Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today [Hardcover]

Larry E. Swedroe (Author)

Book Description

Publication Date: June 17, 2002

It's well known that the technology world is changing at a rapid pace due in part to innovations in computers, the Internet, telecommunications, and biotechnology. It is less well known that the financial world is in a far different place than it was just a few years ago as witnessed by the bursting dot.com and NASDAQ bubbles in March 2000. But even when financial markets change-especially when the change is irrational-investors need to return and hold fast to the basic principles of prudent investing.

Rational Investing in Irrational Times is a timely new handbook for every investor today. Using a question and answer format, rising star Larry Swedroe identifies the many mistakes even the smartest investors make whether markets are strong or troublesome. He attributes almost all current mistakes and losses to investors' human vulnerability (a tendency to stray from proven investment principles), a lack of investing experience, faulty investment strategies, or errors of portfolio development. Unlike most investment books, the author further shows how investment performance can be greatly improved by building a globally diversified portfolio of passive index funds and/or Exchange Traded Funds consisting of multiple asset classes. Apart from offering a winning strategy, Rational Investing in Irrational Times presents an efficient and proven way to avoid the most common (and costly) mistakes investors make.

Editorial Reviews

From Publishers Weekly

Swedroe, a principal in the firm of Buckingham Asset Management and author of What Wall Street Doesn't Want You to Know, believes that many investors listen to the "experts" instead of doing their own homework when they're choosing investments. People thus make costly mistakes that could have been avoided if they had understood the rules of investing. According to Swedroe, that means understanding that following the herd (e.g., investing in dot-com or tech stocks) and relying on the experts portfolio or mutual fund managers is not the right strategy for most individual investors. "The only way to take control over the risk and expected returns of a portfolio is to use index funds, ETFs [exchange traded funds], or passively managed funds as the building blocks of a portfolio," he says. Swedroe obviously knows this subject well; the book is full of citations of academic studies related to investor behavior and statistics about stock market performance. He also includes a thorough glossary. However, the title and subtitle are somewhat misleading browsers picking up the book may expect nuggets of practical advice on how to keep their money safe in unpredictable markets and economic downturns. This advice is here, but it's buried among pages of references to studies and statistical data. Swedroe's belief that the investment community misleads the average Joe is appealing. Regrettably, his message is overwhelmed by unnecessary data and references that diminish its usefulness.
Copyright 2002 Cahners Business Information, Inc.

From Library Journal

Investment professional Swedroe here presents and analyzes 52 common investing mistakes. For example, he lists the ninth mistake as "Do you avoid admitting your investment mistakes?" He explains that many investors will not sell a losing investment because doing so would admit error in making the original purchase. Through the device of the 52 mistakes, Swedroe analytically explores the psychology and mechanics of investing in innovative ways, e.g., he contends that short-term bonds are more effective for portfolio diversification than the customary long-term bonds. As in his previous What Wall Street Doesn't Want You To Know, Swedroe persuasively argues in favor of passive investing, using index mutual funds as the most effective long-term investment strategy. In this he agrees with luminaries like John Bogle (Bogle on Mutual Funds) and Burton Malkiel (A Random Walk Down Wall Street). Like those books, Swedroe's excellent work should be in all public libraries and in academic libraries with investment collections. Lawrence R. Maxted, Gannon Univ. Lib., Erie, PA
Copyright 2002 Reed Business Information, Inc.

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Product Details

• Hardcover: 352 pages
• Publisher: Truman Talley Books; 1st edition (June 17, 2002)
• Language: English
• ISBN-10: 0312291302
• ISBN-13: 978-0312291303
• Product Dimensions: 9.2 x 6.3 x 1.2 inches
• Shipping Weight: 1.3 pounds
• Average Customer Review: 4.7 out of 5 stars  See all reviews (24 customer reviews)
• Amazon Best Sellers Rank: #334,353 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

28 of 28 people found the following review helpful:

5.0 out of 5 stars Asset Allocate with Index Securities, December 20, 2002

By 

dennis wentraub (schenectady, new york USA) - See all my reviews
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This review is from: Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today (Hardcover)

