The Lies About Money

Achieving Financial Security and True Wealth by Avoiding the Lies Others Tell Us-- and the Lies We Tell Ourselves

Ric Edelman

• Publisher: Free Press
• Year: 2007
• ISBN:
  9781416571605
• Topic: Personal Development
• Subtopic: Personal Finance

Ric Edelman, #1 bestselling author of Ordinary People, Extraordinary Wealth, and the personal finance classic The Truth About Money, offers more great wisdom for investors—and a valuable insert of sample portfolios that outline everything you need to know about building the perfect portfolio. Ric Edelman has helped more people achieve financial success than any other practicing financial advisor. Now, Ric reveals the deceptive and manipulative business practices occurring in your retail mutual funds—practices that are causing you to suffer higher fees, greater risks, and lower returns than you realize. In The Lies About Money, he offers you a detailed yet easy-to-follow plan that lets you take back control of your investments—and your financial future.Here, Ric shares his most valuable lessons gained through two decades of working directly with individuals and families. He reveals the lies that have infiltrated your retail mutual funds and retirement accounts and teaches you how to invest your money in your employer retirement plan; how to save for college; and for those who are retired, how to generate more income without sacrificing security. He shows you that proper money management has nothing to do with "hot tips" and everything to do with scientific analysis, bolstered by solid academic research and historical data. Along the way, Ric shows you the secrets to investment success—a long-term focus, the importance of diversification, and the crucial need for (and methods of) portfolio rebalancing.With insight and strategies that will change people's lives, The Lies About Money offers the truth that everyone is looking for.

Chapter 1
The Most Proven, Successful Investment Strategy There Is

In the old days, people bought investments to make money. That seems like an odd statement — why else would anyone buy an investment? — but today’s approach is a fundamental change from the old style.

Sure, you want to make money from your investments. But why? Old-timers invested simply because they knew that doing so would enable them to accumulate more money, and having more money is certainly better than having less money. Thus, they wanted to pick investments that made more money than other investments — and soon, the mantra of “beating the market” became the goal.

We now know that this approach doesn’t always work. First of all, merely making money from your investments doesn’t mean you’re making enough money. That’s why smart investors now evaluate their investment results in the context of goals. Are your investments earning enough? Without goals, you can’t possibly know.

And smart investors have also come to realize that “beating the market” is pointless. This was made painfully clear in 2002, when the S&P 500 Stock Index fell 22%. If your investments fell only 20% that year, congratulations! You beat the market!

This is why you should consider investments to be mere tools. Do not choose them because you think they will beat the market but because they will help you achieve a goal.

This book will show you, therefore, how to assemble a wide array of investments into a cohesive package; a sophisticated portfolio that properly reflects your circumstances, objectives, and tolerance for risk. You’ll learn my philosophical basis for portfolio composition and see how to apply it to your situation. Best of all, the approach laid out in these pages will work for you no matter what your goal is.

So let’s talk about investing in that context. Most people have three primary long-term financial goals. They want to be able to pay for college for their children (and/or grandchildren), retire comfortably and in financial security, and help care for or support elderly parents and other family members as needed.¹

Whether your goals are these or something else, you’ll enjoy the highest possible assurance of achieving them by following four simple steps. These steps offer you, without question, the most effective approach to virtually guarantee long-term financial success:

1. Save regularly.

2. Hold your investments for very long periods.

3. Build a highly diversified portfolio.

4. Periodically rebalance that portfolio.

That’s all there is to it. This is how we’ve always managed our investments and our clients’ investments. This is how we do it today, and it is how we’ll continue doing for decades to come.

The Importance of Saving Regularly

Companies often invite me to speak to their employees. At one recent seminar on financial planning, one worker raised his hand.

“Can you tell me how to get rich?” he asked.

His question evoked laughter among his coworkers, but he wasn’t kidding. I pondered his question for a moment, and considered telling him about semicovariance or the harmonic mean (both of which you’ll learn about later on²).

Instead, I gave him a simpler, more direct answer.

“Get some money,” I replied.

My answer is a sad truth that most financial advisors are not willing to admit. If you don’t have any money, there’s not much that an investment advisor can do for you. All our strategies and methods begin with one assumption: that you have money to invest.

I don’t mean to sound glib, and I don’t want you to mistake my answer as dismis-sive.³ But the truth is that your financial success begins with your willingness to save. You already have the ability; you merely need to be willing to do so. Many people who tell me they can’t afford to save are spending $50 a month or more on cable TV.⁴

Don’t blame your income for the fact that you’re not saving money. Making more money has nothing to do with it. You earn more than you did ten years ago — back then, you longed for the money you’re complaining about today! It’s a common occurrence: A study by the National Bureau of Economic Research shows that high-income households have just as much trouble saving money as low-income households; both groups save pretty much the same amount.

So don’t blame your poor savings on your income. Don’t wait for your income to rise. Just start saving, and save every month.

