Millionaire Teacher

Reject Traditional Schooling's Financial Education Gap

The book argues that traditional schooling fails to teach crucial real-world skills like personal finance and investing. This creates a significant education gap that leaves many people unprepared to manage their money effectively.

The author contends that schools should prioritize teaching students practical money management lessons, such as budgeting, investing in low-cost index funds, and avoiding financial scams. These are the types of timeless wealth-building principles that the book aims to share, in contrast to the academic focus of most school curricula.

By highlighting this educational shortcoming, the book encourages readers to take personal responsibility for developing their own financial literacy, rather than relying on the school system to provide that knowledge. The goal is to empower people to make smart money decisions and build wealth, regardless of what they learned (or didn't learn) in a traditional classroom setting.

Here are examples from the context that support the key insight of rejecting traditional schooling's financial education gap:

• The author notes that higher-level math and Shakespeare are mandatory in most schools, but "learning about laws, human rights, voting procedures, mortgages, how to get a job, and how to invest aren't mandatory." This highlights the lack of real-world financial education in the typical curriculum.

• The author explains that he first started learning about money from a wealthy mentor, and had to read over 400 personal finance books before age 35 to gain the knowledge he shares in the book. This demonstrates the need to go beyond the standard education system to acquire practical financial skills.

• The author describes how he gifted 80 investment books representing 12 different titles to his colleagues at a private school, as they were struggling to understand the financial jargon in the books. This shows how even educated adults lack the basic financial literacy that the education system failed to provide.

• The author highlights how his high school personal finance class was extremely popular, with class sizes swelling beyond the maximum, as students and parents were eager to learn these crucial skills that were missing from their formal education.

• The author notes that one year, 40% of his American students opened index fund portfolios with Vanguard, demonstrating their desire to apply the practical investing knowledge they gained outside the standard curriculum.

In summary, the context provides multiple examples of the financial education gap in traditional schooling, and the author's efforts to fill that gap with accessible, real-world financial knowledge.

Spend to Grow Wealth, Not Display It

Spend to Grow Wealth, Not Display It

The path to true wealth is not paved with flashy displays of luxury, but rather with disciplined spending habits that prioritize long-term financial security over short-term gratification. The key insight here is that appearances can be deceiving - someone who appears wealthy on the outside may actually be drowning in debt, while a more modest lifestyle can conceal a solid financial foundation.

The goal should be to spend like you want to grow rich, not like you want to look rich. This means minimizing unnecessary purchases and redirecting that money towards investments that can compound over time. It's about aligning your spending with your long-term financial goals, rather than trying to keep up with the spending habits of those around you.

Adopting this mindset can be challenging, especially when society constantly bombards us with messages equating material possessions with success. But the true measure of wealth lies not in the flashiness of one's lifestyle, but in the stability and security of one's financial situation. By focusing on building assets rather than accumulating debts, you can position yourself for lasting prosperity.

Here are examples from the context that support the key insight "Spend to Grow Wealth, Not Display It":

• The author recounts how a family in Singapore appeared wealthy on the outside - driving a Jaguar, living in a large house, wearing a Rolex - but their checks were constantly bouncing due to lack of funds. This shows how appearances can be deceiving and do not equate to true wealth.

• The author contrasts this with his own approach, where he focused on minimizing unnecessary purchases in order to maximize his money for investment and growing wealth, rather than trying to display wealth through expensive items.

• The author's father drove an old Datsun car with a hole in the floor, but the author felt "rich" driving it because it was reliable and met his needs, rather than comparing it to fancier cars. This illustrates how perceptions of wealth can be shaped by mindset rather than material possessions.

• The author notes that most millionaires drive relatively modest Toyota vehicles, rather than expensive European luxury cars. This demonstrates that true wealth is built through prudent spending habits, not flashy displays of wealth.

• The author emphasizes that "the surest way to grow rich over time is to start by spending a lot less than you make" and being satisfied with what you have, rather than constantly wanting more. This is a key principle for building wealth.

Harness the Power of Compounding Early

Start Investing Early to Harness the Power of Compounding

The earlier you start investing, the more time your money has to grow through the power of compound interest. Compound interest is the interest earned on interest, which can lead to exponential growth over time. By investing even small amounts consistently from a young age, your money can snowball into a substantial nest egg by the time you retire.

