8 Life Lessons From “The Geometry of Wealth”

The Geometry of Wealth Summary

👇 The Geometry of Wealth video summary 👇

The Geometry of Wealth Lessons

1️⃣ Retirement depends on you

Let’s face it: financial insecurity is becoming the norm, and our natural instincts often hinder us from making smart investment decisions.

Pension plans, once a reassuring safety net, are now a rarity in the modern landscape. In the past, employers shouldered much of the responsibility for their employees’ retirements. Fast forward to today, and the script has flipped.

Workers are now expected to fund their own retirements, with 401(k) investment plans taking center stage in the United States.

The statistics paint a clear picture of this shift. Between 1980 and now, the percentage of employees entitled to a full company pension plummeted from 62 to a mere 17 percent.

On the flip side, those self-funding their retirement through 401(k) plans skyrocketed from 12 to an impressive 71 percent.

This shift hasn’t left us feeling secure about retirement. A 2017 survey by the Employee Benefit Research Institute found that only 18 percent of Americans anticipate a comfortable retirement.

Here’s the twist: our efforts to secure our own retirement are often sabotaged by our instincts. When the economy takes a hit, our sense of security dwindles, leading us to hoard money.

Ironically, during economic downturns when stock prices drop, we panic and sell off our stocks instead of seizing the opportunity to buy low.

Picture it like this: when your local supermarket has a sale, you don’t avoid it; you stock up. The same logic should apply to the financial market.

The prime time to invest in stocks is when prices are low, like during an economic downturn. If you missed out on buying discounted stocks during the 2008 financial crisis, that’s a lesson to remember for the future.

While investing is a key component of financial security, it’s not the only path. In the upcoming sections, we’ll explore various tools to help you organize your finances and navigate this evolving landscape.

Next.

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2️⃣ Use your slow brain too

In a world where financial uncertainty seems to be on the rise, it’s easy to feel helpless. But fear not, because we possess a potent tool in the face of financial challenges: the human brain. While it’s not a magical fix-all, our brains do offer us a surprising degree of control.

Understanding the brain’s workings is crucial. According to psychologist and economist Daniel Kahnemann, our default mode is “fast thinking.” This is our rapid, automatic response to the events around us, like hitting the brakes when a car darts in front of us.

This fast thinking is driven by our brain’s instinct to detect and react to threats quickly, often leading to unconscious financial decisions, like impulse spending.

But there’s more to our mental toolkit. Kahnemann introduces the concept of “slow thinking.” This aspect of the brain handles rational thought and the analysis of complex information. It’s what allows us to calculate the annual returns on high-yielding savings accounts, for example.

Now, let’s explore the realm of control.

According to a study by social scientists Edward Deci and Richard Ryan, about 60 percent of our ability to make wise decisions and find happiness is influenced by genes and circumstances – factors beyond our direct control.

However, the silver lining is that a substantial 40 percent of our life decisions are conscious choices.

Enter the “slow brain,” our key to conscious decision-making. By utilizing this part of our brain, we can take charge of a significant portion of our financial journey, steering it toward happiness and sound choices.

How do you tap into the power of your slow brain? Stay tuned for the next blink, where we’ll unravel strategies to make conscious choices that pave the way to financial contentment.

Onwards.

3️⃣ Minimize your exposure to losses

Risk management is the name of the game when it comes to making smart financial decisions. Think of it like this: the less you expose yourself to potential losses, the better.

Let’s take a cue from seventeenth-century philosopher Blaise Pascal, who had some intriguing thoughts on risk and belief. According to Pascal, believing in God is like making a wager.

If you believe and God exists, you gain significant rewards. If God doesn’t exist, you haven’t really lost anything. In essence, belief is a less risky proposition.

Now, how does this connect to money matters? More than you might think. Minimizing risk isn’t just a wise move in matters of faith; it’s a fantastic approach to financial decisions as well.

Effective money management is all about finding the right balance between risk and reward. Yes, taking more risks might lead to higher potential gains, but it also increases the chance of losing everything.

