Review: Ordinary People, Extraordinary Wealth

Each Friday, The Simple Dollar reviews a personal finance book.

edelmanI’ve been hesitant to review a book by Ric Edelman for two big reasons. First of all, he’s always given off a very strong “I’m a salesman first, an advisor later” vibe – he comes off as a person selling you a product, not a person helping you with advice. Second, every time I’ve dabbled into one of his books, I’ve quickly come across something that’s made my eyebrows shoot up not in a good way – I’ve seen things encouraging people to get into debt and that’s been enough to get me to close the covers.

Yet I often receive emails from readers asking me about Edelman’s advice. “Does he make sense?” “You should review one of his books.” Thus, I decided to give Edelman a fair shake. I headed off to the bookstore, browsed a handful of his books, and selected Ordinary People, Extraordinary Wealth, as it seemed on the surface to be the most interesting one.

Ordinary People, Extraordinary Wealth pledges to contain “the eight secrets of how 5,000 ordinary Americans became successful investors – and how you can too.” Intriguing subtitle. I can’t wait to dig in, so let’s get started.

Looking Into Ordinary People, Extraordinary Wealth

Secret #1
They carry a mortgage on their homes even though they can afford to pay it off.

Edelman basically argues that the concept of a mortgage being a bad thing is a relic of the 1930s, where banks would foreclose on a house on a whim, and the negativity associated with mortgages has hung around this long even though there are a lot of protections for the borrower today.

In a nutshell, Edelman says that having a mortgage with a low interest rate is a very good place to be, indeed, as you can instead use your money for better investments. He very clearly believes in the concept that you shouldn’t pay ahead on your mortgage, but that you should use the money you’d pay ahead to invest.

Secret #2
They don’t diversify the money they put into their employer retirement plans.

The subtitle struck me as quite odd at first, as it seems to fly in the face of common sense. Edelman’s advice, though, is actually pretty common – put your retirement money into a diversity of stocks. In other words, select an index fund or two of stocks in your retirement plan and just dump all of your savings into it.

The subject is actually referring to the idea that people might be way too conservative with their retirement money in fear of losing it in the stock market. However, if you’re investing in a natural diversity of stocks over the long haul, your returns will be very good. Plus, by investing in drips and drops over time (a bit each paycheck), you’re effectively implementing dollar cost averaging along the way, protecting you somewhat from a big downturn in the wide stock market.

Secret #3
Most of their wealth came from investments that were purchased for less than $1,000.

Basically, Edelman states that people who became wealthy did it not by having a ton of money right off the bat. Instead, they just invested a little bit at a time – less than $1,000 a pop. They just did it regularly.

This is something that most people can do – invest $200 or so a month into an index fund and just let it sit there until they need it. By doing this over the long haul, you can build some tremendous wealth by riding the natural growth of the value of your investments.

Secret #4
They rarely move from one investment to another.

The question then becomes what should one invest in? Edelman doesn’t offer a direct answer here, but does suggest that the only clear way to lose is by rapidly shuffling your money around from investment to investment. The route to success is to buy and hold, not to move like a jackrabbit from investment to investment, losing most of your gains to brokerage fees and taxes.

In other words, figure out what you’re going to invest in to begin with, then just steadily invest in that in small increments. This, again, is pretty sound advice – you avoid the costs of brokerage fees and just ride through with the same investments. If you pick some intelligent diversity right off the bat, all you have to do is just stick with it and keep investing over time and you’ll be fine.

Mind Over Money
There’s a section in the middle of Ordinary People, Extraordinary Wealth that focuses on psychological traps that people fall into when investing – things like relying on hindsight too much and so on. If you find this type of material interesting, Eric Tyson’s Mind Over Money (which I reviewed a while back) provides thorough and readable coverage of the connection between psychology and money management.

Secret #5
They don’t measure their success against the Dow or the S&P 500

Instead of using various metrics like the NASDAQ to judge their investment success, they look instead at whether or not their investments are actually achieving the results they need in their life. So what if the S&P 500 has an up or a down day? What’s actually important is that your investments are giving you the returns you need.

