Rescue Your Money, by Ric Edelman-a Review

Sleep in Saturday is when I write about something I consider fun – a book review, a new project, or something random from my past.

I’ve heard of Ric Edelman before on the Bogleheads website, as well as on The Money Guy Show podcast, so when I saw this book in the library I decided to pick it up. Checking the price, it looks like the book is selling for $16 list price.

This book is definitely targeted at beginners to the world of investing. Although I found a few interesting nuggets, for me the book was definitely worth only the price I paid for it ($0). He kicks things off by telling you the secret to investing is to “Buy Low and Sell High!”, and then uses the rest of the book to expand on what that does and doesn’t mean. But really, he could have just written this sentence he has at the close of the book and called it a day:

“Build a highly diversified portfolio consisting of low-cost institutional shares and exchange-traded funds. Buy low/sell high through strategic rebalancing, and maintain a long-term investment horizon” (Page 171)

Essentially the book expands on what that means, and shows – through a variety of compelling examples – why you shouldn’t listen to the financial media daily doom and gloom or euphoria. Which one they’re touting depends on the day, and can change week to week. The financial media personifies Warren Buffet’s quote to be fearful when others are greedy, and greedy when others are fearful.

The book is 174 pages long but really could have been boiled down into two pages of content with a few additional pages of charts and examples. I’m sure two pages wouldn’t have been listed for $16 though. There’s a lot of fillers, short paragraphs, double spacing, and the book itself is small. The plus to this is that you’ll finish it quickly. But unless you’re very new to the world of investing you won’t get a lot out of it.

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Note my lovely coffee cup both propping up the book and serving as scale model to show you how small this book is. It was an anniversary gift from my parents – my husband has a matching one that says “Mt. Right.”

I’ve talked a bit about some of the interesting nuggets of information I saw as I read the book, and here they are:

  • The average stock fund returned 8.3% in 2014, but the average investor only made 5.5%. The same is true for bonds – the average bond fund made 3.1%, but the average investor only 1.2%
  • Over 30 years the difference is even more striking. From 1985 through 2014, the average stock fund made 10.7% but the average investor only 3.8%. Bond funds returned 6.9% but investors only saw 0.7% of that. Behavioral economics is a real thing.
  • USA Today published an article titled “No end in sight as day by day Dow sinks away” on October 2, 2002 – the very low of the Dow in the early 2000’s crash.
  • The 15-year performance of the S&P 500 since 1926 is ALWAYS up. But how much its up varies greatly depending on when you started. It was as low as a few percent and up to nearly 20%. Dollar cost averaging over a long period of time will help you capture the good rolling periods and avoid too much damage from the bad ones.
  • The gains in the stock market are very short lived, and if you miss the run-up periods you will badly lag the market returns. If you were invested from 2001-2015, you earned a healthy 10% return on your investments if you did nothing. But if you popped in and out of the market, trying to catch the falling knife, and by doing so missed the best 15 days of the market you made a grand total of – NOTHING. That’s right, the entire return of the S&P 500 over five years was made in 15 days.
  • From 2011 – 2015, 99% of mutual funds were profitable, but only 49% of stocks. So if you pick individual stocks, you had a 1 out of 2 chance of making money-but if you bought a fund, you had a 99 out of 100 chance of making money. I know which one I’d prefer!
  • The average annual return from a mutual fund from 2011-2015 was 9.8% – but the average stock returned a NEGATIVE 6.5%. That’s right, mutual funds made money while stocks on average lost money. That’s because the winners brought up the losers – a rising tide lifts all boats.

Now that I’ve shared those interesting facts, what’s the actual advice you get in this book? Let me use his conclusion sentence to share it with you, saving you $16.

Build a highly diversified portfolio

Own funds or ETF’s that capture the entire market. Make sure you’re invested in stocks and bonds of all kinds, both domestic and international. Don’t forget to include small amounts of other kinds of investments, like commodities, government securities, and real estate. But still own those through funds, and don’t buy and sell them based on what’s going on in the market.

consisting of low-cost institutional shares and exchange-traded funds.

Costs matter. If you’re paying 1%, 2%, or more of your investment in fees every year you’re giving up a big chunk of your returns. As a long-time Vanguard fan girl I’m going to give them a shout-out here as a great place to pick up inexpensive index funds. But other low-cost choices like Fidelity and Schwab are also good choices. You may not have institutional shares, but all these companies have inexpensive funds that get even less expensive when you have more money invested (e.g., Vanguard’s Admiral shares). ETF’s can be a good way to lock in low costs, but be careful about fees for purchasing or selling them

Buy low/sell high through strategic rebalancing,

Ric gives two options for rebalancing. The simple one is based on time – decide ahead of time (NOT during a market run-up or crash) what percentage of assets you want to have in which type of investment. Then every time period (quarterly or annually) check your funds, and rebalance every time things have gotten out of whack. I like to do this annually, myself.

The other method is more complex. Decide on a percentage range for each investment class, and rebalance as soon as the percentage falls or rises out of that range. So say you want to have 10% in small company stocks. You pick a range of 8-12%. So if there’s a crash in small company stocks, and the total falls to 7% of your investments, you would rebalance to put it back at 10%. This method takes constant vigilance, so of course he recommends getting an advisory firm (like his!) to help you with this. It’s a good method, but too complex for my taste, because you have to watch your investments all the time.

maintain a long-term investment horizon

You’re in it for the long haul. Over a long period of time, investments will work for you and make you extra money. Your army of dollar bills (as Brian Preston from The Money Guy would say) is out there working for you. Sometimes they lose the battle and things look bad, but over the long term they will win and recruit even more money to work for you. But you have to let it ride – dollar cost average in, and leave it alone except for occasional rebalancing.

There, now I’ve saved you $16. Again, if you’re new to investing this book would be good to pick up if you can find a deal on it. But if you’re an experienced investor you’re not going to get much out of it, and I’d recommend only picking it up at the library if you can find it.

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