For example, if you invest $5,000 per year starting at age 25 and earn an average annual return of 7%, by age 65 you would have over $800,000. However, if you wait until age 35 to start investing the same $5,000 per year, you would only have around $400,000 by age 65 - half as much! The extra decade of compound growth makes a huge difference.

The key is to start investing as early as possible, even with modest amounts. The sooner you begin, the more time your money has to multiply through the magic of compound interest. This can set you up for financial security and independence later in life. Don't wait - harness the power of compounding by investing early and consistently.

Here are some examples from the context that support the key insight about harnessing the power of compounding by starting to invest early:

• The author explains how $100 invested at 10% annual interest can grow to:

  • $161.05 after 5 years
  • $259.37 after 10 years
  • $1,744.94 after 30 years
  • $11,739.08 after 50 years
  • $204,840.02 after 80 years
  • $1,378,061.23 after 100 years This demonstrates the exponential growth that can occur through long-term compounding.

• The author states that someone who starts investing at age 19 and lives to 90 will have their money compounding in the markets for 71 years. Even if they spend some along the way, they'll want to keep a portion compounding in case they live to 100.

• The author provides a hypothetical choice between investing $32,400 and turning it into $1,050,180, or investing $240,000 and turning it into $813,128. This illustrates how starting to invest earlier with a smaller amount can lead to greater wealth than starting later with a larger amount, due to the power of compounding over time.

• The author cites research showing the US stock market has generated over 9% annual returns on average over the past 90 years, including major crashes. This demonstrates the long-term growth potential of investing in the stock market, especially when starting early.

Index Funds as a Superior Investment Strategy

Index funds are a superior investment strategy compared to actively managed funds. Extensive research and expert testimony show that index funds consistently outperform actively managed funds over the long-term. This is because index funds track the entire stock market, while actively managed funds try to beat the market, often unsuccessfully.

Financial experts like Warren Buffett and Nobel Prize-winning economists like Paul Samuelson strongly recommend index funds as the best way for average investors to grow their wealth. They explain that no one has been able to consistently time the market or pick winning actively managed funds. The fees and costs associated with actively managed funds also eat into returns, further diminishing their performance.

In contrast, index funds provide broad market exposure at extremely low cost. By simply investing in a total stock market index fund, you can match the market's returns. This passive, disciplined approach is the surest path to building long-term wealth, especially for those with average incomes. Avoid the temptation of actively managed funds, which are often pushed by financial advisors with conflicts of interest. Stick with index funds for the highest statistical chance of investment success.

Here are key examples from the context that support the superiority of index funds as an investment strategy:

• Fidelity investors underperformed their actively managed funds by an average of 2.53% per year, while Vanguard index fund investors underperformed their funds by just 0.71% per year. This shows index fund investors have more discipline and better investment outcomes.

• Nobel Prize-winning economist William Sharpe explained that the "arithmetic of active management" means the average actively managed fund cannot outperform the market index, since their fees and costs eat into returns. As he stated, "the conclusions (supporting active management) can only be justified by assuming that the laws of arithmetic have been suspended."

• Harvard Endowment Fund manager Jack Meyer stated that "the investment business is a giant scam" and advised that "you should simply hold index funds. No doubt about it." This expert endorsement highlights the advantages of index funds over active management.

• The context notes that financial advisers have "mental playbooks" designed to deter clients from index funds, as advisers make more commissions selling actively managed funds. This conflict of interest undermines the credibility of advisers who recommend against index funds.

• The context cites multiple studies and experts, such as Vanguard's Bogle, who state that "nobody yet has devised a system of choosing which actively managed mutual funds will consistently beat stock market indexes." This lack of evidence for active management's superiority supports the case for index funds.

Keep Emotional Investing at Bay

Overcome Emotional Investing

Emotions can derail even the best investment strategies. Emotional investing - the tendency to make decisions based on fear, greed, or other feelings rather than logic - is one of the biggest obstacles to building long-term wealth. When markets plummet, fear can tempt you to sell at the worst possible time. When markets soar, greed can lure you into chasing overpriced investments.

