This is a time-tested bestseller by Andrew Tobias. Unlike the junk Rich Dad Poor Dad series, this bestseller actually lives up to its fame. It was first published in 1978. The latest 8th edition was published in 2005. Mr. Tobias has a witty writing style. When you read the book, you feel like he’s actually chatting with you, not lecturing. That makes the information so much easier to absorb. If not for the advice, you should just read the stories. Some of them are really funny.
The book is organized into 3 parts: Minimal Risk, The Stock Market, and Family Planning. I really like this approach. When you bring up the subject of investing, the stock market immediately jumps into the mind. But in fact there are many things you need to take care of before you even get to the stock market part. I think the best part of this book is in Part 1 plus the beginning of Chapter 7 and some of the appendicies.
The key takeaways from this book include:
- Get your ducks in a row before you jump into the stock market. Spend less, set up a system to save more, and establish an emergency fund.
- Take full advantage of the tax preferred investment vehicles. Fund your 401k and Roth IRA to the max.
- Stick to the basics. Avoid the fancy stuff. Simple plans are often the best. If you are trying too hard to get more, you will get burned.
- The most effective investment choices are Vanguard index funds.
The book doesn’t go into much details on which Vanguard index funds you should choose. But if after reading this book you got a good idea on where to start and what to avoid, you’ve got way more than what you paid for this small book. This book gets on the Recommended Reading List because of its very readable conversational style and because it makes you think about the forest before you look at the trees. There are other fine books that go into the mechanics of choosing the index funds.
Here are some comments on the cool concepts in the book.
A Penny Saved Is Two Pennies Earned
Because we have to pay taxes on our income, the best return on investment often comes from spending less. The return from spending less is risk-free, tax-free. You can’t beat that on the stock market.
Plan for Saving Money
Take a snapshot of what you have, what you earn and what you spend. Make a plan for where you want to be. Save some money by auto deduction before you get a chance to spend it. Mr. Tobias said it the best that you have to internalize the plan.
“No one wants to pass up something because he can’t afford it. But to pass it up because he wants to — because his eye is on a higher goal — well, that’s quite a different thing.”
Trust No One
There are so many gimmicks in financial products and sales. I don’t even know where to start. Mr. Tobias gave quite a few good examples in the book. Suffice it to say, the bad products, for you the investor, far outnumber the good ones. Once again, if you are trying too hard, going outside of the basics, you will often be slaughtered. It’s really sad that financial advisors and insurance salesmen often don’t have your best interest in mind. Mr. Tobias wrote:
“You have to take responsibility for your own money because no one cares about it as much as you. … The simple investments are very often the best. And that goes, too, for the simple loans, the simple insurance, and the simple financial plans.”
Stick to the Basics
A good quote for not to get too excited about venturing outside of the basics (emphasis added by me):
“In the financial marketplace, you get what you pay for, if you are careful. If you try to get more, you get burned.”
Look at the Big Picture
The author establishes that before you go out on the investing path, you ought to have $5,000 – $10,000 somewhere safe and liquid. He makes the point that you have to keep the large picture in mind. Instead of chasing the highest yields on a savings account offered by different banks — the many blog posts I see on Emigrant Direct vs HSBC vs E-Loan vs GMAC comes into mind when I read this — he wrote:
“The real question is overall strategy: What proportion of your assets do you want to keep completely safe and liquid? What proportion might you prudently tie up for a while to get a higher return? What proportion should you risk in the stock market to get a higher return still? … How well are you diversified?”
Amen. Talking about seeing the forest or trees. Once you get the big picture down, then look at the mechanics of the specific products.
Take Advantage of Tax Deferred Accounts
This chapter covers the various tax preferred investment vehicles: custodial account for kids, Coverdell ESA, 529 plan, 401k/403b plan, Traditional IRA, Roth IRA, Annuities (avoid!), your own home, and stocks. The advice on 401k is simple:
“If your employer offers a deal like this [matching contribution] and you’re not taking full advantage of it, you are an idiot. … … Even if your employer doesn’t augment your own contribution, you should fund your 401(k) to the limit.”
I’ve been contributing to my 401(k) to the limit every year since I started working. It’s a great way for accumulating assets for retirement. For most people who earn a good salary and have a 401k plan at work, the deductible IRA is out of the question. If you qualify, you should contribute the maximum to a Roth IRA in addition to funding the 401k to the limit. You don’t think you have enough money for funding both 401k and Roth IRA to the limit? Go back and re-read chapters 2 and 3. Once you have the contributions automatically deducted from your paycheck, trust me, you will find a way to get by.
The author’s verdict on annuities? “Don’t buy them!” I can’t believe it when I read this post on FatWallet. A purported financial advisor wanted the poster to buy a variable annuity in his/her IRA (big commission to the advisor) and charges the poster a 1.5% annual fee on top of it. This is more evidence for the title of Chapter 4: Trust No One.
However I disagree with the author’s write-up on timber. This topic is counter to his earlier message for sticking to the basics. Yes, timber may be a good investment, but it doesn’t belong in most people’s portfolio. I suspect the author fell prey to the symptom of trying to get more and forgot about the you will get burned part. He confessed that he lost a lot of money in the early days on oil and gas deals. Who says timber will not turn out to be the same?
Invest in Index Funds
You’ve gone through half of the book. Only now it comes to The Stock Market part. This order is very important. Except in 401k, Roth IRA and 529 plan for your kids where you want to put perhaps 60-70% in stock funds, don’t even think about investing in the stock market outside of those accounts until you paid off your loans (except home mortgage), have adequate term life insurance, and have a comfortable amount in a safe and liquid account. And if you’ve done all that and do invest in the stock market, you should have a reasonable expectation for your returns. Not 15% or 20% a year, not even 10% or 12% a year, try 6% to 8% a year. Remember, if you try to get more, you get burned. On picking the winning stocks, Mr. Tobias wrote:
“The bottom line, if you want to cut straight to the chase, is that most people should do their stock-market investing through no-load index funds … … If you do, you will outperform at least 90% of all your friends and neighbors — including many who work much harder at this than you.”
So don’t be like the friends and neighbors in that quote. Working harder does not give you better results. Take the easy way. You will enjoy it. Enough said. You can skip the rest of the chapter now.
Forget About Charts
On charts, the author wrote:
“Charts look like they should work, but they don’t. … … Don’t waste your time.”
Vanguard Index Funds Are Best for Most People
The author suggests that the easiest and likely the best approach is buying index funds from Vanguard.
“This is a very simple concept but profound: just by investing all the money you have earmarked for the stock market in the Vanguard Index Trust, you will generally do better than most bank trust departments, mutual fund managers, and private investors — with far less effort!”
The book doesn’t go into much details on which index funds you should choose. There are some brief mentions for having a Total Stock Market fund, a Total International fund, and a TIPS fund, but it doesn’t tell you how you should decide on the stocks/bonds ratio or the domestic/international ratio. It doesn’t mention those wonderful LifeStrategy funds or Target Retirement funds that further simplifies the decisions for you. For those topics, you will need to read a different book.
Rating: ***** (Excellent). Highly recommended.
Refinance Your Mortgage
Mortgage rates hit new lows. I saw rates as low as 3.25% for 30-year fixed, 2.625% for 15-year fixed, with no points and low closing cost. Let banks compete for your loan. Get up to 5 offers at LendingTree.com.