Read an Excerpt

The Lies About Money

Free Press

Introduction

"Why are you calling me? These children are only ten years old. You should be calling the high schools."

The year was 1986, and I was beginning my career as a financial advisor. Because I wanted to teach people about personal finance -- more about that later -- my wife, Jean, and I began offering college planning seminars to elementary-school PTA groups.

Every time I telephoned a PTA president, I got the same reply. "Why are you calling me?" he or she would say. "These children are only ten years old. You should be calling the high schools."

Back then, parents of young children never thought about college. The only issue pertaining to college was choosing one, a decision easily avoided until the child was a junior in high school. It never occurred to parents that college costs were skyrocketing and that they'd need many, many years to accumulate sufficient savings. It might be obvious to us now, but in the 1980s, college planning was a revolutionary idea. In fact, it wasn't just revolutionary -- it was unheard of.

So too were the other aspects of investing and personalfinance. For example, in 1989, as my reputation as a financial educator grew, I was invited for the first time to appear on the radio. After a brief introduction, the host presented me with a thoughtful question. "What's a mutual fund?" he asked.

My, how far we've come. Just two short decades ago, few people had ever heard of financial planning. Employers (not workers!) picked the investments for 401(k) plans; Individual Retirement Accounts were still fairly new (and when surveyed, most people said IRA meant the Irish Republican Army). Nobody worried that Social Security might go broke, and no one had ever heard of long-term care. College planning, retirement planning, estate planning -- none of these concepts was a part of mainstream America.

Today, of course, all of this is well known, and everyone, it seems, knows the importance of saving for the future. This year's newborns will spend more than $250,000 to obtain a college degree, while today's middle class must accumulate millions of dollars if they want to retire in comfort and financial security.

Americans are rising to the challenge. They are spending more attention to personal finance than ever, and the marketplace has responded. When I started offering financial advice and education in 1986, the only consumer resource was Money magazine. Today there are dozens of magazines, two daily newspapers, an entire television news network, many radio programs, and literally thousands of books devoted to the subject. Personal finance peppers the general media as well -- even sitcoms feature story lines around household finance issues. All this demonstrates an unprecedented level of consumer awareness.

And that awareness has led to action. Nearly 60% of all working Americans now contribute part of their paycheck to a retirement plan at work, and tens of millions have an IRA account. Section 529 College Savings Plans are very popular (for reasons you'll read about in this book), and at cocktail parties, people are as likely to talk about mutual funds as sports.

Retail mutual funds are, by far, the most popular investment vehicle in the country -- more than half of all American families, or 54 million households -- own them. With more than 8,400 funds holding $10 trillion in assets, it's not a stretch to say that retail mutual funds are almost as common and indispensable as automobiles.

So. You now understand the need to engage in financial planning, and you're investing to meet your long-term goals of college and retirement. That's great news.

But a new problem has developed, and this is why I've written this book -- a book I never imagined writing. Just as I gave you the truth about money in my first book, I must now alert you to the lies that are placing your financial security in jeopardy. Some of these are lies you tell yourself, while others are lies thrust upon you by those in the financial services industry: the retail mutual fund industry, the brokerage community and its stock brokers, and even some in the media. You need to become aware of these lies so that you can avoid the pitfalls they create.

And there's no greater pitfall than the one created by the retail mutual fund industry. There's no other way to say it: The retail mutual fund industry is ripping you off. You are incurring greater risks, lower returns, and higher fees than you realize, and as a result, you are in danger of not achieving your financial goals.

The situation is shocking -- and no one is more astonished than me. My firm, one of the largest and best-known investment advisory firms in the nation, has placed $4 billion of our clients' assets into retail mutual funds. On my radio and TV shows, through my books, newsletter, website, and seminars, I've been the retail mutual fund industry's biggest proponent. For more than twenty years, I've said that retail mutual funds are the best way to save for college, retirement, and every other important financial goal you can name.

No longer. Jean and I have now sold all our investments in retail mutual funds. All my colleagues at Edelman Financial have done likewise, and our clients are following our advice. You need to sell all your retail mutual funds, too.

