The Book: Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned In School
The Big Idea: You can beat the financial pros and become wealthy by simply investing in low risk, low cost index funds.
The Author: Andrew Hallam worked as a high school teacher but didn’t let his teacher’s salary hamper his dreams of attaining wealth. By controlling his spending habits and investing in index funds he became a millionaire by age of 38, all on a middle class income.
Key Points: The stock market has traditionally earned an 8-10% return over time, despite depressions, recessions, and market declines.
Unfortunately, most people fail to capitalize on these wealth building returns because they (1) are too busy chasing the latest hot stocks (2) give in to fear and panic when the market drops and/or (3) get fleeced by managed mutual funds whose high fees erode any chance of achieving decent returns.
The Review: If I were to tell you that you could become financially independent by investing, you might have a tough time believing me. Fear inducing headlines and first person accounts of incredible stock market losses would make any sane person want to avoid the stock market like the plague.
But, I guarantee the Millionaire Teacher will change your mind about investing. Andrew Hallam’s practical guide shows you how to earn great returns using the stock market without the gut wrenching fear or anxiety. The author’s secret: Live below your means so that you have money left over to invest in index funds.
Hallam spends the first part of Millionaire Teacher extolling the virtues of aggressively paying down debt, learning to control spending, and living below your means. All of this is pretty much standard personal finance information, but it is the next section of the book that’s worth its weight in gold.
Here, Hallam explains how to effectively invest the money you’ll have after you start living below your means, and his advice runs counter to what most of us have been taught. According to Hallam, investors make the mistake of investing their money in actively managed mutual funds, either as part of their 401Ks or at the prodding of their financial advisors.
Mutual funds are accounts in which a manager purchases a basket of stocks for the investor. The thinking is that a mutual fund manager will use his education, knowledge, and experience to purchase the best bag of stocks for you, maximizing your returns.
The problem is that the fees associated with actively managed mutual funds quickly devour your investment returns. Consider the following fees and expenses commonly associated with a managed mutual fund:
Expense Ratio – This is the fancy term for the cost it takes to run the mutual fund, i.e. pay the salaries, utilities, office leases, etc.
12B1 Fees – This is another fancy term for the costs associated with marketing the mutual fund. Yes, you pay to have them market their own mutual fund to you.
Trading Costs – This represents costs that the mutual fund manager incurs to buy and sell the stocks in your basket. These can become substantial.
Load Fee – This is basically the money you pay to actually buy into the fund. It is the sales commission your financial advisor or financial institution receives for selling you the mutual fund.
Despite the numerous and costly fees associated mutual funds, Hallam warns that financial advisors often try their hardest to steer their clients to mutual funds because they often receive a sales commission for getting you to invest in the fund.
Instead of falling into the actively managed mutual trap, Hallam suggests that the average investor should instead purchase low cost index funds. Unlike mutual funds where a manager actively tries to pick the best stocks, with an index fund, you’re simply purchasing all the pieces of stock in a particular index.
A S&P 500 index fund would, for instance, allow you to own a small piece of every one of the 500 largest companies in America. The advantage is that index funds are not actively managed, drastically reducing the amount of fees you pay and improving your returns.
Over years and decades, Hallmam provides evidence showing how index funds far outperform actively managed mutual funds. By starting to invest early – to take advantage of the compounding effect – and investing in mutual funds, Hallman arugues that you can easily create a path that leads to financial freedom.
Should You Buy This Book?: This book is clearly for the person who has already started taking control of their financial life and paid off all high interest debt. Millionaire Teacher will guide that person to the next step, showing them how to invest their money without enduring the high risks typically associated with investing. (In addition to discussing index funds, Hallam also does a fine job of explaining the importance of a diversified portfolio and using bond indexes to further help reduce your risk) For anyone looking to invest and make their money grow, this should be one of the very first books that they read.
BMWK, Have you taken control of your financial life and begun living below your means?