I agree with this logic. I think it makes a lot of sense to use your own goals as the only milestone for success. If you spend all of your time chasing the market, you’ll always be dissatisfied and you’ll always believe you can be doing better. Maybe you can, but is it really worth the risk if you’re already achieving your goals?

Secret #6
They devote less than three hours per month to their personal finances.

I think this concept relates very well to the “training wheel” concept I talked about a while back. Basically, Edelman is correct in stating that the people he’s talking about do spend three hours or less a month on their personal finances, but these are people who already have a firm grip on their financial state.

In other words, this isn’t an invitation for people struggling with debt to not pay some serious attention to their money – it’s merely a confirmation that when you’ve got it all figured out, it doesn’t require a tremendous amout of focus.

Secret #7
Money management is a family affair involving their kids as well as their parents.

If there’s one point that Edelman really hits out of the park in this book, it’s this one. You’re doing nothing but hindering your children’s financial education by keeping them oblivious to money. At the same time, you’re also potentially setting yourself up for a nasty surprise if you don’t involve your parents in the financial discussion as well – not only might they have insights, but you might have insights for them as well.

In both cases, conversation is the key. If you’re having difficulty talking to your parents, a great book to look at is Charles Schwab and Carrie Schwab-Pomerantz’s It Pays to Talk; similarly, an excellent book on relating to your children about money is David Owen’s The First National Bank of Dad. Both provide essential advice if you’re looking for ways to get started, but Edelman gets the basic piece completely right – starting the conversation is the key part.

Secret #8
They differ from other investors in the attention they pay to the media.

In other words, they ignore the talking heads on CNBC or the thousands of stock tips floating around out there for the most part. Why? Because it’s information overload and it’s not particularly useful to most of the people Edelman interviewed for this book.

Instead, what little financial reading they do is from reputable sources – The Wall Street Journal or The Economist or BusinessWeek – and they generally don’t even directly apply that information to their financial planning. They just keep going along with what they’ve always done, steady but sure.

Buy or Don’t Buy?

I have deeply mixed feelings about this book. I’ll use Clint Eastwood as my inspiration as I break it down.

The Good Edelman’s advice is quite good throughout the book. He tends to believe in the value of debt and leverage a bit more than I do (or many other personal finance writers do), but his ideas are sensible and are actually based on substance. His writing has a nice conversational tone, too, and if you find personal anecdotes to be powerful, this boat is loaded down with them.

The Bad More than half of this book consists of very brief half-page testimonials from people that Edelman’s financial advising firm has helped. It’s nice to see reinforcement of the principles, but when you strip away all of this, there’s only about ninety pages of content in this book.

The Ugly Edelman goes down the Robert Kiyosaki road and tries very hard to sell his other books. All. The. Time. Half of the footnotes that I checked were merely pitches to buy other Edelman books or allusions to try using his financial advising services. At times, it felt like a sales brochure for Edelman’s firm – not a good vibe to give off.

If you take the basic advice, skim the testimonials, and ignore the footnotes, this book has some very useful information inside. Unfortunately, by ignoring that stuff, you ignore about 80% of the book’s total word count. In other words, this is a great book to browse, but not necessarily a great one to buy.

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  1. Frugal Dad says:

    Timely review for me personally, I just picked up Edelman’s latest book, The Lies About Money, from the library last weekend. It’s currently on deck in my reading list and now I am less than enthused. I’ll give it a try anyway to see what nuggets I can extract. I usually only agree with half of what these “gurus” write anyway, with the exception of books like Your Money or Your Life, where I tend to soak up just about every idea presented.

  2. Mrs. Micah says:

    Re #2: Isn’t an index fund automatic diversification? Suddenly you’ve invested in bits and pieces of 500 stocks.

    I see where he’s going with it, but it seems like he chose an awkward phrasing.

  3. I really like #7. My parents were always very mum about finances and didn’t teach us kids how to manage money or encourage us to save. Most of us turned out ok with regards to financial savviness anyway, but I definitely want to be more proactive when I have kids.