The solution is to adopt a disciplined, systematic approach to investing. One powerful technique is dollar-cost averaging - investing a fixed amount at regular intervals, regardless of market conditions. This helps you avoid the pitfalls of emotional investing by taking the emotion out of the equation. You simply keep investing consistently, buying more shares when prices are low and fewer when they're high.

By maintaining this discipline, you can harness the power of the markets over the long term, rather than being at the mercy of your own impulses. Emotional investing may feel exciting in the moment, but it's a surefire path to underperformance. Embrace a systematic approach, and you'll be well on your way to building lasting wealth.

Examples to support the key insight of keeping emotional investing at bay:

• The context describes how most investors exhibit self-destructive behavior by selling funds after they perform poorly and buying them when they become expensive, ensuring they pay higher-than-average prices over time. This is referred to as "buying high and selling low" and is driven by emotional reactions rather than disciplined investing.

• The context cites a Morningstar study that found most investors underperform the mutual funds they own, because they "like to buy high, and they hate buying low" - again demonstrating the impact of emotional, rather than rational, investing decisions.

• The context emphasizes that "most financial advisers have a better chance beating Roger Federer in a tennis match than effectively timing the market for your account." Attempting to time the market by jumping in and out based on short-term movements is an emotional, rather than systematic, approach that usually leads to poor results.

• The context contrasts this with the "simple, annual, mechanical strategy" of staying invested in a total stock market index fund, which avoids the emotional pitfalls of market timing and allows investors to benefit from the long-term growth of the market.

Key terms and concepts:

• Dollar-cost averaging: A systematic investment approach of putting a fixed amount of money into an investment at regular intervals, regardless of the price. This helps avoid the emotional impulses that lead to buying high and selling low.
• Market timing: The attempt to predict and act on short-term movements in the stock market, which the context states is an ineffective strategy that most people and professionals struggle with.
• Total stock market index fund: A low-cost, diversified investment that tracks the overall stock market, providing exposure to the market's long-term growth in a disciplined, unemotional way.

Debunk High-Cost Financial Advice

Debunk High-Cost Financial Advice

Many financial advisers have conflicts of interest that lead them to push expensive, actively-managed investment products that underperform simple index funds over the long-term. These advisers often use misleading sales tactics to discourage investors from choosing low-cost index funds, which provide the best odds of investment success.

Investors should be wary of advisers who try to dissuade them from index funds. These advisers are likely more interested in generating fees for themselves than helping the investor achieve their financial goals. Instead, investors should seek out advisory services that use low-cost index funds and are transparent about any potential conflicts of interest.

There are now many investment firms and coaches that can help investors build and manage simple, low-cost index fund portfolios without the high fees and conflicts of traditional advisers. These services empower investors to take control of their finances and grow wealth more effectively than relying on high-cost, actively-managed funds.

Here are examples from the context that support the key insight of debunking high-cost financial advice and advocating for low-cost, index-based solutions:

• The author recounts how a financially struggling family appeared wealthy on the outside, driving a Jaguar and living in a large house, but their checks kept bouncing due to lack of funds. This illustrates how appearances can be deceiving and that high-cost lifestyles are not always backed by true wealth.

• The author cites an interview with Harvard University's Endowment Fund manager Jack Meyer, who called the investment business "a giant scam" and said "Most people think they can find fund managers who can outperform, but most people are wrong. You should simply hold index funds. No doubt about it." This expert opinion supports the key insight.

• The author explains that financial advisers have "mental playbooks" designed to deter clients from investing in low-cost index funds. For example, they may claim index funds are "dangerous when stock markets fall" and that active managers can time the market, despite evidence showing most active funds underperform during market downturns.

• The author cites a study where actors posing as potential clients found that 85% of financial advisers recommended actively managed funds over index funds, even when shown a portfolio of index funds. This illustrates the conflicts of interest that can exist, as the advisers' compensation depends on selling higher-cost products.

• The author explains that pension fund managers, who are considered the "gods of the industry", still struggle to outperform a simple 60/40 stock/bond index portfolio, despite their expertise and advantages like lower fees. This further supports the key insight about the limitations of high-cost financial advice.

