How a Second Grader Beats Wall Street Review

I read it a while ago, but I figured it’s about time I posted my review of Allan Roth’s How a Second Grader Beats Wall Street. The premise of the book is that investing is so simple that a second grader can understand it. Also, not only can a second grader understand it, but adults often mess things up because they’re tricked by Wall Street into making complex and risky investment decisions.

In general, Wall Street makes its money when people invest in risky or complex ways. Investors who buy individual stocks and constantly buy and sell help fuel the profits of Wall Street. Wall Street leads us to believe that investing is rocket-science, and without their guidance we will fail. Allan Roth urges the reader to “cut through the baloney that Wall Street wants us to believe and return to basic simplicity.”

Simply put, How a Second Grader Beats Wall Street proposes investing in a very simple portfolio of index funds. Small tweaks can then be made to this portfolio to fit personal circumstances. Emphasis on the “small”. The main reasons that Allan Roth lays our for his approach are:

  • You can’t predict what the stock market is going to do over the short-term.
  • If the people on Wall Street knew how to make guaranteed money, why would they tell you? They would just do it themselves over and over with their own money.
  • Fees significantly impact your long-term returns in a negative way.
  • Most people don’t construct their portfolio in a tax-efficient way.

To keep things very simple, the Second Grader portfolio is constructed using only three index funds. They’re all Vanguard index funds due to the low-fee philosophy than Vanguard pioneered and continues to follow. These three index funds are:

  • Vanguard Total Bond Market Index Fund (VBMFX)
  • Vanguard Total Stock Market Index Fund (VTSMX)
  • Vanguard Total International Stock Index Fund (VGTSX)

How a Second Grader Beats Wall Street ReviewRoth explains his reasons for picking these specific index funds, and in Chapter 5 he goes over the statistics of why this portfolio outperforms the market. I actually keep a very similar allocation in my Roth IRA. I use the three index funds that Allan Roth proposed, and I additionally index in the Vanguard REIT Index Fund (VGSIX) to invest in real estate.

If you’re new to investing and are exploring asset allocations and simplified portfolios, then this is a great book to check out. If you’re an advanced investor who has read at least five other asset allocation books, then this book won’t provide you much except for reconfirming what you already know. However, whether you’re a new investor or a long-time investor, the book is still entertaining and the slant taken is engaging.

Early Retirement Extreme Review

Early Retirement Extreme ReviewSince starting my job in September I haven’t found as much time to read as I would like. I used to knock out at least a book a week, but with the job and my efforts to increase my side income (so that I don’t need the job), it’s been tough. However, a couple of weeks ago I purchased Jacob Fisker’s Early Retirement Extreme and I just completed it. In case you aren’t familiar with Jacob, he writes at EarlyRetirementExtreme.com. If you haven’t seen his blog before, you should check it out. At the least, you should check out his 21 day makeover and attempt to implement at least some of what he talks about. Anyways, onto the actual review.

Overall, I found the book to be good, although I’ll admit it isn’t exactly what I’d expected. When I purchased the book, I actually expected to receive an expanded version of Jacob’s 21 steps to becoming financially independent in five years. If he had indeed done this, his book would have been like almost any other personal finance book. He would have turned a “blueprint” into a longer, marketable book. Instead, Jacob took on the more difficult task of applying his philosophies regarding money with the modern personal finance norms.

As I was reading through the book, there were a number of instances where I thought to myself: “Okay, he’s getting a little carried away” or “Hmm…That’s a bit extreme”. Most of these revolved around the specific ways that Jacob spent less money than everyone else. And I’d expect them to be extreme, since that is the whole idea, right? Now that I live in my own apartment with my girlfriend, I don’t intend on sharing a house with tons of people to get a bit more savings. Sorry, I guess I’m not extreme enough.

Although at some points I thought he was a bit extreme, most of the time I could feel Jacob already having an impact on my thinking. Early on in the book, Jacob reminds us that until recently, people only took out loans to buy assets. A house could fit under this definition, but people also purchased many items on loan for business, such as machinery. An entrepreneur, using other people’s money, could borrow at a reasonable rate, and invest the money in something expected to give an even greater return. Only recently have people adapted this borrowing to apply to consumables. In this case, people are using other people’s money to purchase assets that do not give off cash flows. These “assets” simply depreciate. Honestly, I’d never really thought about borrowing money to buy consumer goods in its historical context. Being only 22, financing a TV or purchasing goods on credit has always been commonplace as far as my limited experience is concerned. Jacob’s comments made me realize just how ridiculous this really is.

Another aspect of the book that I found thought provoking were the two basic ways of becoming financial independent. As you’d expect, you can either do this by reducing your income to a tiny percentage of the average person’s (which is what Jacob is a proponent of), or you can increase your income to be enough above your expenses that you can become financially independent. I, myself, am opting for a mixture of the two. While I have been reducing my debt and also reducing my spending, I am focusing on increasing my income. Some of what Jacob does to cut expenses simply does not interest me. I am cutting back on many expenses, but I am certainly not extreme about any of them.

Even though I may only be aiming for Early Retirement, as opposed to Early Retirement Extreme, Jacob’s book was still very useful and most importantly, thought provoking. I’m sure you’ll see some of his philosophies affecting my financial decisions. I’d recommend it to anyone who is looking to get out of the consumer rat-race and become escape his/her financial worries.

If you’d like to purchase Early Retirement Extreme, I did notice that the price on Amazon is now down $5 from when I purchased it, so you can rest assured knowing you paid less for it than I did. If you’d like to read more about Jacob Fisker before buying the book, start with How Jacob Became Financially Independent in Five Years.