Below are some books on investing that I find insightful. If you are just starting out, the first two books that I would read are The Little Book of Common Sense Investing by John Bogle and Winning the Loser’s Game: Timeless Strategies for Successful Investing by Charles Ellis. Continue reading Investing for Retirement: the Best Investment Books & Online Resources
The purpose of rebalancing your portfolio is not necessarily to increase returns. Rather, it is to remain consistent with your preferred asset allocation and thereby reduce the riskiness of your portfolio. Continue reading Investing for Retirement: Rebalancing Your Portfolio
Value averaging is a combination of two things: dollar cost averaging, and portfolio rebalancing. Combining dollar cost averaging and portfolio rebalancing: (1) you buy more assets when prices are low and fewer when prices are high, and (2) you allocate more money to stocks when equity prices are low and less to stocks when equity prices are high. Therefore, value averaging permits higher returns than dollar cost averaging alone. Continue reading Investing for Retirement: Value Averaging
More advanced investors can optimize their portfolio, seeking the “most efficient” portfolio for their particular risk tolerance. “Most efficient”, means: no other feasible portfolio with equal risk has greater expected returns, and no other feasible portfolio with less risk has equal returns. Continue reading Investing for Retirement: Factor Investing
The central challenge to long-term investing is not how to increase returns; instead, it is how to manage risk. The solution is to construct a diversified portfolio tailored to your particular risk tolerance. Overall, it is key that you understand how your portfolio behaves during changing market and economic conditions so that you can stick with your desired asset allocation. Continue reading Investing for Retirement: Asset Allocation & Building a Diversified Portfolio
For individual investors, non-core asset classes fail at least one of David Swenson’s rules. There are a number of fixed income investments that serve no valuable portfolio role for almost any investor. And, there are a number of actively managed asset classes that are only suitable for extremely sophisticated institutional investors, capable of investing in illiquid markets and possessing very long time horizons. Continue reading Investing for Retirement: Asset Classes That Individual Investors Should Avoid
In order to build a diversified portfolio, you must first select asset classes that have minimal correlation with one another. David Swenson, the Chief Investment Officer at Yale University, presents one of the best overviews of core and non-core asset classes for individual investors in Unconventional Success: a Fundamental Approach to Personal Investment. Here, we will focus on core asset classes. Continue reading Investing for Retirement: Core Asset Classes
It is nearly impossible for active managers to beat the market over the long term after taking management expenses, transaction fees, taxes, and risk into account. Individual investors don’t have the time or resources to compete with institutional investors. The only rational path for individual investors is to invest in passively managed index funds. Continue reading Investing for Retirement: Actively Managed Investing
The greater your investment costs associated with financial intermediation, the less you ultimately receive in savings. These costs may include brokerage commissions, sales loads, management fees, financial advisory fees, bank trust department fees, advertising costs, and lawyers’ fees. You cannot beat the market because it is a zero sum game. Financial intermediation means that beating the market is a loser’s game. Continue reading Investing for Retirement: Controlling Your Costs
No, you cannot definitively predict the future of financial markets, especially in the short term. However, you can project future outcomes in terms of their probability. These forecasts permit you to be better prepared for possible risks. A Monte Carlo simulation permits you to model real-life systems including the probability (i.e. the odds) of a variety of possible outcomes given specific assumptions about future conditions (i.e. constraints). Continue reading Investing for Retirement: Predicting the Future
Even if you aren’t a history buff, you should have a basic understanding of financial history so that you aren’t surprised by ‘unexpected’ financial downturns. When these downturns inevitably occur, you will be able to stick to your long-term financial plan. Limiting your research to just the past 100 years, financial history evidences significant volatility for both stocks and bonds. Using recent history as a rough guide, you should assume that similar downturns will happen again in the future, even if you don’t know exactly when they will happen.
Continue reading Investing for Retirement: Recalling the Lessons of History
Time is transformational. The longer the time that you hold your investments, the closer your portfolio’s actual returns will approximate their expected average. If your investment time is short, then higher return investments may be too risky due to variation in your actual returns. But, if your investment time is long-term, then you can consider higher-return, riskier investments because the variation in your actual returns will be closer to the expected average. Continue reading Investing for Retirement: Time
But in the long run, whether for an individual stock or the total stock market, the market return must equal the investment return. Speculative return becomes statistical noise. Basic economics governs. Therefore, you do not need to forecast the speculative return; you only need to compute investment return. Continue reading Investing for Retirement: Return
Risk and reward are inextricably intertwined. In the long run, you are compensated for risk. But, don’t expect higher returns without higher risk. And don’t expect safety without correspondingly lower returns. Continue reading Investing for Retirement: Risk
What is most important is not the dollar amount but the purchasing power of the money that you save. In other words, what your savings will buy when you retire. Expect inflation to destroy the purchasing power of your savings almost as fast as you build wealth, depending on your asset allocation. Continue reading Investing for Retirement: Compounding, Inflation & Real Returns
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