My Favourite Takeaways – Millionaire Teacher and FREE book giveaway (Part 2)

 

In my last blogpost, Part 1 of My Favourite Takeaways – Millionaire Teacher and FREE book giveaway,  I raved about Andrew Hallam’s book.

I consider Millionaire Teacher a gem for your personal finance library because it is an excellent and an enjoyable read.  Andrew goes beyond the technical and academic merits of spending less than you make, investing for the long-haul and digs into the behavioural challenges that come with investing.  He understands people and his book helps people get out of their own way to be financially free, faster.   Andrew should know about this.  He’s completed that journey himself!

For today’s post, Part 2, I’m going to start sharing a few of Andrew’s nine rules of wealth that we should have learned in school, and some excerpts from Millionaire Teacher that made an impression on me.

Part 3 with closeout the other rules.  Let’s go!

Rule 1 – Spend Like You Want to Grow Rich

If you want to be a millionaire, you better start thinking like one.  You also need to spend like one and that means you need to save.

“Before we learn to invest to build wealth, we have to learn how to save.”

Easy to say but hard to practice and stay committed to.  Andrew has it right and we all know it.   Andrew cites U.S. author and wealth researcher Thomas Stanley (of The Millionaire Next Doorfame) to reinforce his message when he looks at the costs of home ownership.

“For example, most U.S. homes valued at a million dollars or more (as of 2009) were not owned by millionaires.  Instead, the majority of million-dollar homes were owned by nonmillionaires with large mortgages and very expensive tastes.”

Andrew believes if there were such a thing as a financial Hippocratic Oath, many of us would be committing malpractice.   This malpractice not only goes for houses, but for cars and other major purchases.  Andrew wants you to know that responsible spending habits are never overlooked by the rich because these habits are how they got there.   Avoid credit as much as possible Andrew says.  People continually buying goods on credit, will never be wealthy.  Instead, they will be stressed.

Rule 2 – Use the Greatest Investment Ally You Have

“Starting early is the greatest gift you can give yourself” Andrew says.   Time is an investor’s best friend.

Warren Buffet famously quipped “Preparation is everything.  Noah did not start building the Ark when it was raining.”

Our Millionaire Teacher uses a few tales within rule 2 to demonstrate the power of compounding.   Over time, Andrew tells us that long-term investing or should I say staying invested will ultimately create the wealth you are looking for but you need to be patient.  You also need to learn how to save money first.  Pay off all high-interest debt first then save.  This will put as much investing time on your side as possible.

Andrew also reminds us that “financially efficient households know what their costs are.  By writing down expenses, two things generally occur.  You get an idea of how much you spend in a month, providing an idea of how much you can invest.  It also makes you accountable for your spending, which encourages most people to cut back.”

Again, we know Andrew is right!  On a personal note, we’re trying this exercise at home lately and it’s AMAZING to see where your money is going.  It’s also a bit scary.  Like every 12-step recovery program, admission and awareness are your starting points.  Millionaire Teacher says if you start early enough, for patient investors, the aggregate returns of the world’s stock markets have provided phenomenal returns.   Just for an example, the U.S. stock market has averaged almost 10% annually from 1920 to 2010.   That’s a long timeframe, but the point is, early investing almost guarantees market-like returns are on your side.

Rule 3 – Small Percentages Pack Big Punches

“With training, the average fifth grader can take on Wall Street” writes Andrew.  Rather bold don’t ya think?

One could mistake this comment as overly-confident, maybe even cocky until Andrew shares his logic with us:  “The vast majority of financial advisers are salespeople who will put their own financial interests ahead of yours.  They sell you investment products that pay them (or their employers) well, while you’re a distant second on their priority list.”  So what can we do about this?

Andrew suggests instead of buying the banks and insurance companies’ products, or the bank and insurance companies themselves, rule 3 tells us to own thousands of the world’s best companies in indexed products.   With “just three index funds,” your money can be diversified over almost every available global money market.  You need to buy or win the book from my giveaway to find out what index funds he’s talking about!

Millionaire Teacher goes on to describe the major holes in actively managed mutual funds, expense ratios, trading costs and sales commissions to name a few.  The more trading that occurs within a mutual fund, the higher the taxes paid by an investor – if we know what is good for us, we won’t let that happen to us.

Rule 4 – Conquer the Enemy in the Mirror

“John Bogle, the founder of Vanguard, explains in his book, The Little Book of Common Sense Investing, that the average mutual fund reported a 10 percent annual gain from 1980 to 2005 after fees and expenses, but investors in those funds over the same time period only averaged 7.3 percent per year.”

Shocking?  Not to Andrew Hallam.  Why?  Because one of the biggest challenges any investor must overcome, is not the mutual funds they hold, is not the expense fees they pay, it is them.  Investors need to learn to get out of their own way.

Andrew says “I’m not going to suggest that all indexed investors are evolved enough to ignore the market’s fearful roller coaster, while shunning the self-sabotaging caused by fear and greed.  But if you can learn to invest regularly in indexes and remain calm when the markets fly upward or downward, you’ll grow far wealthier.”

By understanding stock market history and managing your own behaviour and emotions accordingly, you can avoid falling victim to market or media craziness.

I guess you don’t have to go too far back into time to see this madness in action.  The U.S. for example, went through some significant growth in the 1990s when many stocks were rising twice as fast as earnings.  We know, logically, this is not sustainable (and wasn’t).  Bubbles will come and go, markets will have peaks and valleys.  Through Great Depressions, World Wars, Oil Crises, Dot-Com Busts, 9-11 Terrorism and the recent Great Recession of 2008-2009,  Andrew reminds us that businesses survive and many continue to thrive.  Instead of fretting over all this, do your best not to give into your irrational short-term behaviour and if anything, do the opposite of what might seem right at the time:

“Think of the stock market as a grocery store filled with non-perishable items.  When prices fall, it’s a good idea to stock up on those products because the prices will inevitably rise again.  A stock market drop is the same as a sale at your local supermarket.”  Witty and well said!

I encourage everyone to get their copy of this book like I did, so you can avoid being schooled by the financial industry and others who want your money.  Better still friends, win Andrew’s book from my blog!

With this blogpost and Part 3 to follow, I’m going to tally up comments and tweets to randomly select one lucky reader or tweeter to send them a FREE copy of Andrew Hallam’s book just in time for Christmas!

There are a few ways to enter:

• 1 entry point: Leave a comment on this post telling me what you liked about this book or why you want it.
• 1 entry point: Retweet this post. If you do, you must include “@myownadvisor” in the tweet so I can find it or you must add the tweet timestamp in the comments below.
• 1 entry point: Link to this post from your site, to your readers. Again, please let me know about this link in the comments below so I can add your point.

Entries will be accepted until midnight December 11, 2011. From a long list of entries I’ll use Random.org to choose our lucky winner! Good luck.