Book Review: The Elements of Investing

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When reading a good book on investing you try to find some thing new you didn't know or understand before. Many of us that read a lot of person finance or investing books find the information repetitive. So finding these treasures, is the fun of reading, to find that little jewel that makes you look up and take notice. For me I have gotten a lot of info and enjoyment from reading a book called "The Elements Of Investing" by Dr. Burton Malkiel and Charles Ellis. 
 
They have written other books on investing notably "A Random Walk Down Wall Street". That book was a hefty read at 400-500 pages. They have written this new book, which is a boiled down version of just the best stuff. In 176 pages they give just the best advice on investing, saving and how to do it. They write about the different types of investing accounts and what type of investments to put in them. 
 
They describe a wide variety of scenarios and stories of investing and how it works into your life. One of the jewels of this book is their discussion on Asset Allocation. It's explained in a clear and concise way. They write how it's not just important but it's importance is paramount to your success in investing. 
 
What they write about in asset allocation is that whatever your ratio of equities to bonds are, it must be one that you will be able to live with when the market is volatile. If it is wrong you may sell at the wrong time totally destroying your hopes for making a growing portfolio. 
 
Another key technique of good investing is re-balancing your account every year. The first of the year would be a good time to do this. The importance of this is if your 50/50, 60/40 or whatever your equities to bond ratio is, if it goes out of balance, you should sell and buy to get it back in balance. The jewel in this strategy is your selling an asset that has appreciated and buying one that is at a low price. Selling high and buying low at a predetermined time. This technique forces you to take profits and buy low. It restricts you to never buy at the top. It makes a contrarian out of you and increases you rate of return. 

Malkiel and Ellis take on the prognosticators who make a living telling us what to do. They denounce the nonsense they try to tell us. While saying they all get it wrong, in fairness they write about a few who called it right. They go on to say there were a few to get it right but so far in advance that following their advice would have been counter productive. 

The good advice kept coming when they said that it was important to have some fixed income in your portfolio to see you through the time of equity turmoil. It will keep you calm until the roller coaster slows down. 

Many times they told how diversity was key to long term profits. Investing in value and growth equities was important for for a well rounded portfolio. Broad diversity also abroad with investing in fast growing economy's like China, India and Brazil. 

They don't recommend SPDR's or Large-Cap funds, they suggest Total Stock Market Funds that include broad array of stocks like one that follows the Wilshire 5000. Large, Mid and Small-Cap stocks all together. Of course they recommend you do all this investing using only Index funds.

I really enjoyed this book. Its a quick read with a good conversational style. I know I'll keep it and reference again.

The Strangest Secret

Back in 1950's there was a motivational speaker called Earl Nightingale. He was working in the radio industry. He had an insurance company and gave motivational talks. In 1956 he gave his most famous talk. It was recorded on vinyl and won a gold record for 1 million copies sold. It was called "The Strangest Secret".  
It's only a 30 minute recording but carries a lot of good ideas. He talks about the reasons some people have success and some fail. He states out of 100 people only 5 will be financially independent. With people living in a country of abundant opportunity, why is there so much failure? 
 
He says what is the definition of success? It's the "Progressive realization of a worthy ideal". Men fail and they do not know why. They even don't know why they go to work everyday. That by their own choice they conform to what everybody else is doing. There is no success in showing up for a job. A true success is "Doing the job you choose to do deliberately". If you chose a job and educate yourself, you are a success. 
 
He says we live today in a world with a plateau of security. Most everything is available to us, we just have to show up to get it. Just having a job is not success. We have no goals and we don't use are minds and think. 
 
He says the key to success is that "We become what we think". You are what your thoughts are. If you think negatively, you will be negative. If you think good you will be good. You have to believe you will succeed then you will. If you can't find the right circumstances then make them. If you think about frustration, fear and anxiety that's what you will become. If you think about nothing you will have nothing. 
 
The trouble with today's economy is it moves at the speed of it's weakest link. It all up to each individual. We have to use are minds and think. 
 
He states that our minds are the most powerful tool we have. What we put in it is what our lives will become. Our minds are like fertile ground. Our minds like the ground doesn't care what we put in it. It will only return what we put in it. Like the ground, if we plant corn we will get an abundance of corn. If we plant a poisonous plant we will get an abundance of poison. Our minds are the same. He says it a law that we cannot change. 
 
We are the sum total of our thoughts. We have a choice, we can put good things in our mind and live successfully or put bad things in our mind and live in the gutter. 
 
I like a lot of what he has to say. It's interesting that these motivational speakers go back this far and the talks are recorded. I found this on YouTube. 
 
