My learnings from the book — The Millionaire Teacher

Andrew Hallam, the author of the book says there are 9 rules one must follow in order to generate wealth. The book recommends index funds, use common sense, and opposes certain type of investment advisors. This summary will cover all 9 rules that the author advocates.

Spend Carefully

In order to generate wealth, you have to create assets and not get into debt. Buying a house is an asset but a fancy car is a debt that will only get in the way of your goal. You should carefully choose where you spend your money and save up to invest the leftover. Try to aim to save at least 10% of your income. As you build your savings, you will be able to make long term investments in the stock market

Magic of Compound Interest

Use investing biggest gift — Compound Interest, to your advantage. The earlier you start investing the greater the returns. For e.g. 100$ invested at the rate of 10% annually would turn in 5 years into $161 and in 70 years it turns into $78,900. So the earlier you get started in investing, the higher the returns. The S&P500 has annually returned 9% historically. Just by investing in an index fund, you can use the magic of compounding interest.

Avoid fees.

Many financial advisors will recommend Actively Managed Mutual funds over index funds. But 90% of the mutual funds don't beat the S&P 500 index over the long term. Over that, they also charge hefty fees usually in the range of 2%. 2% compounded annually eats up massively into your returns. So ideally it's best to just invest in an index mutual fund. Also, remember that advisors make money when they sell you Actively Managed Mutual Funds.

Know thy self

Not being self-aware of your risk appetite can cause you to lose sight of your goal and act in a way that sabotages your returns. Many people believe that they can time the market. Invest when it's low and sell when it's high. But usually, even the best of investors find it extremely hard to do that. Seeing a falling market can be nerve-wracking and can cause you to pull out in fact when you should be investing. So it's important that you understand yourself and never lose your long term horizon. Have cash on the side as an emergency fund so that you have liquidity for emergencies. This will help you weather the downturns. Over the short term, the market may behave erratically but over the long term, the index will always go up.

Portfolio rebalancing

Another way to manage market fluctuation is through portfolio rebalancing. Based on your risk appetite go for 60–40, 80–20, 100 % division of stocks and bonds. Bonds might not have the returns of stocks but if your risk appetite is low then bonds will help dampen the downturn of your stocks. Regularly balance your portfolio of stocks and bonds at least once a year.

Diversify

In investing diversification is the only free lunch. There are a lot of index funds, ETF’s that help you invest in foreign countries. If you are in Canada you can look at Vanguard ETFs — VEQT, VGRO, VBAL that invest across Canada, the USA, Europe, and Asia. You can also have a look at TD’s e-series index funds.

You don't have to invest on your own

If you are not sure how to go about investing or you would not like to spend time looking after your portfolio, it's better to go with an advisor than not investing at all. Remember time in the market is better than not investing at all. The easiest way to invest is to invest in a diversified ETF that is auto rebalanced such as Vanguards Multi-Asset funds such as VBAL and VGRO. If you do not want to buy or sell your self. Try Robo advisors or your bank investment advisors. They can do it for you.

Beware of “Timing the Market” claims

If you decide to invest in an index fund, your financial advisors might give a range of reasons advising against it. The biggest of them all is that actively managed funds can liquidate holdings before the stock market crashes thus preserving your capital. Although it sounds great finding a manager who can time the market is like finding a needle in the haystack. And even if you find one, past performances are hard to mimic in the future. Be wary of advisors who say they understand the economy so well that they can outperform the index. Some financial advisors train for only 2 weeks in financial planning, so make sure that you choose someone who is well educated and has a good reputation.

If it's too good to be true, it not true.

Keep your eye out for scams. You can outperform most investors by participating in index funds. You open yourself up to making mistakes when you seek unconventional investments. Some people look for index funds that suggest they can outdo the market. Never succumb to sucker claims that you’ll make “easy money.”

For instance, emerging markets often offer sensational returns, but they can turn down sharply and quickly. If you don’t like this kind of volatility, choose a “total stock market index” rather than investing excessively in emerging markets. And gold can turn out to be a poor investment. If you invested $1 in gold in 1801, by 2016 your investment would have been worth only $54.