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84 of 85 people found the following review helpful
on May 25, 2003
Investment authorities have long recommended diversified portfolios of stocks, bonds, and cash as the best way for investors to pursue their financial goals without courting too much risk. In *Worry-Free Investing*, Zvi Bodie and Michael Clowes cast a gauntlet before this conventional wisdom. Most investors, they argue, should forget about traditional asset classes--especially stocks--and should abandon traditional approaches to risk management, like building a diversified portfolio and gradually decreasing its allocations to risky assets over time. Those saving for retirement or for a child's college education should instead invest in "risk-free" assets, such as inflation-protected bonds and annuities, and certificates of deposit with yields indexed to the cost of college tuition. By relying exclusively on such instruments, the authors contend, investors will never risk losing their nest eggs (as they would with stocks), will ensure that their purchasing power never diminishes (as it might with bonds or cash), will stand a much better chance of achieving their financial goals, and will sleep soundly at night. They will become, as the title promises, "worry-free."
While Bodie has been making his case in academic journals for several years, this book marks his first attempt to reach the masses. To both authors' credit, their manifesto is remarkably accessible--much more so than most investment books aimed at a popular readership. The language is grammar-school simple, and important lessons about risk are presented not just in dull graphs and statistics, but through poignant personal stories: of the hardworking couple in their sixties, whose dreams of a comfortable retirement are shattered when an unexpected market correction teaches them that stocks are not "safe" in the long run; of the thrifty saver who spends her working years scraping together a nest egg, and her retirement in equally joyless frugality because she's afraid of outliving her assets; of the brilliant student who's been admitted to Stanford, but whose bear-mauled college fund can only support an enrollment at Penn State. Readers who have never been moved by impersonal tales of compound returns and standard deviations may find the human tragedies here more compelling (if they can agree with the authors that it's tragic to have to attend Penn State), and thus may come away from the book strongly motivated to develop sound financial plans. But others may find the authors' rhetoric patronizing, emotionally exploitative, and tendentious, particularly since many of their anecdotes are simply tales of greed, and not exempla of the conventional investment wisdom (what financial advisor would recommend a portfolio heavy with stocks to a couple two years from retirement, or to a parent whose child is already applying to college?).
Manipulative rhetoric aside, there is no doubt but that Bodie is brilliant, nor that his ideas deserve the careful consideration of every serious investor. Following his advice to shift our investment strategies from risk spreading through portfolio diversification, to risk transference through things like inflation-indexed annuity contracts, could very well improve our chances of reaching our financial goals. How disappointing it is, then, to read that some of the instruments the authors recommend most highly--inflation-indexed annuities, principal- and inflation-protected equity participation notes--currently do not exist! We can only hope that Bodie and Clowes are right that consumer demand will eventually produce them.
Equally disappointing, albeit for different reasons, is the authors' failure adequately to disclose the main risks of their worry-free approach, particularly the risk of a decline in real interest rates. As fate would have it, real rates began to drop sharply even as this book went to press: TIPS and I Bonds, the real-return bedrock of the worry-free retirement plan, now yield about half what they did just a year ago. This means that it takes much more savings to be worry-free now than the figures in the book suggest. Moreover, the recent decline in real rates has coincided with a contraction in economic growth. This coincidence is in fact a normal occurrence: real interest rates tend to be positively correlated with economic growth rates. Accordingly, the worry-free investor, who must step up her savings as real interest rates decline, will have to save the most precisely when the economy is at its worst--i.e., when the rest of her finances, including labor income, are most vulnerable. If she doesn't accelerate her savings in a decelerating economy, she may begin to fall behind in the pursuit of her financial goals, and never be able to catch up. (Interestingly, the worst times for the worry-free investor may be the best times for the equity investor who is still accumulating assets, since stock prices generally fall along with real interest rates. Thus, even if he were to invest less money, his dollars might buy more shares of stock, and the shares he bought would have a higher expected return.)
