For my 6th read in the 52 Books in 2008 series I selected the newest book by Ric Edelman, The Lies About Money. Edelman takes on the retail mutual fund industry, and the deception that runs rampant in that market. The retail mutual fund industry has certainly evolved over the last couple decades, and it hasn’t all been for good. Besides the countless mismanagement and scandals that have come out in that time period, mutual funds are gouging consumers with fees (hidden and otherwise) that are cutting into investors returns. Edelman is adept at breaking down this rather complex phenomenon into a series of easy-to-understand examples and illustrations. Here’s a look at my favorite sections from the book.
Chapter 1 – The Importance of Saving Regularly
People used to invest to make money. That seems logical, and fundamentally speaking that approach hasn’t changed much over the last thirty or forty years. However, with the disappearance of company pensions, and the questionable solvency of social security funds, many folks are now concerned with making enough money from their investments. Edelman breaks down retirement investing in four basic steps:
- Save regularly
- Hold your investments for very long periods
- Build a highly diversified portfolio
- Periodically rebalance the portfolio
The remaining portion of chapter 1 goes on to explain in detail the benefits of allocating to a diverse portfolio, making regular contributions, and scheduling periodic rebalances of your retirement accounts.
Chapter 2 – The Academics Behind the Strategy
This is the nuts and bolts behind the strategies Edelman and his team of financial planners use at Edelman Financial, the firm he and his wife Jean founded. Math nerds will delight in some complex formula sets used to describe calculations for rate of return, average returns, risk, and risk comparisons between two investments.
Chapter 4 – The Demise of the Retail Mutual Fund Industry
If you are new to the mutual fund industry, or haven’t been watching the news for the past four years, this chapter is a great reminder of the causes behind the fall of the once powerful retail mutual fund industry. Edelman leads off the chapter with the top 25 reasons why the industry collapsed, and many are very astute observations of an industry gone bad. The remaining 44 pages in Chapter 4 are dedicated to recounting the timeline of scandals from October 2003 to May 2007. It’s evidence enough of gross mismanagement that it took 44 pages to list all the major scandals from that three and half year period!
Chapter 8 – Three Important Insights to Insure Your Investment Success
At this point in The Lies About Money you have a solid understanding of how to beat the retail mutual fund industry at its own game, and how to build a well-diversified portfolio for long term investment growth. Chapter 8 provides three “crucial insights” to successfully manage those investments over the long term.
- Never Let Your Investment Decisions Be Determined by Taxes
- Never Let Investment Decisions Be Determined by Fees
- Keep Your Portfolio Consistent with Your Current Circumstances
Chapters 9 – 14 – Applying This Strategy to Your Employer Retirement Plan, Saving for College, Investing for Income, Life Insurance, and Variable Annuities.
Each of these investment types are discussed in detail and an effective strategy for investing in each is developed based on the principles discussed in earlier chapters. I particularly liked the chapter on saving for college, because I personally believe 529 College Savings Plans are headed for a similar demise as the the retail mutual fund industry. They started off strong, but lately many states have taken a beating over offering limited investment options and high management fees. Sounds all too familiar.
Throughout the book readers are introduced to the Edelman Guide to Portfolio Selection®, Edelman’s self-developed maze of questions to workflow you to one of 43 recommended portfolio allocations. I do like the implementation of this guide as the questions appear as footers throughout the book with answers leading you to other pages with a new set of questions. It reminded me a little of first generation computer games, or those self-directed stories where by choosing different options the reader is lead through different storylines.
My overall impression of the book was good. I’ve seen Ric Edelman speak on PBS and CNBC as a participant in money makeovers and discussions on the broader market. I tend to agree with most of his advice when it comes to investments, but we have slightly differing opinions on general finances. In past books he has advocated going into debt for what he deemed justifiable causes. I generally don’t advocate going into debt for any reason, accept maybe buying affordable housing. That said, I thought this book was an outstanding read on mutual funds, their history and their future. Mutual funds have always been one of the tougher investment vehicles for newcomers to understand. The Lies About Money offers a comprehensive introduction to the industry and the strategies needed to successfully invest in them, and their cousin – Exchange Traded Funds (ETFs).