Review: Millionaire Teacher

The Nine Rules of Wealth You Should Have Learned in School

Schools aren’t really about helping people make smart money choices. Learning about laws, human rights, voting procedures, mortgages, and how to get a job is difficult, but possible. Learning how to handle money, however, is like religion -- it's too important to teach in school.

Unfortunately, parents often don’t teach their kids about it either. We treat money like we treat death -- something kids shouldn't have to worry about. The end result is that many people have grown up financially illiterate.

Author Andrew Hallam wanted to change that. He taught personal finance, and practiced what he preached. He lived an extremely frugal life, invested wisely, and became a millionaire by the time he was 40. Here are his nine lessons:

Rule 1: Spend like you want to grow rich.
It's the opposite of spending like you want to look rich. Wealth is not about looking rich -- it's living like you're poor so that you can focus on building passive income. (Contrast this with another public school teacher's experience.)

For the young, frugality is the path to building wealth. “If you want to be wealthy, you dramatically increase your odds if you’re frugal, especially when you’re young.” Perceptions dictate your spending habits, so alter your perspective to be happy with what you have.

Don’t lease or buy a new car. Get a used car. “Broke people think how much down and how much a month.” Rich people think how much they'll spend in total.

Don’t make money easy for your kids. Easy money is wasted money. Everyone likes free stuff, but when it costs you two hours of work, you think about what you buy more carefully.

Rule 2: Use the greatest investment ally you have.
Compound interest. You're looking for the best rate of return on your investment.

There's a small cavet. Look at where rate of return is best. Pay off high interest credit cards before investing (paying off -18% credit card debt is better than getting a +10% rate of return on investment).

Rule 3: Small fees pack big punches.
Invest in an index fund. Fees are a killer, so look for one with low fees. My own eperience is educational.

Although I've invested on my own in the past. At one time, I got a subscription to Barron’s Weekly and bought funds that were featured in stories. It didn’t work out particularly well. In one case (Rio Tinto), it took four years just to break even again.

I’ve also used active fun managers (Edward Jones), but I've found that -- apart from "diversify" -- they don’t really have any better idea themselves. They’ll also charge fees for doing what you could do yourself, and then direct your money toward funds according to their own interests.

Enter the index fund. It’s the easiest way to diversify without administrative fees. Nobel Prize winners have advised as much. There’s simply no way for an investor to do better than a broad-based index fund in the long term.

There’s also a bit of survivorship bias among the returns you’re able to look at. You see the ones who’ve survived. You don’t see the ones that didn’t. “You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.” – Steve Forbes.

Rule 4: Conquer the enemy in the mirror.
Our fears make us irrational. We buy high because we fear missing out, and we miss out because we fear buying on a dip. Dollar cost averaging is better. Time in the market, not market timing.

Rule 5: Build mountains of money with a responsible portfolio. Don't keep all your money in a stock index fund. Keep a percentage -- equal to your age -- in bond index funds to balance your portfolio.

Rule 6: Sample a “round the world” ticket to indexing.
For someone who wants something more than just a stock and bond index funds, there's the "Global couch potato index" consisting of 35% bond index VBMFX, 35% U.S. stock index VTSMX, 30% international stock VGTSX.

Index funds are similar to, but not completely the same as, ETFs. For example, Vanguard S&P 500 Index Fund (VFINX) holds the stock of 500 large American stocks. It's available to anyone with a Vanguard account. VOO is the ETF version. It trades on the stock market an is available to anyone with a brokerage account. But VFINX has expense ratio of 0.16% for amounts under $10k. Above $10k, it’s the same 0.05% as VOO. But buying and selling VOO usually incurs commissions, so thee's that to consider. Also, there's the question of reinvesting dividends.

Rule 7: No, you don’t have to invest on your own.
Market timing tends to mess people up. They invest in index funds, but wait things out when prices are low. That's not the best idea

Better to invest in a time-target index fund, and make monthly contributions without regard for what hte market is like. Vanguard has a line of Target Retirement options like (VTWNX).

Rule 8: Peek inside a pilferer’s playbook. This chapter's about understanding an active management firm’s tactics. Two books to help understand the system: A random walk down Wall Street by Burton Malkiel, and Common Sense on Mutual Funds by John Bogle.

Active fund managers don’t like index funds. They pretend not to understand them, or think they're inferior to their own products. But as Upton Sinclair said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

Rule 9: Avoid seduction.
A promise of a ridiculously high return implies either high or unsustainable risk. Also, gold is a horrible investment. Gold is a horrible investment, but few people understand that. One dollar’s worth of gold in 1801 would be worth $54 in 2016. By comparison, $1 invested in the US stock market (if they’d had index funds back then) would be worth $16.24 million by 2016.

“Gold is for hoarders who expect to trade glittering bars for stale bread after a financial Armageddon. Or it’s for people trying to “time” gold’s movements by purchasing it on an uphill bounce, with the hopes of selling before it drops. That’s not investing – that’s speculating. Gold has jumped up and down like an excited kid on a pogo stick for more than 200 years. But after inflation, it hasn’t gained any long-term elevation.”

This is why there are so many gold commercials on Fox News. They say the world will end under a Democrat, then play gold advertisements to take advantage of viewers' fears. The same is true of financial magazines. They can’t afford to educate because advertisers pay their bills, and fear is a powerful driver toward expert advice.[Soource]

Even shorter version:
1. Think and spend like a billionaire if you want to become rich.
2. Start investing early – after paying off credit card debt and other high-interest loans. (When cost of credit is lower than rate of return.
3. Invest in low-cost index funds instead of actively managed funds. Nobody can consistently pick “winning” actively managed funds ahead of time.
4. Understand stock market history and psychology so you can’t fall victim to the craziness that infect every investing generation (often more than once).
5. Learn to build a complete, balance portfolio of stock and bond index funds that will beat most professional investors after fees.
6. Create an indexes account no matter where you live.
7. Find low-cost financial advisory firms that build portfolios of index funds.
8. Lear to fight an advisor’s sales rhetoric.
9. Avoid investment schemes and scams that might tickle a greed button.
[High school students open investment acounts.]