The Best Investment Buys the Calmest Life, Not the Highest Return
Finance writer Morgan Housel argues that returns should be measured in time, stress, and family life, not just percentages.
BiggerPockets · Morgan Housel: The Investing Expert’s “System” for Stress-Free WealthMorgan Housel, a writer on money behavior, was explaining why he puts his own money in index funds and does not try to beat anyone else.
His goal, he said, is not to outperform his neighbors or his peers. He said, “I think we need to talk about effort-adjusted returns and stress-adjusted returns.”
By that, Housel said he means measuring a return by what it costs in work, worry, and time away from home. Finance professionals often judge performance using risk-adjusted returns, he noted, and he wants them to also ask how much life a return requires.
His example was simple. Suppose he earns 10 percent a year as an index fund investor who adds money regularly. An active manager earns 10.5 percent, but does it while putting in long, anxious workweeks and spending less time with family, going for walks, sleeping in, and taking naps. In effort-adjusted terms, Housel argued, the index investor is earning the higher return.
Housel said the same math applies to rental houses. He described selling off properties that were a pain to manage and buying ones in good condition, and accepting a lower financial return for a higher quality of life.
He did not argue that hard work never pays. He said scaling at all costs has become a pervasive mindset in the real estate industry, while for someone who truly wants to build a massive business, the extra effort and stress can be worth it. His point was that real estate investors should ask what the extra half point is costing them at home.
Questions people ask
What does it mean to dollar-cost average into index funds?
Dollar-cost averaging means investing a fixed amount on a regular schedule, such as every month, regardless of market prices. An index fund holds a broad basket of stocks that tracks the market, so the combination is a low maintenance way to buy more shares when prices are low and fewer when prices are high.
What is a risk-adjusted return?
Risk-adjusted return asks how much risk an investor took to earn a return, often using volatility or losses as the measure. Housel's point is that time, effort, and anxiety are also costs, even if they do not show up in that calculation.
Does this idea mean everyone should settle for lower returns?
Not necessarily. Housel is arguing that investors should compare returns after subtracting the work and worry required to get them. If a higher return leaves you exhausted and absent from family life, the extra percentage points may be a bad trade.