A little while back, I received an email from Rob Pivnick that I much enjoyed. It was short and sweet and to the point. He was looking for my thoughts on his book, and included an e-copy in his first email. If you’re going to ask someone to read something, do it like Rob and get to the point.
Much like his first email, Rob’s book is also short and sweet. It’s the perfect book to review. Short enough to read in one sitting (less than 40 pages), and meaty enough to recommend to children and adults alike.
The book is broken into seven chapters, which I will briefly discuss:
Chapter one starts where all good personal finance books should, at the importance of savings.
There seems to be a big push on personal finance blogs promoting the idea of increasing earnings or finding a “side hustle” to make more money. That’s great, and I think everyone should attempt to increase earnings and enjoy their career. However, it doesn’t matter how much you make if you spend it all. You can’t build wealth without spending less than you make. The less you spend, the more you save (and invest) at any given income level.
Rob does a good job illustrating the low savings rate in the USA as compared to the rest of the world. He talks about compound interest, the importance of saving and investing early, and the rule of 72.
He even includes fun facts such as 1/3 of all Americans have no savings at all. And 1/5 of Americans believe that winning the lottery is the best strategy to fund retirement savings.
In the end, Rob recommends that people save a minimum of 15-20% of their income.
2) Budgeting, Debt, and Goals
Rob begins with a quick word on the dangers of debt. Credit card debt, student loan debt, and even the federal debt levels are mentioned. He does a great job separating the various types of debt and explains that not all debt should be feared, i.e. a college degree for higher wages, and the ability to borrow money to buy a home or start a business.
Rob goes on to discuss budgeting and recommends that people should know roughly how much they make, how much they spend, and why they choose to do so. In other words, people should set goals, and then allocate the money they have available toward those goals.
It’s not a difficult concept, but it’s one that can transform the lives of many Americans.
3) Negotiation and Making Deals
I love that Rob takes a break from saving and investing just long enough to discuss negotiation. It’s a crucial skill that should be practiced from a young age.
Rob encourages small talk, friendliness, the allowance of total silence, and questions that encourage conversation. After implementing these simple techniques, Rob encourages readers to “ask for the moon.” In doing so, you might get what you want. Even if you don’t, oh well.
4) Risk vs. Reward
This chapter discusses how greater investment risk is generally associated with greater returns. Rob goes on to discuss the basics of asset allocation as related to stocks, bonds, and cash.
This is a very good primer for children and adults who aren’t familiar with basic investment concepts related to risk and reward.
5) Active vs Passive Investing
Chapter five is the longest chapter in the book, and for good reason.
Rob begins by defining active and passive investment styles. He even touches on the efficient market hypothesis.
Then he dives into some colorful research (displayed on lovely colored graphs) to explain why active management typically underperforms a passive, index strategy.
In any five year period, only 20-30% of actively managed funds are able to outperform the appropriate index benchmark after considering fees. The longer the time horizon considered, the less likely that any given actively managed fund will outperform the appropriate benchmark. This is well documented in empirical research and well accepted in the finance community.
Rob takes it one step further and does a great job detailing the difficulties of timing the stock market. Only a few trading days account for huge upswings and downswings in markets. It’s nearly impossible to predict those few days in advance.
Rob closes with a few excellent graphs on the importance of minimizing investment fees. The mutual funds and ETFs with the lowest fees consistently outperform their peers with high fees.
That quote pretty much summarizes sound investing. Just keep fees low and broadly diversify in passive indexes. Investment success really is that stupid simple.
This is my favorite chapter in the book, hand down. It’s not long, but it’s packed full of beautiful graphs that really tell a story.
The chapter begins by introducing the concept of diversification and briefly discussing the academic theory that led to our modern day understanding of diversification. Rob then looks at the investment performance of a variety of indexes over a 43 year period starting in 1970 and ending in 2013.
In the first graph, Rob shows the risk and return of a portfolio comprised of the S&P 500 and government bonds.
Then he adds TIPS to the mix, making it a portfolio comprised of three indexes.
Then he adds REITs to the graph.
Then small cap stocks.
Then value stocks.
Then international stocks.
And at each step, he shows a pie graph that describes the portfolio mix, along with the historical investment performance, and historical risk (standard deviation).
What Rob is doing is showing the importance of diversification. The end portfolio comprised of many indexes has less risk than the simple two index portfolio with substantially higher annualized returns.
Rob shows that a $100,000 investment in the two index portfolio would have grown to just over $4 Million in that 43 year span. However, the fully diversified portfolio would have grown to more than $8 Million over that same time period with less risk.
7) Money is Not Everything
Rob closes with a wonderful story that sizes up the meaning of life and the place of money.
Life is short, so you shouldn’t pick a profession that makes you miserable for 40+ years in an attempt to get rich.
The Takeaway Points
There are sub-points in each chapter, which leads to a total of 14 Takeaway points:
- Start saving early, and compound interest will work wonders.
- Set goals, then make a budget and stick with it.
- Pay credit card debt every month in full.
- Everything is negotiable!
- Find out what is important to the other person and ask questions.
- Invest in safe investments if you don’t have a long investment time horizon. Take more risk for long term goals.
- Invest passively in index funds. Don’t try to beat the market.
- Don’t try to time the stock market. Research shows it can’t be done reliably.
- Don’t chase hot tips or big returns.
- The market reverts to the mean.
- Minimize investment expenses. Choose low cost index funds.
- Don’t put all your eggs in one basket. Stay diversified and follow a plan.
- While you should absolutely plan for the future, don’t forget to enjoy life now.
- Pursue your passion rather than money. You’ll do fine.
Rob’s book is a real gem to read. If you don’t take my word for it, you can find other glowing testimonials from the likes of Jim Bogle, Burton Malkiel, and Paul Merriman (Why Rob targeted me for another review is beyond me).
Do yourself a favor and share this book with your children. It doesn’t matter how old they are, they will thank you later. As an added bonus, you will almost certainly learn or re-learn something valuable in the process.