Quotes

Let's take a look at some key quotes from "Millionaire Teacher" that resonated with readers.

Many have jeopardized their own pursuit of wealth or financial independence for the allusion of looking wealthy instead of being wealthy.

Some people focus on displaying a luxurious lifestyle, even if it means overspending and accumulating debt. They prioritize appearances over actual financial stability, mistakenly believing that material possessions are the key to true wealth. In reality, this approach can lead to financial insecurity and hinder long-term prosperity. By prioritizing substance over style, individuals can build a stronger financial foundation and achieve lasting wealth.

35% Vanguard U.S. Bond Index (Symbol VBMFX) 35% Vanguard Total U.S. Stock Market Index (Symbol VTSMX) 30% Vanguard Total International Stock Market Index (Symbol VGTSX)

This investment portfolio allocates 35% to a bond index, providing stable returns and minimizing risk. Another 35% is invested in a total domestic stock market index, capturing the growth potential of the US economy. The remaining 30% is diversified across international stock markets, spreading risk and opportunities globally.

When I tell young parents about the power of compounding money, they often want to set money aside for their children’s future. “Setting aside” money for a child, however, is very different from encouraging a child to earn, save, and invest. ​Giving money promotes weakness and dependence. Teaching money lessons and cheerleading the struggle promotes strength, independence, and pride.

Passing on financial values to the next generation is crucial. Merely giving them money can create a sense of entitlement and reliance, whereas teaching them how to earn, save, and invest fosters independence, self-confidence, and a strong work ethic. By guiding them through the process, parents can empower their children to take control of their financial future and develop a sense of pride in their accomplishments.

Chapter Notes

Introduction

Here are the key takeaways from the chapter:

• The "Don't Stay In School" Rap Video: The chapter introduces a popular YouTube rap video titled "Don't Stay In School" by David Brown, a young rapper. Despite the provocative title, the video is not against school, but rather criticizes the lack of real-world learning in the education system.

• Lack of Personal Finance Education in Schools: The chapter highlights that schools often fail to teach important life skills like personal finance, money management, investing, and job-seeking. These critical topics are often not mandatory in the curriculum.

• The Author's Personal Finance Journey: The author, a high school personal finance teacher, shares his own journey of becoming a debt-free millionaire by the age of 35. He learned these principles not from school, but from a wealthy mentor and extensive personal finance reading.

• The Importance of Personal Finance Education: The chapter emphasizes the importance of personal finance education, as many people, including the author's colleagues, lack the basic knowledge to manage their finances effectively. This leads to problems like debt, financial exploitation, and poor investment decisions.

• The Purpose of the Book: The author wrote this book, "Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School," to share the timeless principles of wealth-building that he believes should be taught in schools. The book aims to provide a clear and accessible guide to personal finance and investing.

• Changes in the Investment Landscape: The chapter notes that the investment landscape has been changing for the better, with the emergence of "Robo Advisers" and improved investment products from firms like Vanguard, which are more aligned with the principles outlined in the book.

• The Author's Approach to Writing the Book: The author explains that he wrote the book based on feedback and input from his colleagues and non-financially minded friends, to ensure the content was clear and accessible to the average person, without the use of financial jargon.

RULE 1 Spend Like You Want to Grow Rich

• Spending Habits and Wealth Building: The chapter emphasizes the importance of spending habits in building wealth. It highlights the distinction between looking rich and being truly wealthy, and cautions against the dangers of living beyond one's means through excessive borrowing and credit card usage.

• The Hippocratic Rule of Wealth: The chapter introduces the concept of a "Hippocratic Rule of Wealth," which suggests that the surest way to build wealth is to spend far less than you make and intelligently invest the difference, rather than succumbing to the temptation of instant gratification and hyperconsumption.

• Defining Wealth: The chapter provides a definition of true wealth, which requires having enough money to never have to work again and having investments that can provide at least twice the level of the country's median household income over a lifetime.

• Investing for Wealth Generation: The chapter explains how investments can generate enough cash flow to support a wealthy lifestyle, using the "4% rule" as an example of a sustainable withdrawal rate from a diversified investment portfolio.

