The Kitchen-Table Investor: Wealth-Building Strategies for Working Families

As you might expect, most of my personal investments are safely tucked away in index funds, those mutual funds designed to track the performance of a particular stock market index. This is a smart way for the average investor to achieve solid growth over the long-term.

However, I continue to hold about 5% of my investment capital in reserve as “mad money”. While the rest of my investments are conservative, I use this money to purchase whatever investment strikes my fancy.

I don't do a good job.

In 2006 I gained about 20% with my mad money. Last year I lost about 33%. I've lost even more this year. I'm just not educated enough to pick and choose individual stocks. I buy and sell at the wrong times. Obviously, this is further anecdotal evidence in support of index funds. Undaunted, I recently made a trip to the library to borrow a book about individual investing, John Wasik's The Kitchen-Table Investor: Low-Risk, Low-Maintenance Wealth-Building Strategies for Working Families.

At first, the book made me wary. In the preface, Wasik writes:

My low-risk, long-term strategy makes it possible for any investor to share in the great wealth Wall Street is producing — by investing as little as $25 a month…By following a handful of rules, real wealth is certainly attainable even if you don't have the the money to invest. I'll not only show you how to invest small sums of money but help you find the money to invest automatically on a regular basis.

Real wealth is attainable even without money to invest? What? Despite this bold claim, this book is not a get-rich-quick screed. Wasik offers sound personal finance advice. In fact, his philosophy often echoes classics like Your Money or Your Life: “In saving money, we are preserving our own natural resources, that is, our life energy.”

Wasik's approach to low-maintenance investing follows eight steps. Here are my comments on each:

  1. Find money to invest. Wasik preaches the virtues of compound interest: “If you can save at least 10% of your annual income — no matter how much you make — you will have [prosperity].” But how do you find the money to save? Avoid advertising, Wasik says, especially television advertising. Avoid credit card debt. Buy a sensible home and a sensible car. Spend less than you earn.
  2. Join an investment club. Wasik is a huge fan of investment clubs. These groups provide amateur investors with an opportunity to pool their money to make larger purchases. They also teach members to research stocks and to track their portfolios. The book contains a lot of good information on running an effective investment club.
  3. Find a place to park your money. You need someplace to stash your money while you're saving to make your stock purchases. Wasik recommends money market funds. Nowadays, parking the money in a high-yield savings account probably makes the most sense. (Many of these are money market funds, anyhow.)
  4. Fund your company plans. “Welcome to the golden age of retirement vehicles,” Wasik says. He provides an overview of various pension plans, including 401(k)s, 403(b)s, traditional IRAs, and Roth IRAs. “Fund your plans for maximum growth,” he recommends.
  5. Buy stocks for growth. Wasik offers his five fundamental rules of stock-picking:
    1. Find quality companies that are growing earnings consistently from 10% to 15% per year.
    2. Sales and earnings per share should be increasing in lockstep with earnings. Look for companies with at least five years of earnings.
    3. Buy a stock for the long term.
    4. Keep your costs low and your commitment high. Reinvest all dividends.
    5. Automatically purchase shares on a regular basis to reduce market risk.

    He offers tips on screening companies, and explains how to read an annual report.

  6. Buy mutual funds. What if you don't want to pick individual stocks? What if you're not interested in gambling whether you can beat the market? Create a portfolio comprising four essential mutual funds: one that tracks the Wilshire 5000 index, an international fund, a value fund, and a “wild card” fund. The latter can be any aggressive fund that focuses on one sector of the economy.
  7. Be patient. Don't panic. “Investing is a matter of rational faith,” says Wasik. Buy and hold. Don't pay attention to the financial report. Don't check your stock prices every day. Don't try to second guess the market. Be patient, rebalancing your portfolio every year. Accept the risk and sleep at night.
  8. Become an automatic investor. Wasik loses his way in the final chapter. This ought to have read like David Bach's The Automatic Millionaire. Instead, it's a list of ways to save money through frugality. That's fine, but it has nothing to do with automatic investing.