All this is painful to say and will certainly be distressing for you to read, but you need to know what's happening with your investments. So excuse me for being blunt, but the fact is that the retail mutual fund industry is now flush with liars, crooks, and charlatans. Daily business activities include deceit, hidden costs, undisclosed risks, deceptive trade practices, conflicts of interest, and fundamental violations of trust -- all at your expense. Since September 2003, the retail mutual fund industry has paid out more than $5 billion in fines, and more than eighty executives have been barred from the industry or thrown in jail. Despite this, state and federal regulators say that investors are still being abused.

The disgrace of the retail mutual fund industry poses a huge challenge for everyday investors like you and me. You're struggling to get your kids through college and provide yourself with a comfortable retirement, and you've been counting on retail mutual funds to help you achieve these goals. Your needs haven't changed, but your strategy must.

And so, in this book I'll reveal exactly how Jean and I have changed the way we manage our own money and how our firm now manages our clients' investments. You'll get complete behind-the-scenes details of our investment strategy -- why we invest with a long-term focus, the importance of diversification, and the crucial need for (and methods of) portfolio rebalancing. Our investment strategy is simple, yet comprehensive and remarkably effective. I'll show you how to develop, implement, and maintain your own portfolio step by step. You'll be surprised at how straightforward it is, and the advice and information in this book makes it easy.

You'll also take a tour of the academics behind the world of investing, to show you that proper money management has nothing to do with "hot tips" and everything to do with scientific analysis bolstered by historical facts. Your fears of investing will melt away as you discover how easy it is to invest successfully, and your enthusiasm will build as I show you how to create your own highly detailed portfolio in sync with the latest academic research -- just like we do for our own clients.

To understand the mess created by the retail mutual fund industry, we'll go back in time to the beginning of the industry, from Alexander Hamilton and Scottish sea merchants all the way to today's "bad boys" who are operating today's retail mutual funds.

Along the way, you'll learn how to invest the money in your employer retirement plan and how to save for college (with a special note for doting grandparents). And for those who are retired, I'll show you how to generate more income than is possible from bank CDs, without sacrificing stability. You'll also see the role insurance and annuities play in the investment game -- watch out for more surprising lies! -- and you'll get my six insights that are essential to your investment success.

And we won't stop there. Not only will you learn everything you need to know about building an investment portfolio, this book will actually build one for you. The Edelman Guide to Portfolio Selection that weaves through these pages -- it starts on page 193 -- will take you on a journey that ends at one of forty-three portfolios. Each one is based on the investment strategies and guidelines used by the Edelman Managed Asset Program, one of the largest and fastest-growing investment services in the country. You'll be able to use this portfolio on your own or in conjunction with your financial advisor, secure in the knowledge that you are enjoying the advantages of highly sophisticated portfolio modeling based on the latest academic research, delivered to you in a completely objective manner.

By the time you're finished reading, you'll know how to avoid the lies about money that are hurting your efforts to achieve your goals, so that you can regain control of your investments and return to the path of financial success quickly, easily, and cheaply, just as we have done for ourselves and our clients.

As astonishing as it is to read that we are completely abandoning the investments offered by the retail mutual fund industry -- investments that we have long admired and endorsed -- our doing so (and my telling you about it) is consistent with how we've always handled our investments.

You see, Jean and I founded Edelman Financial out of self-interest. Like you, we were ordinary consumers and investors, and, just like you, we had been subject to the bad investment advice that is all too pervasive throughout the industry. And, probably like you, we became fed up.

Finally, we said to each other, "Let's figure out how to make the right investment decisions for ourselves. Then we can build our own financial planning practice to share what we've learned." In other words, we went looking for investments that we could buy personally, and then we began to share what we learned with other consumers. Today we provide investment advice to more than eight thousand families.

This explains one of the most unique aspects of our firm: The investments that our clients own are the very same ones that Jean and I and all the financial advisors in our organization own. This approach has always struck us as common sense: If it's good enough for our clients, it ought to be good enough for us, and vice versa.

So, Jean and all the advisors of Edelman Financial, join me in inviting you to read, learn, and benefit from this book.

Copyright © 2007 by Ric Edelman

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Excerpted from The Lies About Money by Ric Edelman Copyright © 2007 by Ric Edelman. Excerpted by permission.
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