• Car Buying Strategies: The chapter emphasizes the importance of buying used, well-maintained cars instead of leasing or buying new, expensive vehicles, as a way to avoid the significant depreciation costs associated with new car purchases. It provides specific strategies for finding and purchasing reliable used cars at low prices.

• Careful Home Purchases: The chapter cautions against the dangers of taking on excessive mortgage debt, using the 2008-2009 financial crisis as an example of how overextended home purchases can lead to financial ruin. It recommends doubling the interest rate when evaluating the affordability of a home purchase.

• Avoiding Handouts and Developing Self-Reliance: The chapter discusses the negative impact that financial handouts from parents can have on a person's ability to build wealth, and emphasizes the importance of developing self-reliance and responsible spending habits, even when young.

• The Author's Personal Journey: The chapter includes the author's personal story of living frugally and debt-free in his early career, which allowed him to build a substantial investment portfolio and achieve financial independence at a relatively young age.

RULE 2 Use the Greatest Investment Ally You Have

• Compound Interest is the World's Most Powerful Financial Concept: Compound interest is a simple concept where the interest earned on an investment compounds over time, leading to exponential growth. For example, $100 invested at 10% annually turns into $1,378,061.23 after 100 years.

• Starting to Invest Early is Crucial: The earlier you start investing, the more time your money has to compound and grow. Someone who starts investing at 19 and lives to 90 will have 71 years for their money to compound, compared to someone who starts at 50.

• Investing Less Can Lead to Greater Wealth: By starting to invest early, you can end up with more wealth than someone who invests significantly more but starts later. The example shows how someone who invests $32,400 can end up with over $1 million, while someone who invests $240,000 ends up with less.

• Documenting Expenses Enables More Efficient Investing: Tracking your expenses helps you understand your spending habits and identify areas to cut back, allowing you to invest more. Automating investment contributions on payday also helps ensure the money gets invested.

• Pay Off High-Interest Debt Before Investing: It's important to pay off any high-interest debt, such as credit card debt, before investing. The interest rates on credit cards are typically much higher than the returns you can expect from investing.

• Stock Market Returns Over the Long Term: The US stock market has averaged over 9% annual returns over the past 90 years, even including major crashes. Investing in the overall stock market, rather than trying to pick individual winning stocks, is a reliable way to benefit from these long-term returns.

• Dollar-Cost Averaging: Regularly investing a fixed amount, regardless of market conditions, through a strategy called dollar-cost averaging can lead to significant wealth accumulation over time, as demonstrated by the example of investing $100 per month in the US stock market.

RULE 3 Small Fees Pack Big Punches

Here are the key takeaways from the chapter:

• Small Fees Pack Big Punches: Even small fees charged by financial advisors and mutual fund managers can have a significant impact on investment returns over time, costing investors hundreds of thousands of dollars.

• Index Funds Outperform Actively Managed Funds: Index funds that track the overall stock market tend to outperform actively managed mutual funds over the long-term, even when accounting for fees, taxes, and survivorship bias.

• Nobel Prize-Winning Economists Recommend Index Funds: Renowned economists like Warren Buffett, Paul Samuelson, Daniel Kahneman, and Merton Miller have all publicly endorsed index funds as the superior investment approach for most investors.

• Actively Managed Funds Have Hidden Costs: Actively managed mutual funds have several hidden costs that reduce investor returns, including expense ratios, 12b-1 fees, trading costs, sales commissions, and taxes.

• Past Performance Does Not Predict Future Results: Choosing mutual funds based on their past performance is a poor strategy, as funds that outperform in one period often underperform in subsequent periods.

• Advisors Have Conflicts of Interest: Financial advisors often have incentives to recommend actively managed funds that generate higher fees and commissions for the advisor, rather than index funds that are better for the investor.

• Global Investors Face Even Higher Fees: Investors outside the US, particularly in Canada and India, face even higher fees for actively managed mutual funds compared to index funds.

• Index Investing is Simple and Effective: With just three index funds covering the total stock market, international stocks, and government bonds, investors can build a diversified portfolio that is likely to outperform most professional money managers over the long-term.