Take startups, for example. The successes, like Google and Facebook, are colossal, but a staggering 96 percent of startups launched in the US over the last decade didn’t make it.

While going all-in isn’t sustainable, avoiding risks altogether won’t fuel financial growth. So, what’s the key? Simple: minimize your exposure to potential losses.

Consider the insurance industry as an example. When you buy a house, you’re taking on financial risk – houses are expensive and, unfortunately, they can burn down. To mitigate this risk, you get insurance on your house, reducing the chance of financial ruin if the worst happens.

The same principle holds in the world of investments. Take a page from successful investors like Warren Buffett and Charlie Munger – they share a common trait of being laser-focused on avoiding damage and limiting risks.

Their strength lies in waiting for favorable odds before making their moves. By prioritizing risk prevention, they make strategic bets that are practically foolproof.

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4️⃣ Determine your net worth

Now that we’ve covered the general principles of managing your money, let’s get down to the nitty-gritty. It’s time to do something that many of us tend to procrastinate on – calculating our own net worth.

The beauty of this task lies in its simplicity and effectiveness. Here’s how you can do it:

1. In one column, list all your assets – your house, car, retirement fund, savings, and the value of items in your home.
2. In a second column, tally up your debts – mortgage, credit card debts, college loans, car loans, etc.
3. The difference between the total assets and total debts is your net worth.

Now, why is this exercise crucial? It provides a clear snapshot of your current financial health, giving you a foundation for setting financial goals.

Understanding your financial goals is fundamental to effective money management. While predicting every future need might be challenging, you can make educated estimates based on your current desires and necessities.

For example, if you know you want to save $50,000 for a down payment on a $250,000 house in the next five years, or you’ve figured out the annual income needed for a comfortable retirement, you’ve got your goals in sight.

With these targets clarified, you can create a financial plan to achieve them. Regularly revisit and adjust this plan annually to ensure you’re staying on course or make necessary adjustments.

Moving on.

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5️⃣ Be grateful

Achieving financial well-being goes beyond balancing budgets and making savvy investments. Surprisingly, the intangibles play a crucial role, and one such element is practicing gratitude. It might sound unconventional, but it holds significant merit.

True wealth isn’t just measured in material possessions; it includes happiness. Renowned psychologist and gratitude expert Robert Emmons highlight that gratitude is a key ingredient for happiness – expressing thanks makes you feel good.

Emmons suggests two techniques to boost gratitude. Firstly, appreciate everything you already have. Instead of comparing yourself to others, reflect on your personal progress. This perspective fosters gratitude for your current circumstances.

Secondly, recognize that your present situation isn’t solely a result of your talent and hard work – luck and the assistance of others played a part. Psychologist Kristin Layous emphasizes that humility is the foundation for gratitude.

Acknowledging and thanking others, whether in words or thoughts, serves as a catalyst for happiness and contentment.

Gratitude not only transforms your mindset but also influences your spending habits. Constantly comparing and envying others can lead to unnecessary spending on luxuries to keep up. This isn’t financially wise and won’t bring lasting happiness.

Enter gratitude. When you appreciate the food on your plate or the friends you have, the desire for extravagant meals or trendy gadgets diminishes. It’s that straightforward: gratitude is beneficial for both your soul and your wallet.

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6️⃣ Keep it simple

Let’s take a journey back to the 1840s, to a Vienna hospital where Dr. Ignaz Semmelweis faced a puzzling situation.

The death rate among women giving birth in his ward was one in ten, while “street births” had a considerably lower rate of one in 25. The solution, with the benefit of hindsight, was remarkably simple – washing hands. The lesson? Simple answers are often the correct ones.

Our brains, however, have a penchant for complexity. More choices make us feel happier, associating abundance with security. This explains the popularity of Starbucks’ extensive coffee menu. Yet, while complexity might be appealing, it’s not the wisest approach to financial decisions.

Financial ruin can result from decisions driven by complexity. That’s why it pays – quite literally – to keep things simple. Here are three straightforward rules to guide you:

1. Buy Low, Sell High: Timing matters. Purchase assets when prices are low and sell when they’re high.
2. Diversify Your Portfolio: Don’t put all your eggs in one basket. Spread your investments across different assets.
3. Stick to Your Plan: Avoid the temptation to jump from one investment to another. Stay committed to your chosen path.