He calls this way of living "The Strangest Secret" because it's been known for thousands of years but very few put it into practice. 
 
I can see if you focus on what your doing and have good goals you will be successful. The most interesting item I thought was when he said if you can't find the right circumstances to succeed then make them. That is very important because we blame the circumstances when we fail at something. We blame other people, place and things. Then we quit and are perfectly happy to say we tried. How many times have you heard that or said that yourself. I have done that myself. Did it occur to anyone to go and make their own circumstances. 
 
Earl Nightingale was a famous motivational speaker in his day and probably helped many people. I'm glad I came across his recordings. He made me think in a different way. Maybe that is the way successful people think. If you ever hear successful people who have built large companies from scratch, this is the way they talk. It's different from the rest of 

us. Earl Nightingale says "You have to act like failure doesn't exist". 

Deep In Debt

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How do you help a friend in who is in financial trouble? A friend had his car repossessed. He works with me, he has a good job and is paid well. But he has a problem with handling money. There have been times he would want me to loan him money. I don't loan money and it kind of upset him. 
 
I would talk to him about how I take care of my finances. I told him what satisfaction and peace I had by being organized. I explained how he could apply it to his life. He listened but never took my advice. I tried to keep our conversation on a pleasant level but it got frustrating when he would never follow thru. 
 
Now with the car repoed this was where my patience became lacking. I told him he had to do something different or it would get worse. I said that I cared about him and his family's problems. I said I see you doing things wrong with money. I don't want to butt in, but you need help. What is it going to take to wake you up?
 
You guessed it, he didn't take it all to well. He was quite angry and defensive. He gave me lots of excuses for his behavior. He said it's so bad he can't do anything about it. That he doesn't have the money to work it out. 
 
He was so adamant and entrenched in his opinion. I was afraid this could end our friendship. This had been going on for many years but now it was coming to a head. I thought who am I to to be telling him what to do. I don't have this money thing down perfectly yet. I make mistakes to and I'm still learning. Maybe I should just back off. But as a parent I am not perfect , yet I still correct my children. 

I can see there is a hopelessness he feels about his situation. A comfort zone that is hard to move out of. When finances should be a matter of arithmetic, its mostly becomes a mix of behavior and emotion. 

I'll keep trying to help him. But he's on a progressively downward slope. It's seems the behavior resembles someone that drinks or is on drugs. They don't admit there is a problem.  Then hopefully someday they admit they have a problem and ask for help. All you can do in a situation like this is be patient. You have to realize their success or failure is in their own hands no yours.

Larry Burkett said,"debt is not the problem; it's the symptom." I believe failures with controlling your money is a behavior problem. You have to change behavior. The behavior that can wreck your finances is lack of planning. Planning for today and the future.

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College Students Dont Need Credit Cards

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We have a child heading off to college this week. We are not giving him a credit card to take with him. Most parents equip their child with one. If you do, it would be considered normal. Students are told that the card is only for emergencies. But to a student an emergency is a lack of donuts. You probably are thinking credit cards and students don't mix. Your right, the chance of abuse or immaturity is high. 
 
On campus they are exposed to the wiles of credit card applications. They're offered hats and t-shirts for a filled out credit card application. It's hard to say no to a nice hat. As a good parent it's our job to teach them about credit and making choices about staying out of debt when they have no income. But thankfully there is a new law that says you have to be 21 years old to open a credit card or get an adult co-signer. 
 
Parents hopefully realize co-signing makes you fully responsible if junior defaults on his account. Also if you co-sign you can monitor and keep restrictions on the account. On the other hand if junior doesn't pay, it will reflect on your credit score. 
 
Helping your child is good but doing everything for them is very bad. Sure they need to be educated about the responsibility of credit and debts. Having a credit card without a job is foolish. Having a credit card while in college is not necessary. 
 
Take this opportunity and use this experience to teach them to not use credit like it was cash. Teach them to use cash for purchases. For convenience using a debit card instead of a credit card. Teachable moments like this are great. 
 
Our son worked all summer and put money in the bank to use at school. Mom will be able to monitor this joint account and deposit money to cover expenses. Staying away from credit cards, saving money and living on less than you make is taught in our home. 
 
We won't participate in teaching our children to use credit cards as a crutch because of a lack of planning. The semester ahead has been anticipated and planned for. 

