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Review: The Intelligent Asset Allocator

I recently finished reading Bill Bernstein’s The Intelligent Asset Allocator.

In the introduction to Bernstein’s most recent book (The Investor’s Manifesto), he describes The Intelligent Asset Allocator as a failed attempt at writing a plain-English guide to prudent investing:

I was gratified with the response to it, both among academics and general readers. Sadly, I was less than pleased by what my friends and family told me, which usually went something like this:  ‘Jeez, Bill, it seems you know what you’re talking about, but I fell sound asleep by the second chapter.’

So I went in with the assumption that this book was going to be packed full of calculus functions and statistical jargon.

Not at all. It was really quite readable.

The Gordon Equation

As in Four Pillars and The Investor’s Manifesto, one of Bernstein’s major points is that it’s important to pay attention to valuation levels before buying an investment. For example, he argues that we can achieve a reasonable estimate of future stock market returns by using the Gordon Equation, which states that:

Expected Return = Dividend Yield + Dividend Growth Rate

It’s worthwhile to note that one of his messages in The Intelligent Asset Allocator (written in the late 90s) was that stocks were highly priced and had very low expected returns going forward, whereas in The Investor’s Manifesto (written in early 2009) the message is the opposite: stocks have taken a beating, and have pretty good expected returns going forward.

Important reminder: The Gordon Equation, while rather accurate over extended periods (20 years or more), has essentially no predictive ability for short periods–what the stock market will do next year, for instance.

Efficient Frontier

A second major lesson of The Intelligent Asset Allocator is the concept of  the “efficient frontier.” The idea is that, for any given period, there are a number of efficient portfolios, each of which provides the highest return for a given level of volatility, or the lowest volatility for a given level of return.

Of course, there’s no way to know ahead of time precisely where the efficient frontier will lie for a given period. But if we look at enough periods, we can get a sense of the types of portfolios that tend to be pretty close, thereby allowing us to draw some conclusions about intelligent portfolio design. For example:

  • A portfolio comprised 10% of stocks and 90% of bonds often has higher return and lower volatility than a 100% bond portfolio.
  • Over most extended periods, allocating a portion of your portfolio to international stocks will simultaneously increase return while decreasing volatility.

Would I Recommend This Book?

Absolutely–if you’re someone who finds mathematical explanations to be “meaningful and practical” rather than “abstruse and boring.”

That said, before reading The Intelligent Asset Allocator, I’d recommend reading Bernstein’s newer The Investor’s Manifesto. The message is similar, the writing is arguably better, and the data is more up-to-date (and, therefore, more relevant-feeling).

Review: The Investor’s Manifesto

Investor'sManifestoIt’s always fun to hear that one of your favorite authors has released a new book. Given that William Bernstein’s The Four Pillars of Investing is quite literally my favorite book on investing, you can imagine how eager I was to read his newest release: The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between.

End result: I might have a new favorite. If nothing else, I have a new favorite to recommend for people just beginning to invest.

The Book’s Message

The Investor’s Manifesto is essentially a more accessible version of Four Pillars. The book’s core messages are that:

  • Risk and expected return are related. There’s no escaping it.
  • The best potential future returns are available when things are scariest (i.e., when risk is at its highest).
  • Picking stocks is a bad idea for individual investors. No, you’re not an exception.
  • Picking actively managed funds is perhaps worse than picking stocks.
  • With a handful of exceptions, the financial services industry exists to steal your money.

Behavioral Investing Mistakes

Lots of books and articles claim that our brains are hardwired to fail us when it comes to investing. I agree with that general premise, but I’ve always been somewhat hesitant to accept at face value any claims about the workings of a brain–perhaps the single least-understood organ in the human body–written by a financial author/journalist.

However, when the person making the claims is an M.D. (a neurologist in fact), such claims have an entirely different level of credibility. In The Investor’s Manifesto, Bernstein lays out several aspects of human psychology that detract from our ability to invest successfully. For example:

We use stories to understand things once they become too complex. And in the process, we oversimplify things to the point where our understanding is as wrong as it is right.

We want to be entertained. We love picking stocks, especially the high-flying growth stocks of popular companies.

We make too many analogies. We transfer characteristics across categories, even when it’s inappropriate to do so. For example, we assume that a good company must make a great stock, or that a quickly growing economy must mean high market returns. (Jeremy Siegel calls this the “growth trap.”)

We all think we’re better than average. We pick stocks (and expect to succeed!) even though the people we’re trading with are, in all probability, full-time investment professionals with far larger resources of data and computing power.

Highly Recommended

At just under 200 pages, The Investor’s Manifesto is a quick read. Its advice is sound. And it’s entertaining to boot. I can’t recommend this one highly enough.

