I have recently decided to further educate myself about investing
and retirement, I am 37 with a $25000 portfolio currently
unemployed (hopefully short-term). I remembered hearing about The
Wealthy Barber many years ago, also remember an almost cult-like
atmosphere regarding people who really were into it.
After reading it I am disappointed. The pay yourself first advice
is nothing new nor invented by David Chilton who seems to get all
the credit for it from his fans.
The book is terribly dated, while I was reading I wondered just
when was this written, some of the numbers used over and over were
ridiculous. It was originally published in 1989. The main character
Roy the barber keeps throwing around a twelve percent return on
investment that is not currently achievable and even twenty years
ago was a once in a lifetime blip as the Canadian government
thankfully made a concerted effort to beat-down double digit
inflation and rates in the short-term raised dramatically.
Generally accepted today an outstanding long-term return (20 years
plus) is 7 %. I am afraid readers getting this twelve percent
target in their heads are going to make bad investment decisions
chasing that target. When you know current respected investors are
using a figure like 6 or 7 percent you are more likely to be
skeptical of people promising 10 percent or more. In a major
Toronto daily there are advertisements for returns on investment of
12 to 15 %. Don't fall for it or the lure that the investments are
for accredited investors only or investors with minimum large
investments like $50000 to $100000. Having a large sum to invest
does not mean you are going to be initiated into some special club
where the real deals are, it really means you have to be more
careful of the crooks trying to get their cut of your wealth. I
count active money managers among them. Chilton leaves out of his
outdated book the easiest most simply understood new investment
vehicle to date : Exchange Traded Funds (ETF). Unlike the mutual
fund managers he (Roy) recommends you can set-up an investment
account with your bank or discount broker to trade ETF's and get
maximum diversification for minimum fees. Mutual funds generally
charge 2-3 % fees per year, known as the Management Expense Ratio.
ETF's which are based on whole indexes generally like the
S&P/TSX have MER's of 0.3 - 0.5 % The extra 2% you pay for an
actively managed mutual fund compounded over 20 to 30 years
represents tens of thousands of dollars even for a medium sized
portfolio ($500000)
Another dissapointing example in the book regards real-estate. A
character buys a property with a partner with 20k down and a 57k
mortgage ( no kidding $77000 total - This is 2008 isn't it?
).
The carrying costs are only $400 per month and the home is rented
out for $600 per month. Well lay dee da. What a nice example.
How about some current (2008) examples of succesful real-estate
investment. Show me how someone can purchase and rent a $300,000
home on a $40k income. I have been looking hard at investment
properties for 3 years. I have a nice sum ($25000) for a
down-payment and two-friends with a combined income of 75-80k. We
can't make the numbers work. We of course could buy a place but
being that we have to live there while we are paying for it, there
is no option of renting it out and making easy money like the book
suggests. This review is already long so I will leave you with two
other books I recently read which I think are far better for the
investment side of financial planning. Sleep-Easy Investing, Gordon
Pape. The New Investment Frontier III, Howard J Atkinson.