Online Extra: Don't Bank on These Investment Books
With news of corporate layoffs and grim profit outlooks socking your portfolio with a one-two punch, sound advice on investing would be welcome indeed. While amassing wealth quickly seems a more fanciful dream than ever, two new books on the subject -- both from authors whose previous works have ended up on the BusinessWeek Bestseller List -- seemed intriguing. Perhaps they would at least offer some tips to help compensate for recent drastic losses. Unfortunately, neither offers much advice or insight that seems suited for these particularly treacherous times -- or seems likely to send you on the road to riches.
The first book is the fifth installment in Robert Kiyosaki's Rich Dad series. The problem with Rich Dad's Retire Young Retire Rich is that it's more about the psychological exercise of "changing your reality" than actually investing. As in his other books, Kiyosaki uses advice and stories from the "rich dad," his best friend's father, and his own "poor dad."
According to Kiyosaki, a real job yielding a paycheck is a loser's game. "If you want to retire as young and as rich as possible, you will need to consider a world without a paycheck," he writes. That's probably not the most useful or comforting advice for the hundreds of thousands of people who are facing such a situation.
LEAVE ROOM FOR LOSING.
He focuses on how you can "leverage" your mind and create a financial plan to help you get rich quick and retire, or vice versa. His advice is of this ilk: Never say "I can't afford it" or "that's too risky," and don't be afraid to fail: "A winning strategy must include losing," he writes. He suggests reading biographies of such successful rich folk as Henry Ford, John D. Rockefeller, and Bill Gates for inspiration.
He does give some useful tips about his favorite investment areas -- real estate and stock options. But he cautions that you'll need a lot more information than he's offering before actually diving in. And that's his cue to promote his other books as well as his seminars, which cost around $5,000, and board games, which teach how to get out of the "Rat Race" and on to the "Fast Track" (see www.richdad.com).
He also criticizes the "the buy, hold, and pray strategy" with regard to blue-chip stocks that so many financial advisers adhere to, and he suggests that you should look beyond them and the types of mutual funds typically offered by your financial adviser or retirement plan. Given what happened to employees of "blue-chip" Enron, that actually seems pretty prescient.
Instead, he prefers small-caps and buying stakes in companies through private placements or limited parterships before they go public. Small-cap stocks, as measured by the Russell 2000 index, have outperformed large-cap stocks this year. The Russell 2000 index has inched 0.41% higher this year (through Dec. 18), vs. a 13.4% decline in the benchmark large-cap S&P 500 index.
When it comes to mutual funds, he warns about the "tragic flaw" of capital-gains taxes getting passed on to investors when fund managers sell holdings at a profit, and he points out that just because you have different kinds of funds in your portfolio, you can't assume it's really diversified. "The problem the public has is figuring out which of the 11,000 funds is best for them," he gripes.
His advice: "Find competent financial advisers to assist you in developing the right financial plan for you, but the more you educate yourself about each financial investment available the more financially literate you will become." He doesn't really tell you how to do either, so there really isn't much in here in the way of concrete, useful advice.
In Money For Life: The 20 Factor Plan for Accumulating Wealth While You're Young, author Robert Sheard, who used to write for the Motley Fool Web site and wrote The Unemotional Investor, outlines a few steps for accumulating wealth while you're young. Sheard, who now helps run a private money-management firm and plays a lot of golf, says the first step in becoming financially free is figuring out how much income is needed every year to maintain your lifestyle. His "20 Factor Formula" is your annual income requirement (all costs of living, excluding income taxes and any guaranteed income such as pension plan or Social Security) multiplied by 20.
That is "the amount of money you must have invested to live indefinitely on the proceeds of your stock portfolio," he explains. Once you achieve that investment goal, you must limit annual withdrawals to no more than 5% of your total portfolio. And don't forget, you must live within your means and stay away from credit-card debt.
Sheard doesn't give any advice you haven't heard before. He writes that sticking with "very large, very widely followed industry giants" has proven to be a successful way to narrow the wide investment field. He assumes the S&P 500 index will return 11% to 15% a year over the next several decades. Given its performance this year, that seems like a risky bet at best.
For people starting out, he recommends, "The easiest of all strategies is to pile everything into an S&P 500 index fund." Or he recommends buying 20 or so blue-chip stocks directly, using a discount broker and not through a mutual fund. He doesn't like stock mutual funds because historically, only one in five of the actively managed stock funds will keep pace with the S&P 500 index, he says.
ONE GOOD TIP.
He's not a fan of diversification, or bonds. "Buying into every asset class and every style of stock fund in the name of asset protection does little more than cost you a wad of unnecessary fees and is likely to weaken your long-term returns," he explains. And he doesn't like bonds because inflation cuts into long-term returns. And "real estate just doesn't stack up for long-term returns against the stock market," he writes. But pinning your hopes on the S&P 500 doesn't seem likely to make anyone wealthy while young.
Perhaps most valuable are his tips on how to choose an adviser, as he doesn't think most people have the time, discipline, or interest to manage their own investments properly. A good way to find one is getting recommendations from friends and colleagues, he says. You should make sure the adviser's performance over time has beaten the appropriate benchmark, as well as check how the adviser's fee is calculated along with the aftertax and afterfee returns.
In fact, the most useful advice from each book may be that choosing a good adviser is important -- though this is hardly worth buying a book to find out.
By Karyn McCormack
Edited by Patricia O'Connell