RULE 4 Conquer the Enemy in the Mirror

• Average investor behavior is self-destructive: The average investor tends to buy high and sell low, leading to underperformance compared to the funds they own. This is because they feel good about their investments when prices rise, so they buy more, and feel bad when prices fall, so they sell or stop contributing.

• Dollar-cost averaging can outperform lump-sum investing: Investing a fixed dollar amount in an index fund each month, regardless of market conditions, can lead to better returns than lump-sum investing, especially during market downturns. This is because dollar-cost averaging allows the investor to buy more shares when prices are low.

• Index fund investors outperform active fund investors: Index fund investors tend to have more discipline and avoid the self-destructive behavior of the average investor. They also benefit from the lower fees of index funds compared to actively managed funds.

• Stock prices are tied to business earnings: In the long run, stock prices must reflect the underlying business earnings. When stock prices rise much faster than business earnings, it leads to an irrational bubble that eventually corrects.

• Timing the market is futile: Trying to predict short-term market movements and jump in and out of the market is extremely difficult and often leads to poor returns. Investors who miss the best trading days can significantly underperform the market.

• Young investors should welcome market downturns: Younger investors who are regularly adding to their investments should view market downturns as opportunities to buy stocks at discounted prices, which can lead to higher long-term returns.

• Emotions can sabotage investment success: Investor behavior is often driven by fear and greed, leading to poor decisions like buying high and selling low. Maintaining discipline and a long-term perspective is crucial for investment success.

RULE 5 Build Mountains of Money with a Responsible Portfolio

Here are the key takeaways from the chapter:

• Bonds as Portfolio Diversification: Bonds can act as a "parachute" for your portfolio when the stock market declines, providing stability and reducing volatility. Bonds don't generate as high returns as stocks in the long-term, but they can help protect your portfolio from large losses during market downturns.

• Bond Index Funds Outperform Actively Managed Bond Funds: Actively managed bond funds, on average, underperform bond index funds due to higher fees. Bond index funds are a better choice for most investors.

• Appropriate Bond Allocation Based on Age: A common rule of thumb is to hold a bond allocation roughly equal to your age (e.g. a 50-year-old would hold 50% bonds). This can be adjusted based on risk tolerance, with more conservative investors holding a higher bond allocation.

• Rebalancing a Balanced Portfolio: Regularly rebalancing a portfolio with stocks and bonds (e.g. 70% stocks, 30% bonds) by selling the outperforming asset and buying the underperforming asset helps maintain the desired asset allocation and forces an investor to "buy low, sell high".

• The Couch Potato Portfolio: A simple, passive portfolio consisting of 50% stocks (total US stock market index) and 50% bonds (total bond market index) that has historically outperformed many actively managed portfolios, especially during market downturns.

• International Stock Diversification: Including an international stock index fund (e.g. 30% of stock allocation) can provide additional diversification beyond just a domestic stock index.

• Avoiding Behavioral Investing Mistakes: Investors tend to make mistakes like chasing past performance by buying more of the asset class that has recently outperformed. A disciplined rebalancing strategy helps avoid these behavioral pitfalls.

RULE 6 Sample a “Round-the-World” Ticket to Indexing

Here are the key takeaways from the chapter:

• Index Funds vs. ETFs: Index funds and ETFs are similar in that they both track a given market index, but they differ in how they are traded. Index funds are bought and sold at the end-of-day price, while ETFs trade like stocks throughout the day. ETFs may have lower expense ratios for small account sizes, but index funds can have the advantage of free dividend reinvestment.

• Global Indexing: Investors around the world can build diversified index fund portfolios, though the specific funds and costs may vary by country. The key is to focus on low-cost, broad market index funds rather than higher-cost, actively managed funds.

• Kris Olson's Global Couch Potato Portfolio: Kris, an American doctor, built a simple three-fund portfolio of Vanguard index funds (35% US bonds, 35% US stocks, 30% international stocks) and rebalanced it annually, achieving strong long-term returns despite the 2008-2009 market crash.

• TD e-Series Funds in Canada: Canadian investors can access very low-cost index funds through TD's e-Series funds, which have expense ratios around 0.4-0.5%. These can be a good alternative to ETFs, especially for smaller account sizes.

