There are 8 investment secrets to gaining massive wealth, according to the money book Ordinary People, Extraordinary Wealth by Ric Edelman:
1. They Carry a Mortgage on Their Homes Even Though They Can Afford to Pay it Off
This investment secret will probably be the biggest surprise to you, and it’s best explained with an example:
- Persons A and B both have $12,000 in savings.
- Persona A and B both buy a house.
- Person B wants to minimize her mortgage, so she puts down her entire savings as down payment, and opts for a 15-year loan at 6.5%.
- Person B’s monthly payment is $941, but only 57% of that payment is tax deductible interest.
- Person B even adds an extra $50 a month to pay it off faster (which are entirely principal, and provide no tax deduction).
- Person A, on the other hand chooses a 30-year mortgage at 7%, putting down $6,000 and financing the rest.
- Person A’s monthly payment is $758, but 81% of it is interest – So the after-tax cost is $586 a month! This is $204 less than Person B’s monthly payment.
- Person A invests these savings each month for five years – Where Person B (who wants to expedite the mortgage) is paying extra money for the mortgage, Person A is saving.
- Person A accumulates a total of $12,675 just from saving the extra cash that could be going into the mortgage.
How important is this?
- Say they both lose their jobs.
- Person B used all her money on a down payment, and thus has no savings.
- Sure, Person B has a decent amount of equity, but equity won’t pay for household necessities.
- Being unemployed hampers Person B’s ability to refinance, and the banks would probably reject an application for a home equity line of credit.
- The only way to get ahold of the equity is to…. sell the house. But isn’t that what Person B was trying to avoid?
- Person A on the other hand, has enough money with the extra $12,675 to make her mortgage payments for nearly two years!
“Your mortgage is a loan against your income; it is not a loan against the value of the house.”
2. They Don’t Diversify the Money They Contribute to Their Employer Retirement Plans
The investment secret here is that to gain wealth, investors put all their contribution into one asset class.
Diversification is designed for the management of assets investors already have. It also demands that the investments be for long periods of time. The thing is, most of the money will be invested for a long period of time, some of it will not be. This makes diversification a weak strategy for retirement plans.
Then what’s a strong company plan investment strategy? Let’s consider three facts:
- The retirement plan’s investments doesn’t change.
- The frequency of the paycheck doesn’t change.
- The amount of money invested with each paycheck doesn’t change.
These facts considered, investors would be smart to dollar/cost average their current contributions (for the most efficient rate), and diversify the assets they already own.
3. Most of Their Wealth Came From Investments That Were Purchased for Less than $1,000
“The rich get richer, the poor get poorer.”
This statement is often used as part of a political agenda, to endorse the idea of taxing the rich and redistributing their wealth to the poor. But giving poor people money doesn’t make them rich, if it did, all welfare recipients would be millionaires.
Don’t get me wrong though, the statement is still true.
With an entirely different meaning: The reason rich people get richer and poor people get poorer is that rich people continue to do the things that got them rich in the first place, while poor people continue to do the things that got them poor.
Before one mentions inheritances – That is only how rich people stay rich. There’s a smart businessperson who followed this investment secret somewhere in that family history.
The investment secret here is to save. Poor people can give you a dozen sob stories why their poor. A broke person is too busy trying to overcome being broke. Here are a few ways to accumulate wealth easily:
- Save $10 or $25 before you pay your bills each month.
- Stop spending coins! By saving coins, you can easily accumulate $20 a month.
- When you use a coupon, save the discounted value instead of spending it on something else.
One could go on about money saving tips, but what makes this investment secret effective is to put a couple dollars of your paycheck away every month. Invest the money into a mutual fund or stock portfolio, and continue adding a small portion of your paycheck to it periodically.
There is no reason an investor can’t find a reasonable proportion of a paycheck to start saving. Whether it be $1.50 a day, or $500 a month.
“Poor is a state of mind. Broke is a state of wallet.”
