature. In the course of reading and discussing several well written financial articles, I illustrated investing for the long term by discussing how I bought Apple stock in 2008, watched the price drop, bought more, and then showed them the current Apple share price. This made them want to know my advice on which stocks they should buy. One asked, “Can you give us good advice on the stock market?”

    I replied, “Yes, don’t buy stocks just because your English teacher recommends them.”

    Most of them got the point, which covers several of Morgan’s points.

    By the way, I encourage my students to read his articles.

  • Report this Comment On March 27, 2014, at 2:57 PM, Mathman6577 wrote:

    @The1MAGE: "10% return in one day" is an example.

    @ ryanalexanderson: My thought is the simpler the investment the better. P&G is good (stock in companies selling anything you buy at the grocery store is probably a good investment). So is CVX and XOM .. everyone needs oil and gasoline. Credit default swaps and options are too complicated for most people. Didn't someone say "Don't invest in anything you can't explain to a 4th grader or 6th grader"?

  • Report this Comment On March 27, 2014, at 4:54 PM, ryanalexanderson wrote:

    @Mathman - That was the point I was making. We agree.

    I was replying to the post above mine, who took issue with the concept, not me.

  • Report this Comment On March 27, 2014, at 7:04 PM, cmalek wrote:

    @XXF:

    #42 restated - Analysts work for their brokerage house, not you.

    IOW, their advice profits their employer, not their customer. Although sometimes the customer gets lucky.

  • Report this Comment On March 27, 2014, at 7:07 PM, cmalek wrote:

    The one sure way of getting rich is to write a book on how to get rich. You don't have to be right and you don't have to make sense. There is enough people out there that want an easy way to get rich that will buy your book and make you rich.

  • Report this Comment On March 27, 2014, at 7:31 PM, richie54 wrote:

    70. My friend just said this is a sure, can't miss investment.

  • Report this Comment On March 27, 2014, at 7:50 PM, TagOttawa wrote:

    Don't defer deferred gratification.

  • Report this Comment On March 27, 2014, at 8:18 PM, rogerwilliams wrote:

    A projection based on past trends is just one possibility. There are unlimited possibilities that could disrupt it.

  • Report this Comment On March 27, 2014, at 9:13 PM, talotu wrote:

    Here's how I'd describe JP Morgan to a 3 year old:

    I'll give you these three pennies for 1 quarter, 3 is more than 1. 3 years later they will understand how JP Morgan makes money.

  • Report this Comment On March 27, 2014, at 9:31 PM, chris293 wrote:

    Some of these rules will be broken, otherwise how can you really be a fool?

  • Report this Comment On March 27, 2014, at 9:32 PM, TMFHousel wrote:

    <<Here's how I'd describe JP Morgan to a 3 year old>>

    The problem is that over the last five years, the type of lending you describe has made up between 0% to no more than 40% of JPM's net income. The rest is trading, investment banking, asset management, structured credit, etc. For example, last year JPM earned $25.9 billion in net income, of which $9.9 billion came from the type of old-fashioned lending you describe. Explain tri-party repos to a six year old and you'll prove me wrong.

    Thanks for the comments, all.

    -Morgan

  • Report this Comment On March 27, 2014, at 11:05 PM, JadedFoolalex wrote:

    Mr, Housel,

    54. "Invest in what you know" is dangerously simplified.

    Are you saying that Warren Buffett is dangerous?

  • Report this Comment On March 28, 2014, at 6:38 AM, smartlyfoolish wrote:

    Mister Housel - you way of writing, simple and forthright, just what you need when dealing with people who tend to complicated the entire financial industry to make it what it isn't, rocket science...

  • Report this Comment On March 28, 2014, at 10:26 AM, wtatm wrote:

    Morgan,

    #71 - The borrower is the lender's slave. (Proverbs 22:7)

    Great article... thanks!

    Jim

  • Report this Comment On March 28, 2014, at 10:31 AM, CromulentBrad wrote:

    I'd like to add the best advice my dad ever gave me: "Don't spend money you don't have."

    Also, #15 punches me square in the nose every day.

    Thanks for another great list.

    CromulentBrad

  • Report this Comment On March 28, 2014, at 11:32 AM, TMFMarlowe wrote:

    Nicely said, Morgan.

    John Rosevear

  • Report this Comment On March 28, 2014, at 11:40 AM, pondee619 wrote:

    "7. It's strange that you go to the doctor once a year, but check your investments once a day"

    I'm checking on my personal condition/health with every breath, step and heart beat. Aren't you?

    Seeing a Doctor is like seeing your Financial Advisor. Once a year is about right.

  • Report this Comment On March 28, 2014, at 1:02 PM, TMFFischer wrote:

    Measure the value of your day by how often you smile or laugh, rather than by the value in your brokerage account.

    From a transactional perspective, extra money is only as valuable as the extra benefits it can bring to your life -- and great, extra benefits that can be bought are relatively few and far between.

    That fancy car is likely to bring as much hassle or worry as happiness. :)

  • Report this Comment On March 28, 2014, at 5:45 PM, darrellquock wrote:

    "The most powerful force in the universe is compound interest"

  • Report this Comment On March 29, 2014, at 2:42 AM, vgps wrote:

    "Judge investors by the quality of their arguments, not the performance of their last trade "- This is biggest crap of all time. Judge investors only by their long term performance. Their opinions or intelligent arguments don't matter.

  • Report this Comment On March 29, 2014, at 2:38 PM, Mega wrote:

    "21. No one attending private school should be on student loans. Most should utilize community and state schools, which provide just as good an education for a fraction of the price.

    and yet

    20. You have a strict obligation to not have an opinion about things you don't understand."

    You can't possibly understand everyone's financial/educational/life situation well enough to make that blanket statement.

  • Report this Comment On March 29, 2014, at 2:47 PM, Greg1990 wrote:

    You only need to get rich once.

  • Report this Comment On March 29, 2014, at 5:18 PM, margot5664 wrote:

    I love #41 - so true!

  • Report this Comment On March 29, 2014, at 9:05 PM, JMR wrote:

    Morgan,

    You talked about reading more books. Can you please recommend a few great books for us to read?

  • Report this Comment On March 29, 2014, at 10:54 PM, dgmennie wrote:

    Finance topic # 9 restated:

    "The most common element in the universe is Hydrogen, The second most common is stupidity."

  • Report this Comment On March 30, 2014, at 12:02 PM, rclout100 wrote:

    Emotion clouds good judgment; so, you should never, ever get excited to make an investment.

  • Report this Comment On March 31, 2014, at 7:55 AM, mikecart1 wrote:

    "Work a lot, spend a little, invest the difference."

    I've been doing this my whole life by default LOL!

  • Report this Comment On April 02, 2014, at 10:17 PM, krazycanuck wrote:

    >Proctor and Gamble makes stuff like detergent and diapers. They make it for less than they sell it. They keep the difference, and that's their profit.

    >Berkshire Hathaway buys companies like Proctor Gamble, who have figured out how to make money safely. They don't try to run the companies themselves.

    >...

    I would add the following:

    >...and that's their profit. They pay some of this to their owners: a dividend. But they keep some and use it to make TV commercials to tell more people about their products. Some of these people begin buying them, and their profit gets bigger, so the dividends do too. Then the process is repeated.

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