• Indexing in the UK: Many UK index funds have high costs and poor tracking of their benchmarks compared to low-cost options like Vanguard's FTSE UK Equity Index fund. Investors should be wary of high-cost "index" funds.

• Indexing in Australia and Singapore: Australian and Singaporean investors can build globally diversified index fund portfolios using low-cost Vanguard ETFs traded on their local exchanges. Singaporeans should be cautious of high-cost "index" funds sold locally.

• Rebalancing: Regularly rebalancing a diversified index fund portfolio (e.g. annually) is an important discipline to maintain the intended asset allocation and risk profile over time.

• Avoiding Emotional Mistakes: Sticking to a disciplined index investing strategy and avoiding emotional reactions to market movements is crucial for long-term investment success.

RULE 7 No, You Don’t Have to Invest on Your Own

Here are the key takeaways from the chapter:

• Vanguard's Target Retirement Funds: These are all-in-one portfolios of index funds that automatically rebalance and become more conservative as the investor approaches retirement. They are a hassle-free way for investors to get diversified exposure to stocks and bonds.

• Vanguard's Full-Service Financial Advisors: Vanguard offers full-service financial planning for a low annual fee of 0.3% of the portfolio's value. This provides comprehensive advice beyond just investments.

• Investment Coaches: Firms like RW Investment Strategies and PlanVision offer guidance to help investors build and maintain their own portfolios of index funds, with the goal of the investor eventually taking over management.

• Intelligent Investment Firms: These firms, also known as "robo-advisors", build and manage diversified portfolios of index funds or ETFs for investors at low cost. Examples include Betterment, Wealthfront, and AssetBuilder.

• Canadian Banks and Index Funds: Canadian banks often push their own actively managed funds instead of low-cost index funds. Investors should be wary of this and seek out independent intelligent investment firms.

• Vanguard UK's Target Retirement Funds: The UK version of Vanguard's Target Retirement Funds provides a similar all-in-one solution for British investors, with automatic rebalancing.

• Intelligent Investment Firms in Australia: Firms like Stockspot, Ignition Wealth, and Vanguard Australia offer portfolios of low-cost index funds and ETFs for Australian investors.

• Singaporean Investors and US Estate Taxes: Singaporean investors should be cautious about using robo-advisors that invest in US-based ETFs, as this could subject their heirs to US estate taxes upon the investor's death. Locally-traded ETFs are a safer option.

• Advisors Pushing Actively Managed Funds: Financial advisors who earn commissions from actively managed funds may try to discourage investors from using index funds. Investors should be aware of this potential conflict of interest.

RULE 8 Peek inside a Pilferer’s Playbook

Here are the key takeaways from the chapter:

• Financial Advisers Have Mental Playbooks to Deter Index Investing: Financial advisers often use various tactics to discourage clients from investing in index funds, such as claiming that index funds are dangerous when markets fall, that you can't beat the market with an index fund, and that they can pick winning actively managed funds.

• Advisers' Claims About Beating the Market Are Unrealistic: For actively managed funds to consistently outperform the market, the adviser, fund company, researchers, and fund managers would all have to work for free, which is not the case in the real world. Advisers who claim they can beat the market are often just well-dressed "Pinocchios".

• Most Financial Advisers Lack Extensive Investment Knowledge: Many financial advisers receive only a few weeks of training and have limited knowledge beyond sales and building trust with clients. They are often more focused on selling products than providing sound investment advice.

• Pension Fund Managers Are More Knowledgeable Than Advisers: Pension fund managers, who manage large sums of retirement money, are at the top of the financial knowledge totem pole. However, even these highly skilled managers often fail to outperform a simple portfolio of stock and bond index funds.

• Index Funds Provide the Best Odds of Investment Success: Investing in a diversified portfolio of low-cost index funds gives investors the best statistical odds of achieving long-term investment success, despite the efforts of many advisers to steer clients away from this approach.

• Advisers May Have Conflicts of Interest: Advisers often have incentives to sell actively managed funds, even though index funds may be a better choice for investors. This can lead to advisers providing biased or misleading information.

• Education is Key to Resisting Adviser Pressure: Becoming educated about the benefits of index investing and the limitations of actively managed funds can help investors stand their ground against advisers who try to steer them away from index funds.