  4. Tyler says:

    I would be interested in examing the “information overload” concept in further detail. I think that a lot..I mean a lot of people try to find the “secret” investing formula for wealth and forget to put anything into proactice to see waht works for them.
    There are a lot of people making a lot of money in different ways, but those ways might not be a fit for you. One has to take action and figure out what strategies best suit their needs and personality. There is no “one size fits all” when it comes to financial strategies.
    Thank you for the review.
    ~Tyler

  5. bushidozen says:

    Keep in mind that the book was published in 2001 (meaning it was written in 2000), before the stock market bubble popped. If you think his words sound unconventional now, they were utter blasphemy during the tech rally.

    Also, while I like Edelman and agree with much of what he has to say, Ordinary People, Extraordianary Wealth was not his best book. I emplore you to read his other book, Discover the Wealth Within You. The first third of this book talks strictly about achieving goals, while the remainder of the book focuses on how to structure your investments to make your goals a reality. I honestly think you will like this book better (with the exception of the advertising footnotes, which he does in all of his books).

    Besides, if you can review, 2 (or more) of Jim Cramer’s and Dave Ramsey’s books, then you can give this guy another shot. :)

  6. Credit says:

    Index funds are not well diversified — especially the Vanguard 500 because it is weighted by large caps and high P/E stocks. If you want to lose money over the next 10-20 years, put everything you have in these funds. This advice seems to be a common myth that is extremely prevalent amongst the PF blog crowd and is quite disturbing. It would be nice to think that thought about investing is not necessary and mindlessly investing in an index fund is a panacea. I would advise that people do a bit more research into investing and balance the advice that Trent by also reading books by John Mauldin and Ed Easterling who provide a different perspective.

  7. mshultin says:

    @Frugal Dad:
    OPEW is the only book that’s heavy on the personal testimonial side of things. All of his books are very conversational in delivery, and full of data and examples.

    @Mrs. Micah:

    Edleman isn’t a big fan of index funds. In several of his books he notes that index funds were not designed as investments, but as indicators of the market, as snapshots. The only association with index funds he uses are ETFs, as they’re currently based on index funds (the first actively managed one was approved for release last week). His firm goes more for institutional mutual funds, and increasingly ETFs.

    @Credit:

    Nicely put.

  8. Kevin says:

    As usual this review does a great job of summing up the gist of a book. I’m happy finally see a review that isn’t all positive — I was starting to think you liked everything!

  9. Trent Trent says:

    Kevin: I’ve had a run of books I’ve liked. I’ve been hardcore negative on books in the past.

  10. Saving Freak says:

    I’ll vouch for Trent being negative in the past. The word ruthless does not begin to describe some of his reviews. I was shocked he had so many in a row that he liked.

  11. It’s a shame he will turn so many people off by trying to sell other books—that is not the way to get new people interested in investing, no matter what the advice is.

  12. Graham Lutz says:

    I tend to like books. I treat books like the grocery store. I take what I need and leave the rest.

  13. Cortni Marrazzo says:

    I agree with his #1 point about investing extra money instead of paying down your mortage. At least for me this is the smartest thing to do because I’m in my mid twenties and my money will go a lot further in investments due to the length of time I have until retirement, instead of paying down my house which I will probably only be in for about 5 years anyhow.

  14. Dough Roller says:

    Trent, I have to agree with your assessment of Edelman’s book. I’ve always found much of his advice to be wrong, ridiculous or irrelevant. Years ago he preached against index funds because of their “hidden” tax time bomb. In other words, because they are run so efficiently, capital gains tax builds up and “surprises” the investor when he or she goes to sell. That’s just silly. As a general rule, I shun personal finance books written by authors who feel the need to put a full body shot of themselves on the front cover.

  15. furgurl says:

    I agree.. with the original comment on Ric edlemans books and pitch,, he is after the buck and recommending planners which I am sure he is getting a commission ,, we all don’t work free,, he sounds great ,, but is he??? I wonder… is he on the Titanic too??? hummmm

  16. furgurl says:

    Ric doesn’t tell you that the ETF’a have commissions for buy and sell unlike a index fund like Vanguard,,,and that eats into the profit,, I liked his The Truth About Money,,, but Lies About Money with all those boring financial plans was awful ,,, so boring,,, he is right ,,,stay in the market ,,,don’t sell your shares … and the boring garbage about his Dogs,, who cares..Don’t buy his book,,, get it from the Library… another hussle,,,another Buck,,, keep rowing Ric ,,, we are all on the titanic… yo ho ho.

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