4. They Rarely Move From One Investment To Another
This investment secret debunks the myth about the popular sham of market timing.
Unlike a buy-and-hold approach where your investments whether the storm, market timing is when one studies the market and sells an investment as it’s about to lose money. Ric Edelman quickly debunks market timing with some facts from his earlier books:
- Between 1926 and 1997, stocks were profitable 61% of the time. If you took away the top 6 years of returns, the total return would be zero. Removing 8% of the time eliminates 100% of the profits!
- The Federal Reserve Board’s own economic forecasts are never correct. This is the controlling body of interest rates, one would think they would be able to influence the events they’re trying to predict.
- At U.S Trading and Investing Championships (yup, they have those), few succeed. Only 22% of entrants among 3,500 made any money at all. A fraction of that kept pace with or exceeded the S&P 500.
A fraction of the best investors in the country made a (relatively) negligible amount of money. Now what about the average investor? Here were some common occurrences:
- Investors got out when they should have stayed in.
- Investors stayed in when they should have got out.
- Investors incurred taxes and a high amount of transaction costs, further eroding any returns they may have made.
There’s no “get-rich quick scheme.” The best way to accumulate wealth is to invest diligently!
5. They Don’t Measure Their Success Against the Dow or the S&P 500
This investment secret is the simplest: Don’t get caught up comparing apples and oranges.
Investors who do not own a diversified portfolio, own nothing but stock funds. When comparing to the Dow or the S&P 500 indexes, the discovery that some of their funds beat the indexes, while others did not could frustrate investors over “lost opportunities.” This could lead to uninformed or emotionally charged investments.
Those who do have a diversified portfolio, are not invested solely in stocks. Yet they compare their portfolio to the indexes as if they were. This disappointment that their safe and steady approach didn’t match the returns of the stock market could cause them to move their non-stock assets into stock assets.
Both investors are acting emotionally, and could face further dismay when the stock market falls in value.
6. They Devote Less than Three Hours Per Month to Their Personal Finances
Ric Edelman shares four observations he’s made of his clients:
- The less money you have, the more checking and savings accounts you have.
- The less money you have, the more time you spend paying your bills.
- The less money you have, the more you micromanage it.
- The less money you have, the more you act like you have a lot of it.
The investment secret here is : You always need to know each month how much you need, but it takes an hour a month to do it right. Get rid of unnecessary accounts.
7. Money Management is a Family Affair Involving Their Kids as well as Their Parents
The investment secret here is that successful families talk openly about their finances. Talking about money is one of the best ways to evaluate the strength and depth of a relationship. It will help the family achieve greater financial success.
8. They Differ From Most Investors in the Attention They Pay to the Media
According to Ric Edelman’s survey of successful clients:
- 19% read The Wall Street Journal.
- 21% watch CNBC or PBS’ Wall Street Week.
- Less than 20% attended a financial seminar in the last year.
- Barely 15% read one or more personal finance magazines.
- Only 11% watch PBS’ Nightly Business Report.
- 8% or less read investment tips newsletters, business newspapers, or magazines. (For the record : this isn’t investment tips to make money, but eight investment secrets to gain wealth).
Let’s estimate all the investment tips, hot stock picks, columns from the Wall Street beat, and television financial analysts. Paying attention to the media can net you thousands of investment tips.
But these are bogus. Warren Buffett, the world’s most successful investor, says that the best investors might be able to come up with 10 to 20 great ideas in a lifetime.
Ric Edelman says to avoid:
- Following the market to closely.
- The avalanche of information that’s continually produced by the markets and the media.
The investment secret is to invest as much money as you can, as often as you can, for as long as you can. You will then become wealthy.
The best and most guaranteed way to gain wealth: How To Properly Invest With A C.D.
If you enjoyed this, you really need to see The Secret of Asset Allocation.
More awesome investing articles at Rate of Return Finance Journal!