RULE 9 Avoid Seduction

• Avoid Seduction of High-Yield Investments: The author cautions against investing in high-yield, seemingly lucrative opportunities like Insta-Cash Loans, which turned out to be a Ponzi scheme. These investments often promise unrealistic returns and can lead to significant losses.

• Beware of Investment Newsletters and Their Unaudited Track Records: The author shares his experience with the Gilder Technology Report, which made poor stock recommendations that resulted in substantial losses for his investment club. He emphasizes that investment newsletters often exaggerate their performance and should be viewed with skepticism.

• High-Yielding "Junk" Bonds Can Be Risky: The author advises against investing in high-interest corporate bonds, known as "junk bonds," as these companies may be in financial trouble and unable to pay the promised interest.

• Fast-Growing Economies Don't Always Translate to Stock Market Gains: The author cautions against the assumption that investing in fast-growing economies, such as China, will automatically lead to superior stock market returns. Historical data shows that stock market performance in slower-growing economies can sometimes outpace that of faster-growing economies.

• Gold is a Poor Long-Term Investment: The author demonstrates that gold has significantly underperformed the stock market over the long term, making it a poor investment choice compared to diversified stock and bond indexes.

• Investment Magazines Cater to Advertisers, Not Investors: The author explains that financial magazines often feature content that appeals to readers' emotions, such as "how to protect your money," rather than providing objective investment advice, as their primary revenue comes from advertisements by financial services firms.

• Hedge Funds Underperform Index Funds: The author presents data showing that, on average, hedge funds have underperformed simple index funds, even among the largest and most popular hedge funds. He attributes this to high fees, risky investment strategies, and survivorship bias in hedge fund performance reporting.

• Currency-Hedged Index Funds Underperform Unhedged Funds: The author cautions against investing in currency-hedged index funds, as they tend to underperform their unhedged counterparts due to higher fees and the inherent challenges of currency hedging.

• "Smart Beta" Funds May Not Outperform: The author warns that so-called "smart beta" or factor-based index funds, which claim to outperform traditional market-cap-weighted indexes, may not live up to their promises, as their past outperformance may be due to rising valuations rather than sustainable investment strategies.

• Small-Cap Stocks May Not Outperform: The author presents research suggesting that the small-cap stock premium may not be as significant as commonly believed, once adjusting for factors such as higher trading costs and delisting bias.

Conclusion

• Think and Spend Like a Millionaire: The author emphasizes that to become rich, one must adopt the mindset and spending habits of a millionaire, which involves being financially responsible and disciplined.

• Start Investing Early: The author recommends starting to invest early, but only after paying off any high-interest debt, such as credit card debt. This allows for the power of compound interest to work in the investor's favor over the long term.

• Invest in Low-Cost Index Funds: The author strongly advocates for investing in low-cost index funds, as opposed to actively managed funds, as research has shown that it is difficult for actively managed funds to consistently outperform the market over time.

• Understand Stock Market History and Psychology: The author emphasizes the importance of understanding the historical performance of the stock market and the psychological factors that can influence investor behavior, in order to avoid falling victim to the "craziness" that often affects investors.

• Build a Balanced Portfolio: The author recommends building a balanced portfolio of stock and bond index funds, which can help to mitigate risk and outperform most professional investors after fees.

• Create an Indexed Account Regardless of Location: The author suggests that investors can create an indexed account no matter where they live, allowing them to access the benefits of low-cost index investing.

• Seek Low-Cost Financial Advisory Firms: The author recommends finding low-cost financial advisory firms that build portfolios of index funds, as this can help investors avoid the high fees and potential conflicts of interest associated with some traditional financial advisors.

• Learn to Identify and Avoid Investment Schemes and Scams: The author cautions readers to be wary of investment schemes and scams that may appeal to their greed, and to develop the skills necessary to identify and avoid such pitfalls.

• Teach and Pass on What You Learn: The author encourages readers to share the knowledge and principles they have learned with others, in order to help more people achieve financial success and prosperity.

Discussion

What do you think of "Millionaire Teacher"? Share your thoughts with the community below.