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Book Review: Dave Ramsey's The Total Money Makeover

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Financial Guru Dave Ramsey has made financial fitness cool. Between his radio program, web site and Money Makeover Live Events he 's making new in roads to the main stream culture. I was first exposed to him on his web site when I was looking for some debt help. I believed he was some cult leader trying to sell a book. But under further scrutiny I've been sucked into drinking the Ramsey kool-aid big time. His latest book titled "Dave Ramsey's Total Money Makeover", now updated for 2010, is on bookshelves now.

His book describes a plan for becoming financially fit. Whether your a beginner or on track, this book can help you. Early in the book he describes his financial life. Starting poor and becoming a millionaire in real estate. Losing it all and declaring bankruptcy. He started a  journey to learn the right way to become wealthy. He talked to many people especially millionaire's learning how they made it and how they kept it. He has a heart for people who have lost everything like he did. Even the day they repossessed his child's furniture. His car was also repossessed and electric shut off. He eventually paid of his debts and began to build wealth. Also a career teaching others how to do it right. His book explains this plan with something called the " 7 Baby Steps".

The 7 Baby Steps are:

1. Save up a $1000 baby emergency fund for a rainy day. Cut up all your credit cards and set up a budget. Also never use credit again.
2. Begin the "Debt Snowball Plan" by paying only the minimums on your debts. Writing down your debts smallest to largest. Paying the smallest with all the extra money you can. After that one is done rolling that money and more into the second one. Thus making the snowball bigger. With that ones done, roll that one into the third. By then your making huge payments and accelerating your debt payoff plan.
3. Finish your Emergency Fund by making it 3 to 6 months of expenses in savings.
4. Invest 15% of your income in retirement accounts.
5. Setup college funding for children with Educational Savings account invested in good Mutual Funds.
6. Now work hard to pay off your home with large principle payments till is paid off.
7. Build Wealth and Give.

As he describes his plan, snippets of real peoples testamonials are interspersed throughout the book. Included in the back of the book are budget, debt and planning forms for the reader to use. Dave Ramsey says its how he got to where he is today and it can work for you.  The book is written on a 6th grade level so its easy to understand by anyone. This book takes you by the hand and leads you down the road to success.

From my point of view,I am someone closer to retirement than just starting, I could see it working. Lots of books on personal finance look good on paper, but don't translate well to real life. In writing a book its hard to explain a plan that could apply to everyones situation. This one is so simple it could just work. I reccomend this book its a good read. I have enjoyed the testimonials I can see how they could be inspiring. What didn't I like about this book is baby step 2. Saving 3 to 6 months expenses in savings could be a waste. You could be using it to pay off your house or invest. He also says you should be getting an average of 12 % on your investments. Its doubtful anyone could average that. I wish he would reveal these great Mutual Funds that produce 12%. Always when reading books you take from it the best information. You apply it where appropriate.

There is something about Dave Ramsey's plan that is different from all the other plans. It's the way people talk about it. People will say "I'm on the Dave Ramsey plan." and  "Dave Ramsey got me out of debt". Do you ever hear anyone saying that about Suze Orman.

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Pay Off House Or Invest?

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Pay off your house first or invest. I am trying to figure out what would be best. I've been doing the math on this problem and I have the figures. I have started with just adding $100 to my principle every month. If I do that it takes 5 years off my 30 year mortgage. If I add $200 it takes 9 years off. If I add $300 it takes 11 years off. That's some great results but that's still 19 years away at best. The $300 would be the the money I would have used to invest. So in 19 years I would have a paid off house and no retirement. 
 
Now here's where real life enters the situation. I have a plan to sell my house in 10 years. All the kids will be gone and I can downsize. So wouldn't it be better to use the extra $300 payment and invest it? I did the math and found that the $300 @ 8% would be over $50,000 at the ten year point. This would make sense for me because I have very little saved. If I had a decent amount in retirement then paying it off would make sense. 
 
Generally the results of paying extra on mortgage: 
 

• Less Stress
• No debt
• Money free to invest
• Security
• Never be foreclosed
• Lose tax deduction
• Cash poor
• Less risk

 
To put the money toward investing: 
 

• Always have the cash to access in emergency 
• Greater tax deduction 
• Market may crash and you would lose the investment 
• You could lose your house to foreclosure 
• More risk 

 
There are so many factors to consider. Its not just the math deciding what to do. The math works either way. The decision must go along with your goals. It also depends on where you are in life. Your income either rising or declining. Your age and how much savings you have. 

 
For me the benefits to a paid off house are to far away. My timeline of selling in ten years makes it impractical. My lack of savings makes it impractical. It makes sense for me to invest the money in a retirement account. Saving for ten years then selling my home, buying a smaller home for cash makes sense. No two situations are the same. You should run the numbers first to get the the facts then decide. 
 

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