Customer Reviews

The Intelligent Portfolio: Practical Wisdom on Personal Investing from Financial Engines

5 star:		(10)
4 star:		(1)
3 star:		(1)
2 star:		(1)
1 star:		(0)

 

 

In the crowded space of personal investment books, this one distinguishes itself with some unconventional and intriguing advice. Here are some highlights I found eye-opening:

- Rebalancing is a bad idea! Rebalancing back to your 'target allocations' is effectively making a contrarian 'bet' that some assets have become overvalued and others undervalued. Such a bet against the market doesn't fit with the EMH.
- Small/value tilt isn't worth it; Midcap growth may be better! This was a shocker, as almost every asset allocation book out there advises tilting toward small/value, in keeping with the Fama/French research. But if you believe that overall market risk is the only kind worth taking, then the only 'tilt' worth making is toward asset classes with high correlation to the market and higher volatility than the market (e.g., higher 'beta'). Which, as it turns out, is Midcap growth! (and smallcap growth too, to a lesser extent)
- REITS, emerging markets, commodities -- not worth it. Again, some surprising advice. Emerging markets aren't well correlated with the overall market, so why bother with higher expenses when you can get your beta elsewhere? Ditto for REITs, which are really 1) a sector bet 2) a sector which is implicitly included in equities (all companies own real estate) and 3) a sector you're already overexposed to if you own a home. Finally, commodities -- I hardly need convincing there -- they're not a return-generating asset class at all.

So what should you focus on? Expenses, for one! The author makes a powerful case for choosing your asset classes with full awareness of the expenses of each. Again, get your beta the cheapest way you can, even if it means dropping an asset class. The foregone diversification benefit pales in comparison to the difference in expenses, in most cases. The author demonstrates this numerically.

Bottom line: this is probably the smartest book I've read in personal investing space. Although it's left me with plenty of questions to ponder, the final advice given is hard to beat.

This is a great book for anyone who wants to gain confidence in making their own investment decisions or anyone who just wants to be able to have a smarter discussion with their financial planner.

Jones very effectively demystifies the rules of investing and stays focused on "what you need to know" to manage a retirement account or other personal investment account for the long term. He avoids chapters full of finance terms and discussion of investments that most of us shouldn't be investing in anyway. Instead, you get an engaging, smart book that you can read in a weekend that almost feels like sitting across the table and getting advice. He covers the subjects in just the right amount of depth-- you won't be left scratching your head, or feeling like you've once again been told "the rules" about things like diversification, but still don't know exactly what to do.

You'll finish this book and feel a lot more confident about your money and have a much better perspective on market headlines. Would highly recommend this read.

This book was well written and easy to read.

The author makes the case that we would need about 1500 years of stock market return data to be able to predict stock market returns within +/- 1% with high confidence. Since we only have about 100 years of reliable data, we can predict within +/- 4% of the long term historical average. Over long 25 year time periods, stock market returns can vary by a factor of 6X or 6 times.

The author discusses the current world asset allocation of about 63:37 stocks:bonds. Interestingly enough, this is not far from the age old pension plan asset allocation of 60:40. The ratio of U.S. to foreign stocks is also about 60:40.

This author has a different opinion about periodically rebalancing a portfolio. He says rebalancing is really a market timing bet.........because you are betting against the consensus of market participants when the market asset allocation changes. He recommends rebalancing to changes in the over-all market allocation versus to a fixed stock:bond asset allocation ratio.

While conducting research for Financial Engines, they found that investors preferred having risk expressed in dollars versus percentages or sigma.

The author correctly focuses on using funds with low expenses, and he says most mutual funds have total expenses over 2% per year. He recommends adjusting your asset allocation around low expense funds...........if you are in a 401K with very limited choices. His work suggests that not investing in an asset class only costs you about 0.5% in return. If it costs you more than 1% in additional fees to get into a new asset class, then skip this asset class.

The author suggests having a maximum of 10% invested in REITs. He argues that if you own your home, you probably have no need for REITs as a separate investment.

The author also argues that commodities have a 0% expected return, so skip this asset class.

Over-all, this book is easy to read with very sound advice for investors.



In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.

If you want practical ideas on long term passive investing, read some of the books below:

The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing

This was not the easiest book in the world to read, so I wouldn't recommend it for beginning investors; but if you're looking for a fairly advanced analysis of the issues that individual investors need to consider, I would highly recommend it. (There's little or no math, but there are several charts that need careful scrutiny and a variety of possible investment scenarios whose differences are discussed in fine detail, so you will need to put your thinking cap on and pay close attention.)

Some of the parts I found most interesting were:

Jones argues that some of the traditional methods of measuring portfolio risk and investment performance of particular asset classes may be of questionable reliability, because those methods depend very heavily on historical data, and there is simply not enough historical data available to enable one to make such judgments with a reasonably small margin of error. (Perhaps that explains why bonds have outperformed stocks for the past 20 years.)

Not only are judgments about the performance characteristics of particular asset classes fairly unreliable, but judgments about the performance characteristics of individual fund managers are even less reliable. (Perhaps that explains the meteoric rise and subsequent, cataclysmic collapse of Heiko Theime's American Heritage fund.)

Picking individual stocks is probably ill-advised for the vast majority of individual investors. Mutual funds, with their essentially automatic diversification, are strongly preferred.

