Automatic Wealth: The Six Steps to Financial Independence (Agora Series) [Paperback]

I found this book slightly disappointing, having read so many 5 star raving reviews of it. It is a worthwhile read, for sure. To me, the book was more of a "how I succeeded" book than I was expecting. He is very specific in recommending those things that have done well for him. He offers many strategies for making more money doing specific types of (high paying) jobs, investing in real estate, and starting or financing small businesses. There is good advice in there, and I think it is worth reading for that, since Mr. Masterson is very successful, and whose example to follow but someone successful?

The book's pitfalls to me center around specific investing advice. For instance, he recommends not investing much in the stock market because of its volatility, and talks about how much he likes investing in bonds, since if you hold them to completion you know what you are getting. This is true, but does not consider the effects of inflation, which makes that steady income worth less (whereas stock valuations and dividends tend to keep up with inflation). This is a perfect example where you have to realize he is telling you what has worked for him, but may not be the best advice for many (although I agree with him the stock market is currently overvalued). He also seems to contradict himself when he uses the stock market's historical average of 10% returns to claim you need a net worth of 10 times your living expenses to retire (or 12 times if you're more conservative). In one breath he is poo-pooing the stock market as an investment, then using its average returns in his retirement calculations.

I also wish he didn't refer to real estate investing as "flipping" real estate. All the advice he gives about real estate is sound, explaining rents need to be able to cover your mortgage payments, and that today we're in a housing bubble (here in San Diego it's a bubble bath!). Then later he estimates an average ROI of 25% from real estate investing. Again, after inflation is taken into account, I doubt this to be an accurate figure (even taking into account the leverage involved) in today's already-too-pricey environment. Personally, I believe there will be many people losing a lot of money (read: bankruptcy) in real estate over the next five years. I kind of wish Mr. Masterson hadn't used the term "flipping" houses, as I expect it to be a term that in five years will be looked back on with regret and disbelief, just like "day-trading" is today five years after the Nasdaq crash.

I've spent a lot of time here explaining my negative comments. I do think he has presented a good way one could get wealthy - one that has been proven, which is even better. So I would say read intently his wealth building strategies, but double-check the math on your own.

Masterson, a self-made millionaire, puts forth a logical approach for building wealth. He believes that a person, who is willing to put in the effort and time, can amass wealth in a period of 7 to 15 years. I think that timing is a bit optimistic, but even if it takes 20 to 25 years, the end result is still the same - financial independence, more freedom and tranquility. Masterson believes one's primary goal is to accumulate enough capital to generate passive income to pay for life's necessities.

This 271-page book is divided into only six detailed chapters. Each one explains one of the six steps to achieving wealth, which are:

1. Face the facts - you won't get rich saving 10% or more in your pension plan or getting measly salary increases.

2. Plan to become wealthy - This is occurs one step at a time and requires planning.

3. Develop specific wealthy habits - work hard, good a what they do, are extraordinary savers, pay themselves first

4. Radically increase your income - to the tune of 25% to 150%

5. Get rich while you sleep - by receiving passive income

6. Retire early - to live the lifestyle you want

Masterson provides specific examples of each of his six steps, as well as personal experiences and appropriate stories. It all seems very real and makes a lot of sense. He mentions that an individual has to make getting rich a priority and be willing to focus his/her energies on building wealth. He also covers the need to have a detailed short-term and long-term written action plan with specific goals.

The author suggests that everyone choose specific lifetime goals; calculate their retirement income needs based upon an analysis of assets and liabilities, and lifestyle requirements. He then recommends that individuals prepare wealth building goals, health goals, personal relationship goals, and personal growth and development goals. These goals should be set for daily, weekly, and monthly timeframes. He is a strong believer in time management and suggests managing time in 15-minute increments so that multiple goals can be worked on during the day.

Masterson believes that real estate can provide significant income and spends time covering how to invest in real estate and what the income should look like. Although he does mention investing in the stock market, he only invests 2% of his money in it. He is reluctant to plunk down a chunk of his money in stocks because they are too risky for him. Obviously, looking back the stock market's devastation during 2000-2002 and the real estate market's appreciation during that time period, his advice seems right on the mark.

He feels the stock market is a very difficult place to make money, and that investors should tread lightly there. For those who invest, he strongly urges them to cut losses at a specific level (25% for him), and use stop loss orders and trailing stops to protect profits. He does not recommend investing in the market unless you have at least $100,000 to invest.

He is a strong believer in investing a sizable portion of income in side businesses and local real estate to build wealth over time. He prefers investing in income generating real estate, buying rental properties, and buying fixed income investments - holding bonds to maturity to avoid any principal losses due to rising interest rates.

Overall, Masterson does a masterful job of explaining the steps necessary to accrue wealth and enjoy life. For those who believe that investing in the stock market is a critical element in the process, as I do, I recommend a newly published book by Paul Merriman titled "Live it Up without Outliving Your Money" which provides a conservative way to build a highly diversified portfolio that has outperformed the market with less risk.

Author clearly has a strong understanding about how to build wealth long-term through focused habits and methodology of thinking, but stay away from his "stock investment" advice and his retirement withdrawal strategies - they're very misinformed. Clearly the author has never heard of Modern Portfolio Theory nor does he make any consideration to market volatility, inflation, and it's affects on withdrawal.If one thinks they can withdrawal more than 4% of their initial portfolio adjusted for inflation for the rest of their life, they'll be in a very bad situation 20+ years into retirement. The author misses the boat here big-time - dangerously so.

Advice: Buy the Book for its foundational principles of wealth building and his excellent assessment of real estate investing, but completely ignore Chapter 5's discussion on stock picking and double the amount you will need for retirement. All his advice will be flushed down the toilet if you follow those parts of the book. Instead, substitute those sections with the book, "The Four Pillars of Investing" by William Bernstein. The combination of the two books would certainly lead most logical consumers to significant wealth accumulation.