As many frugal people know, going to the library is one of the best ways to save money. Not only can read the great classics for free, but you frequently find other good works that have fallen by the wayside for one reason or another. I was looking for such books in the finance section like usual when I came across Douglas R. Andrew’s Missed Fortune 101, which promised a way to wealth beyond the usual methods of real estate and 401k’s and index funds. Intrigued, I took the book home, made myself a bag of popcorn and set down for a good read. To my surprise, I grew increasingly horrified the more I heard about Andrew’s strategy, which I would characterize as a house of cards at best and quicksand at worst.
That said, even the worst book (or scam) has some nuggets of wisdom, and I will mention these first. Andrew raises good points about the bizarre ways we think about the value of home equity. He points out that from the perspective of the bank, when an economic crisis strikes it is in their interest to foreclose on houses that are mostly paid off. They’ve made their money on the property already from the interest you’ve paid on their loans, why not maximize the investment by legally taking the property for almost its entire list value too? They could easily double their money. Conversely, homes mortgaged to the hilt scare banks away because they cannot recapture their investment if the price of the home drops below what is owed. I had never considered this perspective and it illustrates what cruel SOB’s banks are.
A second point he brings up is that when it comes to home appreciation, the amount of equity that you have in the home doesn’t factor into the equation. A home with full equity will appreciate by the same amount as one leveraged to the hilt. This reinforces the belief among real estate investors that you should put as little equity into a property as possible to make it cashflow, and nothing more.
Lastly, he emphasizes the importance of forward thinking when it comes to saving for retirement. I had never really understood the differences between a 401k and a Roth IRA before, but Andrews clearly demonstrates that the utility of once versus the other depends on where you think taxes will be decades from now when you retire. If you think taxes will go up, you should use a Roth IRA and pay a tax now and collect the proceeds later on tax-free (i.e. tax the seed, not the crop from the seed). If you think taxes will be the same or less, you should put money into a 401k tax free and then pay your taxes in the future. You can also have both types of accounts and strategically withdraw from both of them as needed to avoid getting stuck in a higher tax bracket. I congratulate Andrews on explaining these concept so clearly.
Unfortunately, the ideas in the rest of the book are downright treacherous.
The foremost problem is that Andrew advocates for putting your money in a flexible, tax-free investment vehicle…which is interesting, except that the instrument he identifies is life insurance. There are far more knowledgeable experts on this than me, and I highly suggest you read them, but an insurance product is simply not an investment. Your deposits do not grow at market rate because they are primarily based on U.S. Treasury bonds, which have far lower interest rates. The money is also out of your control to a large extent. You can lose a lot of it if the company goes bankrupt. You also need to apply to the company to take out a “loan” from the account’s balance to pay for your yearly living expenses (according to Andrew). But this fact is a key problem: loans can always be denied. If you refuse to pay a fee to get your money, they can turn you down. It takes time to process your request and you may not have the money when you need it. I also have a hard time believing that a company would give out 20 consecutive loans to fund someone’s retirement with no promise of repayment. Plus, even if they permit that today, what’s to stop an insurance company of changing their policies and denying it tomorrow? Nothing, leaving many retirees up shit creek with no paddle. While this strategy not as bad as buying lottery tickets to fund your retirement, no one would ever be able to retire confidently with this scheme.
Another issue with Andrew’s ideas is the notion of a continually growing market and a secure job environment. He encourages readers to have as little equity in their home as possible so that they can have it work elsewhere earning more. For example, if you’re home appreciated by 2% due to inflation, and you can make 7% in the market, you should take the money out of your home and make the 5% difference. This concept is known as arbitrage. While sound in principle, it’s vulnerable to market fluctuations. The value of a house does not change as rapidly as a stock does, so putting all of your money in the market can wreck havoc with your total net worth and retirement. If you don’t have much of your house paid off, it also limits one survival strategy in the face of tough economic times. Since home mortgages are a large part of regular expenses, refinancing to lower your mortgage payment (i.e. the total payment amount, not the interest rate) is one way to tighten your belt and survive on less. After all, how many of us have ever seen a home in disrepair owned by a retiree? They’re so poor they can’t afford repairs, but have plenty for property taxes and utilities and can keep a roof over their head. A home with a low mortgage is still the safest and most secure way of providing for two human needs: warmth and shelter.
Finally, Andrew identifies freedom as having enough liquid cash to wash away any of your liabilities, and in doing so often encourages the reader to push the envelope in stripping money out of their house (and 401k and Roth IRAs) and putting these into other assets. He qualifies this by saying that such a strategy would require “discipline” or even “extreme discipline” to maximize returns, but investment strategies should not be based on ideal human behavior, but on realistic human behavior. That is why strategies based on eliminating liabilities work so well. If you live below your means, establish a consistent savings rate, and invest the profit, you can still live the way you want without the threat of ruin every time the economy turn.
To close, should you ever find yourself in the library’s personal finance section – don’t pick up this book or any like it! Insurance is not an investment vehicle. Your home is a refuge, not a strip mine. And pursuing a strategy that only works in perfect conditions is asking for trouble. There are much more reliable books and ideas out there.