Final review: “The New Frugality”

I finished Chris Farrell’s “The New Frugality” a few days ago, and there are things I liked about the book and things I definitely did not like.

I like that there’s an emphasis on frugality, living simply, and examining choices vs. common wisdom. I like that he advocates comparing the cost of renting vs. owning a home and says that it’s not throwing away money to rent–something I’ve felt for a long time but didn’t know how to put into financial terms. I really like that he emphasizes a margin of safety in all money decisions.

I’m leery of his advice to only invest in index funds that track the major indices like the S&P 500. Looking at the return rate of funds like these over the last 10 or more years is not comforting. If I were to be invested in a fund like this, I’d be barely keeping ahead of inflation, if that. I don’t think his comments on actively managed funds are true; there are mutual funds with returns greater than 8% over 10+ years, many with returns around 12%. I think if you understand what you’re investing in, you don’t need to be as basic as Farrell advises.

I’m also critical of anyone who writes a financial advice book but isn’t wealthy. I know that sounds a bit crass, but I am reminded of Dave Ramsey’s saying about not taking advice from broke people. If you aren’t at least doing fairly well financially, why should I listen to you?

I think the perspective on the Great Recession was helpful. The lingering message is that this too shall pass, and to avoid losing your shirt by keeping a portion of money safe in proportion to your age and need.

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4 thoughts on “Final review: “The New Frugality”

  1. I actually agree with his advice that actively managed funds are no good. It jives with just about everything I’ve read from people in the know over the last several years. Like this piece from the NY Times:

    http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html?_r=1

    And yep, the stock market has been through a couple of big bubbles the last 15 years so the indexes don’t look great. Blame the economy. SOME managed funds will do better, but this could easily be a matter of luck rather than skill. If 1,000,000 bet on 15 coin flips, 30 or so of them will get every result right. That doesn’t mean they’re smart or that they’ll get it right next time.

    • I think Chris Farrell actually quotes that same research in the book, it is so familiar. 🙂 But for most investors, they’re not already wealthy and are using investing as a retirement savings strategy. Like the article says, if you invest in mutual funds using money in your IRA, then most of the tax burdens are alleviated since it’s either already been taxed (Roth IRA) or won’t be taxed until taken out (regular IRA).

      I guess the I dislike the advice of only using one type of investment vehicle (mutual funds vs. index funds). I think diversification is the general rule, so having some money in mutual funds, some in index funds, some CDS and bonds, etc. is a good idea. Personally, I’d also invest some ‘fun money’ into individual stocks. I’m pretty skeptical of anyone who says to only invest using one strategy.

      Thanks for the comment!! Good to know I have probably 2 readers. 🙂

  2. I used to think that renting = throwing money away too, but it’s not really that simple. Owning a home is only a good investment if you plan on staying there for a number of years, and even then appreciation is not guaranteed.

    • Yeah, I figure with all of the utilities that our place includes in the rent that our actual cost for the space is quite low. If we rented a house where we were responsible for gas/heat, water/sewer, garbage, snow removal and lawn care, plus the rent and electric bill, we would be spending at least double what we are now.

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