Eight Steps to Seven Figures: How to Get Wealthy by Charles B. Carlson, CFA

I recently picked up a copy of this book at the local library. Although it is a couple years old at this point (published in 2000), it is written in a generalized fashion that makes for an easy weekend read. Following in the footsteps of The Millionaire Next Door by Thomas J. Stanley and William D. Danko, Carlson seeks to extrapolate a series of steps that ordinary people have used to amass seven figure portfolios. The book is broken out into chapters for each of the eight steps and each chapter concludes with a profile of an every day person that has amassed a seven figure portfolio.

Step 1: Start investing NOW.

Carlson begins with a discussion of the power of compounding and the power of time. He then discusses the common excuses that people use to delay establishing an investment portfolio, including not having enough any money to invest or feel as if one does not have enough money to invest. Besides investing through a 401(k) plan, Carlson extols the virtues of DRIP plans for investors that may not have much money available to start.

Step 2: Establish a goal-any goal-it doesn't matter what it is as long as it matters to you.

Carlson extols the power of specific, written goals that you can visualize and then breaking them into small steps. I have to agree on this one-having defined goals can make it easier to think twice about spending money on things such as those "gotta-have-because-their-oh-so-cute sandals" or the latest and greatest techie toy when you know that instead that money could put you a little bit closer to your goals.

Step 3: Buy only stocks and stock mutual funds. Forget about asset allocation.

Carlson's advice boils down to: "You get rich buying stocks. You stay rich buying bonds." Carlson discusses the Rule of 72: In order to estimate how many years it will take for your money to double in an investment, estimate the rate of return and divide it into 72.

Depending on how one defines risk, according to Carlson, bonds can actually be considered riskier if you are trying to build a seven figure portfolio. His logic is that the stock market over the long term has returned an average of 11%. In contrast, while bonds are considered "safe", sometimes they barely keep up with inflation or may even lose value after inflation, which increases the "risk" that your portfolio will actually be losing value rather than getting you closer to reaching the seven figure mark.

Step 4: Swing for singles. You'll strike out fewer times and hit some home runs in the process.

Here Carlson's advice seems pretty strong for a long-term outlook-if you concern yourself with chasing stocks that are going to skyrocket, you'll run a great deal of risk and likely end up losing your shirt. Instead, if you "swing for singles" and invest in good solid companies with solid, but perhaps not spectacular returns, you will do very well over the long term, reduce your risk, and occasionally get lucky and hit it big.

Step 5: Invest every month, no matter how small the investment.

I have to agree with Carlson here. Investing every month, even if some months it's just a little, can really make a difference in the long run and makes it much easier to stick to your plan. It's kind of like exercise-if you commit to at least getting a little bit of exercise every day it's a whole lot easier to get out there than it would be if you're out of shape and have been sedentary for a month.

Step 6: Buy and hold...and hold...and hold...and hold...and hold.

That about sums it up. Pretty much goes back to Step 1.

Step 7: Take what Uncle same gives you.

This goes for maximizing use of 401(k)s, IRAs, or whatever plan is available to you that receives preferential treatment. One of the areas that I practice in as an attorney, is taxation. One factor that I see many folks overlooking when it comes to investing is short-term versus long-term tax consequences. If you buy and sell within a 12 month window, you're gain is going to be taxed at ordinary income.

However, if you hold for at least 12 months, it's then capital gain and you'll be subjected to a lower tax rate. Depending on your tax bracket, taxes can really cut into your gain, so it's something to consider as part of your investment strategy. This is always why it can be important to look at turnover ratios if you're investing in mutual funds. Ultimately, it ties back to Step 6: buy and hold.

Step 8: Limit shocks to your finances.

Carlson's advice is basically to think about what impact major life decisions are going to have on your portfolio. From the group that Carlson interviewed, he concluded that everyday millionaires are boring people who don't job hop, marry only once, have two kids rather than five or six, stay in the same houses for many years, and buy and hold investments for at least five years. That's not to say that one can't still be successful despite one or more of the attributes, but it is a no brainer that some of these types of life-changing decisions can also have a major impact on your wallet.

All in all the book is a decent read, but is best suited for someone that just entering in to the foray of investing. It does very much technical advice in terms of selecting investments, but is a good overall confidence builder that everyday people can be successful at investing. One thing I did notice is that Carlson is pretty heavy on the recommendations for DRIPs. He is the author of the "DRIP Investor" investment newsletter, so I suppose this is understandable, but knowing that he is the author of the newsletter kind of discouraged me from taking his praise of DRIPs as seriously.

If you're interested in checking it out, you can probably find a copy at your local library or check it out on Amazon here.