Now, let’s unpack the third rule a bit. When you invest, you’re essentially either lending money to a company or buying stocks/shares in it.

For long-term investments spanning decades, stocks are often the best choice due to their high return on investment. For short-term investments, bonds provide a safer option. The key is to choose a trustworthy company with a strong product and stick with it.

Remember, simplicity isn’t just pragmatic; it’s a financial powerhouse. In a world that loves complexity, your straightforward approach will lead to more effective and rewarding financial decisions.

Onwards.

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7️⃣ Pick high probability investments

Contrary to the portrayal of finance as a realm of precise equations and algorithms, investing isn’t an exact science where complex market movements can be perfectly predicted.

In fact, that’s a good thing. You don’t need multiple PhDs or a genius-level grasp of mathematics to succeed in the markets.

Charlie Munger, a highly successful investor, emphasizes that investors can’t know the precise outcomes of their decisions. The best they can do is select investments with a high likelihood of success.

This might seem like modesty, but it’s a wise perspective. To make sound investment choices, accepting the role of chance in the “game” is crucial.

In practice, this means acknowledging that you don’t have all the answers. Even if you’re a high-profile investor with access to vast financial information, humility is key.

Despite the Hollywood image of assertive traders on Wall Street, the best investors understand that humility outshines overconfidence.

Why? Consider this: when you realize you can’t predict every market outcome, you’re more likely to cultivate patience, stick with your investments, and prioritize portfolio diversification and risk management.

This beats hastily jumping onto the latest investment trend and putting all your money into the most hyped option. In the unpredictable world of finance, a humble and realistic approach is a winning strategy.

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8️⃣ Give it time for the probabilities to play out

If you ask your mother or neighbor about the return you can expect on your stocks, they might throw out a figure like ten percent.

It aligns with the common-sense understanding of investment returns, and in many cases, it’s not far off the mark. The Ned Davis Research Group reports an average yearly return of around ten percent for stock investments.

However, this seemingly straightforward figure hides a crucial factor – probabilities. The range of possible outcomes in investments is far from steady. While the average return is about ten percent, the actual returns fluctuate significantly over the years.

Consider the US stock market. In some years, it experiences remarkable growth, soaring by as much as 167 percent.

On the flip side, there are years with sharp downturns, with contractions reaching up to 67 percent. The range of positive and negative outcomes is substantial, especially in the initial years after an investment.

The silver lining? As you stay invested over the long term, this range tends to diminish. While early years might showcase wild fluctuations, over a couple of decades, there’s a strong chance that things will level out.

In the long run, you’re looking at a more manageable range of returns, typically between zero and twenty percent, though small losses are still possible.

The takeaway here is to maintain a realistic perspective and not be overly swayed by the early volatility in your stock’s value. Patience is key, and over time, the investment landscape tends to smooth out.

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In the world of finance, maintaining a level-headed approach and acknowledging the role of luck are essential.

Successful investing involves humility, risk management, and avoiding impulsive decisions. To enhance your chances of success, focus on simple and reliable investment strategies and commit to them over the long term.

Given the unpredictable nature of financial markets, relying on a single company can be risky. To mitigate this, diversify your investments across multiple companies.

This strategy acts as a safety net, helping you navigate potential downturns or underperformance in specific stocks.

The Geometry of Wealth Quotes

🔥 Daily Inspiration 🔥

No one could ride a horse if the horse discovered its real strength. The same is true for people.

Horses are massive, gentle creatures far more extensive and robust than the men and women who handle them, yet they docilely obey their commands.

It isn’t logical that a large, powerful animal would allow itself to be mastered by a human being.

Yet, we have been able to use our intelligence to dominate the animal kingdom.

You can use these same forces to allow the positive side of yourself to dominate the negative.

A Positive Mental Attitude allows you to tap the source of great power within you, enabling you to accomplish things you never before believed possible.

— Napoleon Hill