Millionaire Teacher

Spend like a millionaire... if you want to be rich

"One of the surest ways to build wealth over a lifetime is to spend far less than you make and intelligently invest the difference. But too many people hurt their financial health by failing to differentiate between their ‘wants’ and their ‘needs’."- Millionaire Teacher, page 2

If the title of the The Big Idea made you do a double take, you’re not alone. How would spending like a millionaire make you rich? One of the most interesting facts that I found in the book was how the average decamillionaire – a person with a net worth of more than $10 million – paid $41,997 for his or her latest car. The most expensive car that one of the world’s richest men – Warren Buffet – has ever owned is a $55,000 Cadillac. Many of the truly rich in the world spend far less on vehicles than the wannabe rich and this goes to the heart of the The Big Idea – if you want to be a millionaire, don’t act (or look) like a millionaire.

Hallam describes being wealthy as meeting these two criteria:

1. You have enough money to never have to work again.
2. You should have investments, a pension, or a trust fund that can provide you with twice the level of your country’s median household income over a lifetime.

The U.S. median household income in 2013 was approximately $51,000 which means that, according to this definition, your investments need to generate over $100,000 annually to be considered truly rich. This definition is great because it separates the wannabes from the real deal. Even if you appear to be rich with a new Ferrari, a house with a three-car garage, and the latest coolest gadgets, if these consumables create more debt than income, you wouldn’t be considered wealthy – nor should you be!

Not everyone can boast a $100,000+ a year investment fund but I think the lesson here is not to be caught up with the Joneses and mount ourselves with greater debt. Significant wealth can be built over time and it’s a lot easier than you think (see below). But it all starts with the mindset to become rich!

Commit to passive investment with index funds

"Academic evidence suggests that, statistically, buying an actively managed mutual fund is a loser's game when comparing it with buying index funds... the vast majority of actively managed mutual funds will lose to the indexes over the long term."- Millionaire Teacher, page 39

Warren Buffet once said that “people get nothing for their money from professional money managers… the best way to own common stocks is through an index fund.” Owning index funds are far superior to owning stocks, mutual funds, and other types of investment vehicles because they are cheaper, more diversified, and reliable over the long term. Funds like mutual funds also require a large amount of money to keep running. Think about the fund managers, sales people, marketing, etc. that are required to keep a mutual fund on the market? Most of those costs are placed on the investors – cutting down on the returns they make.

“96 percent of actively managed mutual funds underperformed the U.S. market after fees, taxes, and survivorship bias” according to a 15-year-long study published in the Journal of Portfolio Management. You can easily setup a diversified portfolio by purchasing index funds in your home country stock index, an international stock index, and a government bond market index. This should allow you to own a little bit of the world’s stocks and bonds with far smaller risk than owning any individual stock or overpaying on a mutual fund.

It’s not timing the market that matters – it’s time in the market

"Long term, stock markets predictably reflect the fortunes of businesses within them. But over shorter periods, the stock market can be as irrational as a crazy dog on a leash"- Millionaire Teacher, page 68

One of the easiest ways to destroy the wealth that you create in your portfolio is to become a victim of the gyrations of the stock market. By selling low and buying high, you can erode your returns significantly. For example, from 1980 to 2005, the average mutual fund reported an average of 10% annual gain. But investors in those funds over the same time period only averaged 7.3% per year. How did this happen? Investors had sold their shares when prices were low and bought when prices were high. This 2.7% difference can have a significant impact on your bottom line. Over a 25-year period, this is how it might impact your portfolio:

$50,000 invested at 10% a year for 25 years = $541,735.29
$50,000 invested at 7.3% a year for 25 years = $291,046.95
Cost of irrationality = $250,688.34

Over the past 90 years, the U.S. stock market has generated returns averaging 9% annually. That’s a pretty good rate of return as long as you don’t incur the penalty of jumping from different funds and buying/selling at the wrong time. The only time that Hallam suggests going out to actively buy more shares in index funds is when you know the price is low. The prices of funds after the recession in 2008 provided some great bargains and those are the opportunities to buy. As he explains it, “a stock market drop is the same as a sale at your local supermarket”.