In Ordinary People, Extraordinary Wealth, I revealed that five thousand ordinary Americans became wealthy simply by saving small amounts of money on a regular basis. You’ll find four ways that you can easily create savings in chapter 49 of The Truth About Money.

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Here are three more ways: Stop smoking, stop drinking coffee, and lose weight. If you buy a pack of cigarettes and a cafe latte every day, you’ll enter retirement with $2.8 million less than you’d have otherwise.⁵

And a study at Ohio State University found that people thirty pounds overweight spend more on health care, earn less money, get promoted less often, and enter retirement with smaller amounts of savings and only half the assets of slimmer people.⁶ Cornell University says that women who are sixty-four pounds overweight earn 9% less than average, and Michigan State University found “consistent evidence of weight discrimination” that reduces the incomes of overweight people. The data also showed that as individuals lost weight, they significantly gained wealth.

So if you want to improve your personal finances, quit drinking coffee, stop smoking, and lose weight.

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If you want to become rich, marry up — I mean, start saving money. Begin by joining your retirement plan at work (see chapter 9). Once you’re contributing the maximum, divert all additional cash to paying off credit cards.⁷ Once that’s done, build cash reserves.⁸ Then, and only then, are you ready to begin your long-term investment program.

Why We’re Long-term Investors

We approach investing with a long-term view, and for one simple reason: It’s the only way you can be sure that you’ll capture the profits produced by the financial markets. Consider the ten-year period ending December 31, 2006. If you had owned the S&P 500 Stock Index⁹ for the entire 2,516 days that the stock market was open for business, you would have earned 8.4% per year.

But as Figure 1.1 shows, if you missed the ten days that the stock market did best, your return would have fallen to 2.2%. It’s true: 74% of the total profits earned in the entire decade occurred in just ten days. And if you had missed the fifteen best days, you actually would have missed the entire profit of the whole ten years!

Figure 1.1

If you want all the profits, you must be invested all the time

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I hope you didn’t buy this book expecting to learn when to buy or sell. No one is able to tell you that, but I’m one of the few willing to admit it.

But even some of my own clients expect me to have a crystal ball. During the three-year bear market of 2000 through 2002, as the S&P 500 declined 43%, I’d get an occasional call from a client, saying, “Hey! My account is going down! I thought you were watching it!” And I’d reply, “I am watching it. I’m watching it go down!”

Did the caller really think I knew that prices were going to drop? Or that I knew when prices would stop dropping? If the client sold merely because prices were down, the only thing we’d know for sure is that the client would be out of the market when prices returned to former levels.

And, of course, a return to former levels is precisely what happened next. Sure, the Dow Jones Industrial Average was 11,287 on April 11, 2000, and it fell to 7,286 by October 9, 2002. But by May 2007 it had risen to 13,200, and everyone who remained invested throughout the entire period enjoyed the entire 17% gain; that short-term decline had no lasting impact on their portfolio.

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Many people don’t realize that stock market returns gyrate. This is quite different from bank CDs (certificates of deposit), where the rate of return is the same from day to day. And not only do stock returns vary constantly, there’s no way to predict when the good returns will occur.

This is demonstrated in Figure 1.2, which displays the calendars for 1997 through 2006. The dots represent the stock market’s fifteen best-performing days, as measured by the S&P 500.¹⁰ As you can see, the occurrences of the dots are quite random. And, amazingly, twelve of the fifteen occurred during the three-year bear market of 2000-2002!

Figure 1.2

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This is question #2. If you haven’t answered question #1, STOP! and turn to page 185.

Q Will you be adding money to this account on a regular basis?

a) Yes................................................turn to page ...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Acknowledgments
• Contents
• Introduction
• Chapter 1: The Most Proven, Successful Investment Strategy There Is
• Chapter 2: The Academics Behind the Strategy
• Chapter 3: Why You Should Use Mutual Funds
• Chapter 4: The Demise of the Retail Mutual Fund Industry
• Chapter 5: How to Beat the Retail Mutual Fund Industry at Its Own Game
• Chapter 6: The Greatest Invention Since Mutual Funds
• Chapter 7: Creating the Investment Portfolio That’s Right for You
• Chapter 8: Three Important Insights to Insure Your Investment Success
• Chapter 9: Applying This Strategy to Your Employer Retirement Plan
• Chapter 10: Applying This Strategy When Saving for College
• Chapter 11: Applying This Strategy When Investing for Income
• Chapter 12: Three More Important Insights to Insure Your Investment Success
• Chapter 13: Implementing This Strategy with Life Insurance
• Chapter 14: Implementing This Strategy with Variable Annuities
• Chapter 15: Should You Adjust Your Portfolio Because Baby Boomers Are Retiring?
• Epilogue: Lessons Learned
• Sources
• For Further Reading
• About the Author
• Index
• Portfolio Insert
• Foot Note