Like the Investor's manifesto, this book from Daniel R. Solin is a classic on making reasoned and well-informed investing choices.
Highlights:
"Smart" Investing = investing for market returns by investing in all the stocks and bonds in broad market indexes.
"Hyperactive" Investing = trying to beat the market by picking winners and timing the market. (aka "Dumb")
Investing for market returns is easier than investing hyperactively because:
- you don't have to pay any attention to the financial media
- you don't have to sift through mountains of conflicting information from self-styled experts
- it's less expensive
- the results are demonstrably superior
- most investors do not need any advisor or broker : you can deal directly with brand-name mutual fund families
- it should only take you 90 minutes or so per year
There is ample data indicating that, over the long term, simply achieving market returns will beat 95% of all professionally managed investment portfolios.
A majority of the volume of trading in the U.S. are just index ("smart") investing.
Asset allocation
Low risk = 14% stocks, 6% int'l stocks, 80% bonds
Medium low risk = 28% stocks, 12% int'l stocks, 60% bonds
Medium high risk = 42% stocks, 18% int'l stocks, 40% bonds
High risk = 56% stocks, 24% int'l stocks, 20% bonds
Asset allocation accounts for 90% or more of the expected return from any particular portfolio. The specific securities held only account for 5%. Market timing accounts for 2%.
Your cash requirements should amount to 6-12 months of living expenses.
The four-step stock allocation process
1. Decide on your asset allocation (low, medium-low, medium-high, or high)
2. Open an account with Fidelity, Vanguard, or similar passive deep-discount index
3. Invest as described in your asset allocation plan
4. Rebalance your portfolio twice a year to keep your portfolio either aligned with your original asset allocation or to a new asset allocation that meets your changed investment objectives or risk tolerance.
When do smart investors need an advisor?
For larger investors with over $1M, some investment advisors can add value by adding a layer of complexity and fine-tuning to the asset allocation strategies named here.
Be wary of any advisor who does not consider the lowest-cost options to implementing investment portfolios, including Exchange-Traded Funds (ETFs), Fidelity/Vanguard index funds, low-cost index funds, or the entire lineup of passively managed DFA mutual funds.
DFA and its network of consultants offer passive portfolios that are slightly different than ETFs and typical Fidelity index funds.
#1 greatest threat to your financial well-being is the hyperactive broker or advisor.
#2 greatest threat to your financial well-being is the false belief that you can trade on your own and attempt to beat the markets by engaging in stock picking or market timing.
It is reasonable to expect your portfolio to achieve annualized returns from 7-11% over the long term. Attempting to achieve returns higher than 11% involves speculating.
If you choose one of the portfolios described here, you are likely to beat the returns of 95% of actively managed mutual funds over the long term.
[From the Great Books Series. Also see The Success Manual - Encyclopedia of Advice, which contains summaries of 100+ Most useful books.]