As John Bogle frequently points out, no one can predict performance, but anybody can predict fees. The author agrees that investors should pay a lot of attention to the fees that fund managers charge. (Perhaps their low fees explain why index funds have done so well performance-wise over the past 30 years.)

There were fascinating discussions of alternative investments, including commodities, real estate, and hedge funds. I won't say I agreed with everything the author said, but he had some very thought-provoking arguments.

There were also some very interesting discussions of market-timing, rebalancing, and the possibly dubious value of investing in emerging and other foreign markets. Again, I'm not saying that I agree with everything the author said, but I think he raised some issues that should be carefully considered. (On the rebalancing issue, for example, the author's recommendation seemed to assume that markets are essentially always highly efficient. I'm not sure that's correct. Then again, even if the markets are not always perfectly efficient, it may well be that there's no reliable way to take advantage of the supposed inefficiency. As someone once remarked -- perhaps it was James O'Shaugnessy, who found out the hard way -- markets can remain irrational for longer than you can remain solvent. So maybe the author is correct on his overall point after all.)

For all of the advanced analysis, the author seemed to end up with a surprisingly (to me anyway) simple asset allocation scheme.

In short, this book was very thought-provoking, well worth the effort -- and despite the author's engaging style, it was an effort -- of reading it.

This book does a number of things well.

1) it offers a great overview of the basics of personal investing (historical and future market performance factors, the roles of risk attitudes and time horizon when determining one's asset allocation, the value of diversification, tax issues, etc.)

2) it shows, mathematically, the perils of individual stock picking, and the negative impact this will likely have on your portfolio

3) most importantly, in my view, is the detailed examination of how and why a passive indexed approach will likely beat an active managed approach, unless the managers get lucky. No wonder John Bogle likes this book!

The book is heavy on concepts and examples, light on tough math. Not a super-light read, but far from a technical manual. Good for most readers, I would think.

In conclusion, if you implement what this author suggests, you can't go wrong.

These are the unconventional investment ideas that I found this book very unique:

1. Portfolio rebalancing means unintended bet against the market.

2. Presented the portfolio risk not as standard deviation of return, but versus that of market portfolio.

3. Hierarchical approach of investment (asset allocation first then investment selection) is not a good idea. Reason being: 1. Asset allocation likely assuming zero cost index fund as a guide. 2. Assuming each fund can fit into single asset class. 3. Asset allocation is paramount to investment selection regardless of the quality of investment selection. 4. Approach frequently ends up with actively managed and high fee fund.

4. Alternative investment not necessarily a good diversification due to risk and cost.

5. Financial Engines does not put funds into rigid asset class categories but rather use techniques to create a weighted peer group of funds based on how close the investment style (risk relative to market portfolio) is to the fund in question, and then rank funds on various measures (expenses, fund-specific risk, performance, turnover).

Overall, the book is very enlightening to both novice and professional investors without digging into complicated mathematics!

I highly recommend this book. I have read a number of books on investing over the last two years, and this is one of the best. I have read it twice, and was sorry to finish each time. The author has a very unique presentation based on the Financial Engines model. He covers a lot of the same material as the other books that I read, which focused on asset allocation, passively managed (index) funds, not trying to beat the market and cost efficient investing--the John Bogle approach, but he gave me a much more comprehensive and realistic view of the relationship betwen risks and rewards amd "expected" outcomes vs. historical returns. I am glad that I read the other books first, because they enable me to profit more from The Intelligent Portfolio. However, everyone who is serious about investing should read this book before they implement the advice they receive from the other books on this subject or their financial advisor. The quality of the book is reflected in the high praise it received from Peter Bernstein (See the back of the dust jacket).

For some background, I have very complete education in finance, including emphasis in both undergrad and graduate school, as well as a CFA. That said, I'm always interested in sharpening my skills or a few refreshers. When I started reading this book, it initially seemed like a promotional piece for the author's web site and financial engines software. However, as I progressed through the book, there was some valuable information. As I recall (been a while since reading), the author spends time pointing out the weaknesses of some of the traditional methods of measuring portfolio risk. He then uses several examples of how a monte-carlo-type approach to forecast potential paths of individual stock prices can give you a better idea of how much idiosyncratic risk lies in the portfolio and how that may impact your range of portfolio outcomes.

His data output is also conveyed differently. Instead of expected volatility, beta, and the usual measures, he looks at scenarios such as: if you invest $10,000 today and your goal is $20,000 in 10 years, what is the probabilty of you exceeding that goal, coming close, or even having a loss. He runs through this math under various types of portfolios - single stocks, funds, etc. (I believe he ran the simulations ex-post)

The author also does an interesting dissection of the various costs that go into an actively managed portfolio (e.g, turnover impact on taxes, bid/asks, contradictory incentives, otherexpense, You'll come away with a different perception of what risks you are taking in your accounts.

I have been investing using Modern Portfolio Theory (MPT) for over 20 years and have read many books on this subject. This book has reemphasized some of those not so obvious concepts that I have learned through the years. For some one with very basic investment knowledge, specially in MPT, this may not be the first book that I would recommend. However, at some point in the investor's life, this book is a must!
In addition to the above comments, it would say that to effectively implement the book's recommendations, Financial Engines (a paid Monte Carlo software) is most likely needed.

We have used Financial Engines for tracking and planning since the initial article about it in Wall Street Journal many years ago. This book explains very clearly about how their data-based system actually works and the statistical information they use to make their recommendations. Very clear writing style and easy to read in several gulps. I have bought extra copies for my kids to use.