David Bach’s Start Over, Finish Rich (Part 1)

About a year ago I reviewed Suze Orman’s 2009 Action Plan. I felt certain that it would be the first in a series of annual paperbacks from Ms. Fabulous. Sadly and inexplicably, she seems to have passed on this particular opportunity.Bach 2010

But all is not lost. David Bach, of Latte Factor® fame, has stepped into the breach with Start Over, Finish Rich: 10 Steps to Get You Back on Track in 2010. It works well as a sequel to Orman’s book. Aside from the similar title it shares the same peculiar 4 x 7 1/2 paperback format and a cover laden with gold leaf. (Of course, by law, all personal finance books have some gold leaf on the cover. But this one has an Orman amount.) And Bach cribbed Orman’s gimmick of giving away electronic copies of the book for a limited time to build sales momentum.

But while Orman’s 2009 book had the tone, if not the substance, of a collection of emergency maneuvers to help the reader deal with a calamity, Bach’s 2010 book is more of a pep talk to get the reader back on track now that the calamity is over. Indeed, it is endearingly old school. The goal is to get rich, not merely avoid becoming poor.  And Bach generally resists what must have been a strong temptation to make his book seem more timely by claiming that his advice is specially tailored for times like these.

On the contrary, his message is that what you should do now is what you should have been doing all along. What is a good idea in 2010 was a good idea in 2009 and 2008 and will still be a good idea in 2011 and 2012. I have to admit that I admire that sort of stubbornness, all the more since it limits Bach’s ability to issue new books for 2011 and 2012. Then again, he has never shied away from repeating nearly the same book under a different title.

When the current circumstances are taken into account, Bach tends to use them as a justification for being more aggressive in investments rather than more defensive. He takes the (not unreasonable) position that risky assets, stocks and real estate, are very cheap just now. So go out and buy.

But, at least with regard to real estate, Bach’s endearingly stubborn optimism crosses the line into a foolish refusal to learn from the recent past. He is adamant that if you want to finish rich you must own a house. Long-term, renters lose out. Period.

Over the long haul, homeownership remains one of the best – if not the best – investments you can make. In fact, in the 12 years from 1997 to 2009, U.S. homeowners have seen the values of their properties appreciate by an average of 5.4% a year. (p.119)

It is nice to be reminded that on a twelve year basis houses are still up nicely, but is 5.4% really what the best investment you can make pays? The S&P 500 returned about 5.0% including dividends over the same period. Moreover, that was an atypically good period for houses and a below average one for stocks.

Someday a psychology professor will write a brilliant book explaining how, despite widely available numerical evidence to the contrary, it was once conventional wisdom that owning a house was an easy path to wealth. Then the bubble burst, and the scales fell from everybody’s eyes.

Everybody, that is, besides David Bach. For him it is still 2005. He is dismissive of the idea that there could be an argument against home ownership. “When it comes to real estate, there are three kinds of people: those who own, those who want to own, and those who own and want to own more.” He provides information to help first time buyers get a house with as little as 3% down.

If you already own you will, naturally, want to upgrade. This is a great time to do that. Bach does caution that unless you have the money to carry two houses you should be sure and sell the old one before buying a new one.

That said, you will probably be able to find a tenant if you can afford to rent out your [old] place at 25% below market. In this case, you may not want to sell your old house now, but rather hang on to it until the real estate market recovers – and it will recover. The fact is that if you have the cushion and income to carry two properties comfortably, then this could be a great time for you to rent your home, buy another one to live in, and become a real estate investor. As I said, it’s real estate markets like this one that provide an opportunity for average people to become millionaires. (p.137)

It is not that this was sound advice in 2005 but is no longer sound in 2010. It was a bad idea back then too. But in 2005 everybody else was saying the same dumb things. Today Bach stands out like the last guy driving a Ford Excursion.

To be fair, if you look closely you can find some minor tweaks to Bach’s outlook occasioned by recent events. He says that the proportion of your investment portfolio in bonds should equal your age in percent. That’s about 10-20% more in bonds than he was recommending in The Automatic Millionaire (2004).

And in the obligatory recapping of The Latte Factor® Bach concedes that the 10% investment return assumed in his previous book’s discussions is a bit ambitious. Getting rich from avoiding Starbucks was, you see, first conceived back in the early 1990s, when 10% was a reasonable assumption.

Not to worry, even including recent unpleasantness, for the 42 years ending 2009 the stock market was up an average of 8.76% annually. (42 years being the time the original caffeine addled non-saver had until retirement.)  Compounded over the next 42 years that’s still some serious money. Not quite as much as with 10%, in fact it’s nearly a third less, but still.

Having made this modestly sobering observation Bach immediately proceeds to ignore it and uses 10% in his calculations for the rest of the chapter. Nor does he reconcile these rates of return with his recommendation to have your age in bonds.

But he does have a new Latte Factor® iPhone app. Only $2.99.

[Part 2 here.]

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