Modern portfolio theory (MPT) has an aggressive advocate in Larry E. Swedroe's RATIONAL INVESTING IN IRRATIONAL TIMES. Investors are advised to stick with index funds, tax managed funds, or exchange traded funds (ETF) and allocate across a range of asset classes. This investment strategy may be a little dull, Swedroe concedes, but his evidence for its soundness is compelling. This book is organized around 52 mistakes that investors make many of which might be avoided by adopting the author's strategy. Many of these mistakes are familiar to readers of the current crop of investment literature: Stay away from hedge funds, IPO's, market timing strategies, market gurus, yeserday's winners ("recency"), the misuse of margin, and high turnover portfolios. Recognize that many mistakes result from our own behavioral patterns including overconfidence in our skills, failing to sell our losers ("regret avoidance"), mistaking skill for luck, failing to rebalance over time to our basic plan, over-concentration in a company we think we know, etc. Much of this familiar territory. Where Swedroe distinguishes himself is in his relentless focus on a few key ideas that are logically developed and supported by recognized academic research. Financial markets are too efficient in their assimilation of new information for an active manager to consistently outperform a benchmark index. Lucky streaks are common but not proof to the contrary. News is by definition a surprise (viz., randomly occuring and unpredictable) and the evidence is strong that it is a "persistently important factor in stock performance". Active management will not anticipate the unexpected. Achieving "incremental advantage" over the market is therefore virtually impossible. Trading costs, tax issues, and the opportunity cost of having to hold cash in actively managed mutual funds are additional factors that make them structurally deficient. Separate studies by Mark Carhart and Russ Wermers support the underperformance of mutual funds relative to appropriate benchmarks. Meanwhile, the best way to reduce the portfolio risk of bad news in an uncertain world is to diversify. If your ouija board is warped, diversification might be a prudent strategy. The research of Fama and French, Ibbotson and Kaplan, and Brinson, Hood, and Beebower all reach a somewhat surprising conclusion: Far and away the most important factor in equity returns is not stock selection or timing. It is asset allocation based on market capitalization (size) and value (book to market, BtM). It is far more important to be in small cap value stocks or international growth than Industry Leader X over Competitor Y. Using indexed securities is an efficient way to deploy your assets to these broad asset categories. To be sure, Swedroe's argument for indexed securities over individual stocks and most actively managed mutual funds runs counter to an entrenched financial services establishment that is based on exclusive analyst recommendations, punditry, and televised stock news sizzle. Nonetheless every investor will profit by implementing some of the ideas in this book.

16 of 16 people found the following review helpful:

5.0 out of 5 stars Garrison Keilor reminds us, October 10, 2002

By 

John A. Macbain (Carmel, Indiana USA) - See all my reviews
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This review is from: Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today (Hardcover)

weekly that in Lake Woebegone, all the children are above average. Likewise, all investors are above average with the ability to time the market and know which stocks / segments / classes are the next to take off. Isn't this just about true? Curiously, Larry Swedroe disagrees. Larry has written a series of three books, this one being the third. The focus is on passive investing, asset allocation, the fact that none of us are above average, and the fact that none of the experts are above average. (Those that appear above average are just part of the statistical distribution and could not be identified in advance.) As Larry works through this book, he highlights the many ways each of us have shot ourselves in the foot repeatedly through the years. If I had known these investment errors 20 years ago and if I had possessed the courage to overcome them without falter, I certainly would not be working today. The timing of this third book which focuses on the mistakes could not be better timed than during the worst bear market since the period around 1929. Larry shows you how to not make mistakes such as taking too much risk, not being diversified, the importance of fixed income assets in the portfolio, the importance of not chasing the hot sector, and the list goes on and on. Yes, some of our trading friends will become wealthy. Yes, some who use actively managed funds will do very well. But, Larry guides one down the path that is known to be superior to most managed programs given time and expenses. I highly recommend that this book is a must read for every investor, novice or expert. All will benefit from the wisdom contained therein.

John MacBain, Ph.D.

10 of 10 people found the following review helpful:

5.0 out of 5 stars Good book for the ordinary person, July 4, 2002

By 

Frank Rowe (Dover, OH USA) - See all my reviews

This review is from: Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today (Hardcover)

If you are anything like me, those quarterly statements from your mutual fund company haven't looked too hot lately. Since misery loves company, I began lurking at the various forums on Morningstar's web site. Morningstar has several forums, and there are knowledgable folks on several of them. I was introduced to Larry Swedroe's books on the Vanguard Diehards Forum where several posters had made references to his books. Since they seemed to be rather knowledgable investors, I borrowed Larry's first two books from the library and read them. I learned much about efficient markets, risk, modern portfolio theory, asset allocation, investment plans, and developing a portfolio. Although the first two books were good, Rational Investing in Irrational Times is better for an ordinary bloke like me. It's not as theoretical as the other two and explains the mistakes investors make in simple terms. I really didn't have a proper perspective of risk until I read this book. The book helped me develop an investment plan that is the right one for my risk tolerance and goals. In that respect, it is a good book for those who invest in actively managed funds as well as those who invest in index funds. If you're not sure what I am talking about, you will after you've read the book.