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« Why Conventional Wisdom Isn't Always the Best Advice | Main | The Portrait of the Perfect Investor »

June 13, 2012

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FMF: "The investing section was dreadful, maybe even harmful. Ugh."

I agree that the investing section of YMYKL was both dreadful and harmful, FMF. I also have to say that it did as much to help me discover effective ways to invest as the saving sections of the book helped me to discover effective ways to manage my money (reading about the Crossover Point was one of the most exciting moments of my life).

Dominguez had a unique insight into the aspect of investing that most needs to be solved. That's the power of that section of the book. Unfortunately. he hadn't thought the matter through carefully enough at the time the book was published. Thus, he did indeed end up writing some very dangerous stuff.

What he was trying to do was to figure out a way to take the risk out of investing. If you are going to quit your job at age 39, as he did, you need to have a SECURE income stream. Most people think you cannot get that from stocks. So he went looking for something else. He proposed Treasury bonds. But Treasury bonds just do not provide the level of return needed. So he went with this irresponsible idea that you don't need to count inflation when determining your investment return. That's foolish and just flat-out wrong.

There is a valid solution to the puzzle Dominguez was trying to solve. Shiller's research shows us how to eliminate the risk from long-term stock investing. If you take valuations into account when setting your stock allocation, you can know in advance your long-term return (you need to be willing to move to non-stock asset classes at times when stock are priced to give poor long-term returns).

Valuation-Informed Indexing is the concept that Dominguez was reaching for but not quite grasping. Thanks for writing a balanced series of articles on YMYL. The book is indeed flawed. It ranks in my mind as the most important personal finance guide ever published all the same.

Rob

As a practical matter, nobody can write a "how to invest" book or chapter that will teach every reader how to earn a risk-free 6% per year. Are there better books on investing? Certainly. The Intelligent Investor is at the top of the list. He didn't write an investing book.

Dominiguez wrote a personal finance book two decades ago that was unique in it's time and stands the test of time. Dominiguez was't aiming for the biggest bank account ever. He only wanted enough.

Two decades after it was written and nearly 15 years after the author died, the first edition still has value because the fundamentals don't change. In my view, the same cannot be said of any other PF book published since.

Catherine --

The fundamentals of The Millionaire Next Door haven't changed...

I'm a reformed spendaholic who's now saving aggressively to retire early. The reason YMOYL was my "Aha!" book because it was the first thing in 35 years that managed to create in me a desire to look beyond today. I have a very go-with-the-flow "Type B" personality, but when I managed - and maybe it did take all 4 chapters to accomplish this - to get the idea buried way down deep in my psyche that saving money would produce real freedom in my life... well, for someone who deeply hates to be tied down to anything, that's what flipped the savings switch in me. I didn't need all the metrics and the investing advice, and I too found the book repetitive and boring in places, but it gave me perspective that I lacked before.

I think people who are naturally frugal, maybe a little anal-retentive, and who are already on "the path" probably will find very little to sing about in this book. However, if you were trying to get someone who's sleepwalking through their financial life to wake up - a potential mate, say - then there's nothing like it. My husband has given thanks many times that I read this book. It took us from daily arguments about money to a place of shared goals and enthusiasm.

My 0.02.

Na, Thank you for taking the time to review this book, "Your money or your life".

Everyone has nice things to say about the book, it's nice to see a contrarian viewpoint.

What made YMOYL so mind-blowing for me was the whole idea of exchanging work/money for time. And that for most is a sea-changing experience.

Again, thank you, I enjoy your blog and I learn a lot.

I got this book a few years ago, and I too thought it was pretty much written for people that are just beginning to think about their money and investing. I didn't even read the whole book. It just seemed like a waste of time. They made some of the simple ideas seem hard, and tried to make the more complex stuff seem easy. It's not a book I would recommend to anyone. Lots of better stuff out there.

I am very familiar with some types of income investments and it's possible to find "Tier 1" corporate and municipal bonds with coupons in the 5%-5.25% range, but you cannot expect to get 6% without dropping down to lower rated bonds.

You can do better than 6% by trading in and out of hi-yield bond mutual funds. However with hi-yield (i.e. junk) corporate bond mutual funds, the catalyst to doing well is a rising stockmarket. In a rising market you get some return from the income the bonds produce but more importantly the value of the bonds also follows the trend of the underlying stock as well. This means that you cannot just sit back and hold junk bond funds forever. You have to own them when the underlying stock is rising and sell them when the underlying stock starts to fall. This is why, at my age, and because I am happy with a consistent 5% return I prefer municipal bonds over corporate bonds. Municipal bonds don't follow the stockmarket's ups and downs, have far less volatility and don't have to be traded. They are also free of federal income tax.

The other popular type of income investment is "rental properties". I don't have any and don't like the concept because I don't like to have complete strangers living in property that I own. If you own rentals you already know that renters range from being great to being scumbags, and its the scumbags that cause all of the headaches for you. You cannot just sit at your computer and manage your rentals the way you can manage your bond investments - instead you have to deal with renters. It's either that or pay a lot of money to a property manager and have him deal with all of the headaches for you.

There's always going to be that one book, or video, or speech, or something that ignited the fire. This book is so loved because so many wayward souls found solid ground reading it. As far as content, nothing is new or radical. Honestly, Benjamin Franklin said all this stiff hundreds of years ago, so no one blogging or writing is really shaking things up much.

You were VERY critical of this book because you were looking at it from an experienced point of view. You write very in depth, detailed articles for the entire spectrum of money savvy people. This book is for beginners! Imagine if you were depressed, living paycheck to paycheck, commuting an hour each way, charging expensive suits to your credit card and borrowing against your matched 401k to lease a BMW when you only made $50k a year. This book would wake you up!

I think you came off too harsh. This criticism is best suited for private conversation between experienced, wise money people. It doesn't serve your image to put it on a blog with new readers coming in. Just my opinion though.

FMF - the Millionaire Next Door isn't personal finance, it's market research.

It's too full of survivorship bias to be widely applicable as personal finance guide.

I agree and that the earlier in life you read this book the better it'll probably appear to you. When you first join the workforce the idea that you trade your time for money may not have dawned on the readers yet. Overall this book appears to be below my level but I haven't read it so I can't say for certain. If you know someone in trouble with money, this may be motivational but doesn't sound to show you how to cut back and begin living the lifestyle that is maintainable.

Catherine --

The principles found in MND work. (FYI, they are detailed here: http://www.freemoneyfinance.com/2012/05/manage-your-finances-and-think-like-a-millionaire.html). I know this because I have applied them to my life and have done quite well financially.

As for the "survivorship bias" that you keep posting about every time I mention the book, I think you need to check out Trent's thoughts here: http://www.thesimpledollar.com/2007/11/11/review-fooled-by-randomness/

In short, any bias the book has in its research does not negate the principles that it highlights, which again, I know for a fact work for people when applied.

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