Review: The New Coffeehouse Investor

coffeehouseinvestorcoverCourtesy of a giveaway run by Laura of Green Panda Treehouse, I recently received a copy of Bill Schultheis’s The New Coffeehouse Investor.

The message of the book is that it’s possible to invest in such a way that you can meet your goals without having to pay attention to day-to-day market movements, product pitches from brokers, or meaningless noise coming from the financial media.

Given that that’s precisely the message of this very blog, it should be no surprise that I quite liked the book. 🙂

The Three Coffeehouse Investing Principles

Schultheis argues that the following common sense principles are all you really need to know in order to invest successfully:

  1. “Don’t put all your eggs in one basket.”–Diversify within asset classes and across asset classes.
  2. “There’s no such thing as a free lunch.”–Markets are (mostly) efficient. Use index funds rather than trying to beat the market.
  3. “Save for a rainy day.”–Make sure you’re saving enough to meet your goals.

I think he’s spot on with all three. (At the same time, I can’t help but be amused by the juxtaposition of principles #1 and #2, given that diversification has often been described as a “free lunch.”)

Money and Life

The book also offers sound financial advice outside of the realm of investing. For example, Schultheis is a big proponent of tracking your spending:

“I hate budgets as much as you do, but keeping track of expenses has nothing to do with budgeting and everything to do with creating an awareness of how I spend my money.”

That sums up exactly why Kalinda and I track our expenses as well. It’s not about setting restrictions. It’s about making sure that the way we use our money is actually in line with our goals and values.

Would I recommend it?

I think The New Coffeehouse Investor provides an excellent, easy-to-read introduction to buy & hold index investing. It is, however, not very heavy on facts and figures. If you’re into that type of thing, I’d suggest picking up The Four Pillars of Investing or The Little Book of Common Sense Investing instead.

And of course I won’t neglect to mention that if you buy The New Coffeehouse Investor together with Investing Made Simple, you’ll qualify for free shipping from Amazon. 🙂

Review: The Bogleheads’ Guide to Retirement Planning

455579_cover.indd I’ve read books that are intended to be “all you need to know about personal finance.” And I’ve read books that are intended to be “all you need to know about investing.” But The Bogleheads’ Guide to Retirement Planning is the first book I’ve read that’s “all you need to know about planning for retirement.”

Note the distinction: This book is not about saving/investing for retirement. It’s about planning for retirement (and everything that’s a part of such planning). The best part about the book, in my opinion, is the breadth of topics covered. The chapter-by-chapter table of contents should give you an idea of the scope:

  1. The Retirement Planning Process
  2. Understanding Taxes
  3. Individual Taxable Accounts
  4. IRAs
  5. Defined Benefit Plans (written by fellow blogger, The Finance Buff)
  6. Defined Contribution Plans
  7. Single-Premium Immediate Annuities
  8. Basic Investing Principles
  9. Investing for Retirement
  10. Funding Your Retirement Accounts
  11. Understanding Social Security
  12. Withdrawal Strategies
  13. Early Retirement
  14. Income Replacement
  15. Health Insurance
  16. Essentials of Estate Planning
  17. Estate and Gift Taxes
  18. Seeking Help from Professionals
  19. Divorce and Other Financial Disasters
  20. Meet the Bogleheads


The chapters average 16 pages in length, so you get a little more than just a high-level introduction to each topic, while at the same time avoiding details that are unlikely to be important to more than a small number of readers. Also, the authors conclude each chapter with suggestions for additional reading, making it easy to research a particular topic further should you so desire.

A Few Discussions I Particularly Enjoyed

(In chapter 11) Social Security strategies: By intelligently planning when to begin taking Social Security payments, you can significantly increase your expected lifetime payout. (This goes double for married couples, as the planning opportunities increase when there are two spouses involved.)

(In chapter 9) How asset allocation should be affected by your other assets: For example, if you have a pension that pays out a fixed amount every year, that’s roughly equivalent to a large bond holding, so perhaps you should have a heavier stock allocation than other investors. Also, if your pension is not indexed to inflation, perhaps your other bond holdings should be in TIPS so as to provide some inflation protection.

(In chapter 7) How to shop for Single Premium Immediate Annuities: SPIAs can be used to offset the risk of outliving your income, but shopping for annuities is tricky business. Being an informed customer helps you avoid getting ripped off.

Would I Recommend the Book?

It depends. If you’re still quite young, there’s a lot of material here that you don’t need to worry about just yet. I’d suggest starting with something different–perhaps some combination of the following:

If, however, you’re starting to think seriously about getting all the retirement planning specifics nailed down, then I can’t recommend The Bogleheads’ Guide to Retirement Planning highly enough. It’s the only book I’ve seen so far that covers all of the different topics involved in planning for retirement.