The Kitchen-Table Investor is not a bad book — in fact, I think it would be quite useful for many Get Rich Slowly readers — it's just not everything I had hoped. Still, bits and pieces are quite good. I like that Wasik provides examples from his own life. He's not afraid to share the mistakes he's made in order to illustrate a point.

Though some of the book's advice is dated, and there's more delivery than payoff, The Kitchen-Table Investor is worth reading if you're interested in a more active approach to self-directed investing. If you want to try picking your own stocks, then consider borrowing this book from your local library. It'll give you a solid introduction to the basics.

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Bill Lefler
Bill Lefler
12 years ago

I have found the Motley Fool collection of services extremely valuable. I personally subscribe to their Stock Advisor service. Every month they publish a newsletter recommending two new stocks that they expect to beat the market (S&P 500) over the next 3 to 5 years. On their site they maintain a list of around 10 stocks that they recommend as best for your new money now, in case you don’t prefer to buy their two new recommendations. They publish their scorecard for all of their previous recommendations so you can see how they did versus the market as well. The… Read more »

Working Dollar
Working Dollar
12 years ago

This looks like a good book. I especially like his idea that sorta shook you up – “Real wealth is attainable even without money to invest?”

I’ve seen my dad do this time and time again in business (not in market investing) so I know its possible. Now I want to read the book to see how he claims its possible in investing in the market. Thanks J.D.

Tyler
Tyler
12 years ago

J.D,
This is interesting information and valuable for the most part.
However, I must disagree with point #6 – Buying Mutual Funds. In the previous point it is suggested to keep costs low, and then in point #6 it is suggested to by index-tracking mutual funds.
I’m certian that one could produce and index tracking portfolio consisting of ETF’s that would have lower overall costs than Mutual Funds.
Thanks for the review, keep up the great work!
~Tyler

Adam
Adam
12 years ago

The book sounds great..i use morningstar.com, and i do light investing. morningstar gives you helpful analysis of many featured stocks but is just general recommendations. i may check out motley fool cause it sounds like they almost walk you through it.

betsy teutsch - MoneyChangesThings
betsy teutsch - MoneyChangesThings
12 years ago

Morning, JD. I like your idea of 5% “Mad Money”. my husband is very negative about stock picking in general. I however like to invest directly in companies in alignment with my values, so we do invest a certain portion directly. Some of them have done very well, and we’ve generally used the appreciated assets to contribute to charities. (However, lately, everything is tanking, tanking, tanking.) We also take 1% of our net worth and, as suggested by Coop America, designate that as community investing – microloans like Kiva.org, CD’s for Equal Exchange (you can read about these on the… Read more »

Tom
Tom
12 years ago

Have you considered P2P lending with your 5% mad money? I’ve been playing around with it (and blogging about it) for the last year or so and I think about 5% is the right amount for most portfolios. All the more tax friendly investments should be funded first of course.

And, unlike some mad money ideas, there is no chance you are going to double or triple your money. I guess P2P lending is my safe “mad” money. 🙂

Dustin
Dustin
12 years ago

Does this book recommend investing in your company plan AND ALSO investing in a mutual fund, or just one of them?

Rooky question, but what would be the benefits of investing in both?

Tom
Tom
12 years ago

Betsy – I didn’t see your post before I wrote mine. I see you also mentioned P2P lending through Kiva.

I’m more a fan of Prosper or Lending Club as an investment but Kiva is a good choice if you are looking more at a sweet charity option.

J.D.
J.D.
12 years ago

I wrote: I’ve lost even more this year. Yikes. I’ve nearly lost it all, in fact. Basically, my IRA contribution from last year is now worth $0. That sucks. There are a number of ways to look at this particular investing failure on my part. You could, with some merit, argue that I was an idiot for investing in a struggling company. (A struggling company that has ultimately failed.) Thinking that way, however, is unproductive. It only brings you down. It doesn’t give you anything constructive to build from. But I like to think of it this way: This was… Read more »

rstlne
rstlne
12 years ago

Consider having your mad money in a taxable account instead of in your IRA. That way, if the stock goes down, you can at least take a capital loss deduction. However, there is no substitute for study, both of the macroeconomic environment and of the businesses that you own.

