The book Ordinary People, Extraordinary Wealth is one of about a dozen recent books that describes how people of average means became wealthy over time. Like The Millionaire Next Door and Eight Steps to Seven Figures, the book is based on a survey of successful investors. The author, Ric Edelman, a Washington DC area financial planner, surveyed 5,000 of his firm's clients to determine their real-life practices and habits that others could learn from and replicate.
The book is organized around eight "secrets," which are traits and behaviors that Edelman found among many of the respondents. Below is a brief description of each "secret":
They carry a mortgage on their homes even though they can afford to pay it off. The rationale here is that, every dollar that you pay back to a bank is a dollar you can't invest. Mortgages today cost around 6.5% to 7.5%. Paying off a 6.5% mortgage denies you the opportunity to invest the money where it might earn more. The average annual return on large company stocks since 1926 is 11%.
They don't diversify the money they contribute to employer retirement plans. Edelman argues that diversification works best for the management of assets that you already own, not for "new money" that gets saved by payroll deduction. He found that most of his respondents put their company retirement plan money into some combination of U.S. and international stocks, not bond funds or fixed accounts. Since most employers match 401(k) plan contributions 50 cents (or more) on the dollar, even if a 100% stock account falls by 50%, your own contribution remains intact.
Most of their wealth came from investments that were purchased for less than $1,000. More than 95% of Edelman's sample obtained money through their own efforts. They began investing when they were young (average age: 24) and their initial investment averaged $658. More than 9 in 10 saved regularly throughout their lives and they did not allow circumstances to get them off track.
They rarely move from one investment to another. There are two ways to invest: "buy and hold" and market timing. Edelman's clients "bought and held" investments with 85% making three or fewer moves in their portfolios over the past five years. They hung in there in both bull and bear markets and were in the market during its upturns. For the five years that ended on December 31, 1997, the market gained 24.6%. The entire profit was produced in just 40 days, however.
They don't measure success against market indexes like the Dow or the S&P 500. Edelman notes that it doesn't matter how a market index performs-unless your investments consist exactly of that investment (e.g., stock index fund). What matters is that the performance of your investments is matching your "Individual Investor Index." In other words, if you need to earn 8% to 12% to achieve a financial goal and actually earn 14%, it is irrelevant that a stock market index produced 25%. The focus should be on determining whether you are progressing as planned.
They devote less than three hours per month to their personal finances. Edelman's clients did not micro-manage their finances and kept simple financial records. They do not have dozens of accounts to track and they pay attention to important decisions like purchasing insurance.
Money management is a family affair involving their kids as well as their parents. Most respondents talked about money with family members. Parents of young children were teaching them about taxes, charity, and saving.
They differ from most investors in the attention they pay to the media. Edelman's clients avoided "information overload," and the temptation to trade frequently, by not following the market too closely and reacting to every bit of financial news.