Review: The Little Book of Bull Moves in Bear Markets

BullMovesBearMarketsCoverI recently finished reading Peter Schiff’s The Little Book of Bull Moves in Bear Markets. I found the book to be absolutely fascinating, even though (or perhaps because) I didn’t agree with everything in it.

For background: Peter Schiff is famous for predicting the collapse of the housing bubble and the calamity that came with it. He’s the president of Euro Pacific Capital (a broker/dealer in Connecticut) and is now running for Senate.

The premise of Bull Moves in Bear Markets is essentially that the U.S.’s deficit spending and imbalance of trade over the last several years have been fueled by inflationary monetary policies. Schiff makes the case that if the U.S. (both the government and its citizens) continues on the track it’s on, hyperinflation will be the result.

Schiff on Investing

Given Schiff’s belief that extreme inflation is likely to occur in the near future, his investment suggestions are no surprise:

  • Stay out of U.S. dollar-denominated fixed income investments,
  • Invest in gold,
  • Invest heavily in non-U.S. stocks–specifically stocks from emerging markets.

Something that I particularly appreciated about the book is that Schiff isn’t afraid to get into specifics. For example, he goes over all the different ways you can invest in gold (buy it directly, buy stocks of mining companies, buy commodities funds), and he runs through the pros and cons of each method.

My biggest hang ups with his investment approach are that:

  • He’s far more confident in an individual’s ability to successfully pick stocks than I am, and
  • He doesn’t really address the fact that many of his predictions should already be priced into current market values.

Schiff on Frugality

There’s an entire chapter in the book dedicated to the idea that frugal living is the best way to get through an economic downturn. This makes sense to me, and most of his suggestions are good, if not particularly original: look for ways to cut down on recurring costs, save/invest your raises and bonuses rather than spend them, etc.

Side note: I sometimes joke that the best investments for a crisis are not bonds but rather food, guns, and ammo. Schiff says exactly the same thing. The difference: I don’t think he’s joking. Immediately after suggesting that you stockpile cornflakes, Schiff says the following:

“It might also be a good idea to buy a handgun and lots of extra ammunition to protect your supply.”

Maybe that has something to do with why he’s sometimes called Dr. Doom.

Schiff on Politics

Schiff’s political views are quite different from my own–the presence of a back cover blurb by Glenn Beck should have been a giveaway–but I’m in agreement with his general premise that we can’t keep spending money we don’t have.

I think it takes a brave person to publicly state (while running for office) that a lower standard of living isn’t a problem to be avoided, but rather the solution to many of our problems.

Should You Buy It?

While I’m not entirely on board with many of Schiff’s suggestions, Bull Moves in Bear Markets is certainly a thought-provoking read. Added bonus: It qualifies for free shipping if you buy it together with my latest book. 😉

Review: The Power of Less by Leo Babauta

I just finished reading Leo Babauta’s The Power of Less. I can’t help but share a few thoughts, as the book really clicked with me. (Granted, this should be no surprise given how much I enjoy Leo’s blog.)

The major premise of the book is that if we can identify the 4-5 most essential things in our lives–and do our best to eliminate everything else–we’ll be able to:

  • Enjoy life more fully.
  • Be more productive.

In the introduction to the book, Leo puts it this way:

Simplicity boils down to two steps:

  1. Identify the essential.
  2. Ignore the rest.

I had to do a double-take when I read this. I can’t get past how analogous this to what I’m always saying about investing. In fact, just a couple weeks ago–while working on the introduction to my next book–I had written this:

Oblivious Investing consists of a simple, two-part strategy:

  1. Invest in diversified portfolios of stocks via low-cost funds.
  2. Stick with the plan, ignoring all the short-term market fluctuations.

Jeez. It’s practically the same thing. (With, of course, the exceptions that Leo’s thesis applies to life in general, and that he’s much more concise.)

As you can imagine, I like Leo’s way of thinking.

A practical, usable approach to productivity

Leo’s book is the antithesis of other productivity/self-help books that recommend dramatic restructurings of our entire lives. Leo repeatedly urges taking things slowly. Like he does on his blog, Leo advises us to work on creating new habits.

For instance, rather than attempting to achieve a weight loss goal by deciding to run for 30 minutes everyday, Leo suggests that we start with 5 minutes each day. Do that consistently until it becomes a habit. Then try 7 minutes. He suggests always starting with a small goal. Small enough, in fact, that it seems almost too easy.

I love this approach. It increases the likelihood of sticking with the plan, because it prevents burnout. Similarly–as we all know–small, repeated actions can have a big impact over extended periods. (Dollar-cost-averaging, anyone?)

I have to say, for as much as I enjoy his blog, I enjoyed the book even more.

[Side note: Leo also recently put out a free ebook entitled Thriving on Less: Simplifying in a Tough Economy. Definitely worth the time to read, imo.]

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