Anne
Anne
12 years ago

Sharper Image is trading at $0.39. You can sell it if you don’t want to take any more chances in the bankruptcy.

Gnashchick
Gnashchick
12 years ago

Yikes, JD.

I’m going to start a “mad money” fund just for risky-fun investing. It will be very small — an amount I’m comfortable with if it vanishes — and I’m going to use an online brokerage. This way, I can “gamble” with my mad money while not affecting my retirement portfolio.

Stephen Martile
Stephen Martile
12 years ago

Hi JD,

Another great investment are REIT’s.

Real Estate Investment Trust

Basically, funds that invest the majority of their money in real estate. You can even get into specific niches (ie. self-storage real estate)

Stephen Martile
Personal Development Made Simple
http://www.stephenmartile.com

Jesse
Jesse
12 years ago

In response to comment #4: generally index funds have very very low expense ratios (obviously there are exceptions) but for instance my index fun that is my “main” retirement stock holder has an expense ratio of .10 ….not bad at all.

Rich Money Million
Rich Money Million
12 years ago

“I buy and sell at the wrong times.”

Apart from ‘Buy Low, Sell High’, what rules are there for determining the ‘right time’? Personally I think, after all is said and done, it’s a guessing game. Your statement got me thinking and I ended up blogging about it. I wonder what methods your readers are partial to when determining when they buy and sell.
-Rich

RacerX
RacerX
12 years ago

I thought the book was a ral mixed bag. The investment info felt a bit out of date and the end of the book, just as you said, was a weird segway off to a good, but not tied topic.

Also to say here is how you can save: Buy a smaller house…Yep gonna sell my bigger house takwe a huge loss at the pit of the market…

A solid “C”

Master Your Card
Master Your Card
12 years ago

Intelligent Investor: A Book of Practical Counsel (revised edition)

This book is now nearly 60 years old and is still hands-down the best book on investing that has ever been written. Don’t take my word for it – the great Warren Buffet himself said so.

Get to your local library asap!

P.S: JD have you reviewed this book yet? If not, I’d love to see one!

J.D.
J.D.
12 years ago

@RacerX

I’d give it stronger than a C, but I agree that it’s a mixed bag. Actually, a grading system might be interested. I’d call this a B- or so. There’s some good stuff here, but the book isn’t put together well…

fynyx
fynyx
12 years ago

Dear J.D., My first reply to this blog. I was attracted to your blog title ‘Get rich slowly’. It stands in direct contrast to what is so prevalent on the Web these days. Gels nicely too, with how I also see the process. About your comment #10 ‘Automatic investing’ of Wasik’s book: I think he uses the term in a different sense, to mean — An ‘automated’ mindset of thrift, which over a long time saves money to ‘invest’ in more worthy things. This becomes a virtuous cycle of wealth building. A new spin of words on an old concept,… Read more »

Travis
Travis
12 years ago

J.D. I am a stock and option trader and have been mentored by several multi-millionaires, and I do fairly well on my own. If you are interested I am willing to share a few things with you that may help your stock investing. It will be free, I believe in giving back, besides reading your blog has inspired me to start my own. If your interested just let me know and I will contact you, or you can send me an e-mail.

MossySF
MossySF
12 years ago

If the goal is to “Get Rich Slowly”, there should be no need for stock picking.

Craig
Craig
12 years ago

J.D.,

Thanks for the post. It’s timely as I’ve been sitting on the edge of individual stock investing for a while now. I’d like to see a future post dedicated to that idea, perhaps with reader book recommendations and/or brokerage recommendations. Thanks for the great blog!

WeSeed Editor
WeSeed Editor
12 years ago

Interesting since Cramer just had a whole show about “responsible speculation” last night. He talked about how it keeps investing exciting and can keep you interested in keeping up with what’s going on. I agree–I’m exclusively in index funds right now and not being invested in individual stocks means I lose interest and might be missing some good opportunities.

Also note that he and Peter Lynch say: It’s OK to lose money in your spec portfolio. It happens. But the gains you can get from one big stock will more than make up the difference.

Newest on the Net
Newest on the Net
12 years ago

I am not sure that I want to read the book, but your book review was great. thanks.

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