I’m going to do TWO things today that I don’t normally do …
1. I’m going to review a book, and
The book review outlines some of the ‘secrets’ suggested in the book … and I would like to give you some insight into how I think …
… so, here goes (everything in italics is from the blog post):
Ordinary People, Extraordinary Wealth pledges to contain “the eight secrets of how 5,000 ordinary Americans became successful investors – and how you can too.” Intriguing subtitle. I can’t wait to dig in, so let’s get started. Looking Into Ordinary People, Extraordinary Wealth:
They carry a mortgage on their homes even though they can afford to pay it off.
Edelman basically argues that the concept of a mortgage being a bad thing is a relic of the 1930s, where banks would foreclose on a house on a whim, and the negativity associated with mortgages has hung around this long even though there are a lot of protections for the borrower today.
I bought my most recent house without a mortgage … I had plenty of cash, but I simply plonked it down. But, I have two rules around this:
1. The 20% Rule – never have more than 20% of your net worth invested into your house at any one time; for MOST people this means that you will HAVE to take out some sort of mortgage, and
2. Even if you meet # 1. (I do … most people don’t) don’t be afraid to use up to 50% of your home’s equity to support other buy-and-hold investments.
So, recently I took a $1 mill. line of credit on my home (about 50%) to plonk into my Scottrade account (I use margin lending in there, as well, so I am really taking some additional risk with my home equity that I shouldn’t be taking).
They don’t diversify the money they put into their employer retirement plans.
The subtitle struck me as quite odd at first, as it seems to fly in the face of common sense. Edelman’s advice, though, is actually pretty common – put your retirement money into a diversity of stocks. In other words, select an index fund or two of stocks in your retirement plan and just dump all of your savings into it.
Firstly, 401K’s are a tool of the poor: if you are young, you want to invest as much as you can outside of your 401k so that you can exert some control (a self-directed fund is another matter entirely – PROVIDED that you borrow money against your invested equity to leverage into investments).
And, if you are old, you should have so much money in outside investments that your 401k is just icing on the cake (I confess that I have NO IDEA how much is currently in my 401k-equivalent).
Secondly, diversification is also a tool of the poor and uneducated; even Warren Buffet recommends low-cost Index Funds over other forms of investing for the uneducated … but Warren doesn’t diversify. Neither do I.
Most of their wealth came from investments that were purchased for less than $1,000.
Basically, Edelman states that people who became wealthy did it not by having a ton of money right off the bat. Instead, they just invested a little bit at a time – less than $1,000 a pop. They just did it regularly.
Hmmm … this is a hit-or-miss one for me; a LOT of my money came from businesses that I started with No Money Down. But, a lot came from other investments, as well … most recently an office building that I bought for $1.4 million (25% down) that sold for $2.4 million less than 5 years later.
They rarely move from one investment to another.
The question then becomes what should one invest in? Edelman doesn’t offer a direct answer here, but does suggest that the only clear way to lose is by rapidly shuffling your money around from investment to investment. The route to success is to buy and hold, not to move like a jackrabbit from investment to investment, losing most of your gains to brokerage fees and taxes.
Another strange one …. you see, to me the VERY DEFINITION of INVESTMENT is something that you buy-and-hold … that’s the strategy that I use in two different ways:
1. To Get Rich Slowly (but surely), and
2. To KEEP my money, once I’ve made it.
But, you can’t just save your way to the sorts of investments that will make you rich; you need to find the money to make those Buy-and-Hold investments by INCREASING YOUR INCOME.
Other than getting a pay rise, working overtime, or holding down 2 or 3 jobs (all of which suck, if you ask me … especially the pay rise if it requires grovelling for 18 months to get it), ONE WAY that I can think of to increase your income is to TRADE …
… that means rapidly moving in/out of ‘investments’ such as stocks (trading stocks or options) or real-estate (flipping). It’s not really INVESTMENT … if it’s RISKY, it’s BUSINESS … but you have to take some chances along the way IF you want to get rich.
They don’t measure their success against the Dow or the S&P 500
Instead of using various metrics like the NASDAQ to judge their investment success, they look instead at whether or not their investments are actually achieving the results they need in their life. So what if the S&P 500 has an up or a down day? What’s actually important is that your investments are giving you the returns you need.
Couldn’t agree more; I have more than $1 million invested (or trading in/out) in the market at any point in time and I don’t track the indexes other than to assess the MOVEMENT of money in/out of the market AFTER the fundamentals tell me that I am ready to buy (or sell).
They devote less than three hours per month to their personal finances.
I think this concept relates very well to the “training wheel” conceptI talked about a while back. Basically, Edelman is correct in stating that the people he’s talking about do spend three hours or less a month on their personal finances, but these are people who already have a firm grip on their financial state.
I’m a terrible budgeter …. I’m probably the only multi-millionaire who ever had their American Express card taken away from them for forgetting to pay the bills (really!) … not highly recommended, but if you increase your income and invest well, personal finances actually take a back seat (and, my wife now controls the houshold accounts!).
Even when I was starting out, I only ever did one budget … actually, I tracked EVERY SINGLE EXPENSE for just one month … that was enough to tell me where I was and I already knew where I needed to go.
Money management is a family affair involving their kids as well as their parents.
If there’s one point that Edelman really hits out of the park in this book, it’s this one. You’re doing nothing but hindering your children’s financial education by keeping them oblivious to money.
My wife and I started teaching our children about money very early and I’m happy to say that they both understand the basics, saving 50% of their pocket-money and only spending what they need to.
My 13 y.o. son seems to have an entrepreneurial-flair having his own successful eBay business (he earns more from this than his pocket-money brings in) and even runs his own books and accounts (using Quickbooks). He researched this and set it all up himself … other than gentle encouragement, I can lay no claim to his success 🙂
Both our children know that they will need to find their own way in the world … we will nurture and educate, and that’s about it (financially).
They differ from other investors in the attention they pay to the media.
In other words, they ignore the talking heads on CNBC or the thousands of stock tips floating around out there for the most part. Why? Because it’s information overload and it’s not particularly useful to most of the people Edelman interviewed for this book.
I don’t read the financial press … too boring.
Anyway, to make money, you need to be contrarian (BUY when stuff is cheap … ) … you can only do that if you have the guts to buy when everybody else is lining the windows to jump off the ledge.
How do you match up against the Edelman ‘secrets’?