Bodie and Clowes also fail to mention the risks that attend Social Security--risks that worry many young investors much more than the vicissitudes of the stock market. The authors acknowledge that a complete reliance on TIPS and I Bonds to fund retirement would require an improbable increase in most Americans' savings rates; hence the worry-free approach to retirement relies heavily on the government's guarantee of a healthy stream of Social Security income to supplement personal savings. Readers who are genuinely concerned about the future of Social Security may therefore conclude that a worry-free retirement plan would do as much to heighten as to relieve their anxieties.
Given the reservations that must be attached to this book's recommendations, readers who know little about investing would do well to follow the advice of the tenth chapter and seek out a knowledgeable financial advisor who can evaluate their needs and assess the likelihood that a worry-free program will address them. More seasoned investors can probably judge the merits of *Worry-Free Investing* for themselves. After reading it, they may wish to revisit some of the canonical works that Bodie and Clowes so brilliantly challenge, especially Jeremy Siegel's *Stocks for the Long Run*.
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50 of 54 people found the following review helpful
on May 31, 2003
The central theme of this book is that stocks are risky, even for long time horizons. In other words, you can't rely on "time diversity" to reduce risk. If you are depending on harvesting capital gains from a stock dominated portfolio to fund your retirement, you might outlive your assets. But, what about that more than 10% average return on the S&P 500 since 1926? The key word here is "average." The average is not necessarily what you will realize over any given span. It took decades for the Dow to return to its pre-depression level. The Dow also went nowhere from the end of the 1960's until the beginning of the 1980's. But at least you got a decent dividend yield in those days. That's why the net returns were generally positive in the past. In fact about half the historical return on the S&P500 was due to dividends. But today's S&P dividend yield is less than 2%. That's too small to compensate for the price risk. There are other reasons why future stock returns might not reach anything like 10%, and the book provides some discussion as to why. However, the authors are short on details, a little too short. If you want a more through discussion, see "Valuing Wall Street," which pretty much takes the same position with respect to the future prospects for stocks. The authors recommend inflation-indexed US Treasury bonds, both TIPS and I-bonds as the core of your retirement portfolio. This was good advice several years ago, but not today. The base rate on these bonds is much too small. Can you live on a 1.5% (real) return? So to some extent this book is already obsolete even though it was just published! Nevertheless, it's a valuable consciousness raiser for those who might not appreciate the flaws in the "cult of equities." I think the retirement investor is going to have to assume some risk and go for non-inflation protected bonds, but that's not worry free investing. Another solution is to keep on working. If you have a more than 50 year time horizon, there's an even worse problem-demography. There won't be enough young people to do the work for the retirees, no matter what their financial assets. So people are going to have to retire later, say after 70. But that's ok as people seem to be living longer in good health. It might be better to hire a personal trainer than a personal investment advisor.
Even though I like the book's viewpoint, I can't give it a top rating because I think it's a little too skimpy. The authors more advanced books are much better. Having read them I find this book a bit of a disappointment.
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26 of 28 people found the following review helpful
on December 2, 2003
Investors still numb from their stock market losses in recent years will find some solace in the message of Worry-Free Investing by Zvi Bodie and Michael J. Clowes. They argue that stocks are "not safe in the long run" - a dismissal of Wharton School Professor Jeremy Siegel's extensively documented work on the subject. It is the nature of equity prices to be uncertain. The unpredictable risk of future stock market returns stems from the unexpected, 'random', flow of information that changes investor's perceptions of a company's value. Their argument is a bit heavy-handed. Equity prices may move unexpectedly in the intermediate term, but over the long run they appear to be positively linked with advances in our economy as measured by our GDP and mirrored in our standard of living. That should give some reassurance to long term investors, but the connection gets no mention here.
The authors make the case for investing in inflation adjusted, government protected I Bonds and TIPS (Treasury Inflation-Indexed Securities also called Treasury Inflation Protected Securities). Focusing on the major goals of saving for retirement and providing for college education costs, Bodie and Clowes show how much an investor needs to save today. If the calculations seem a bit heady, readers are referred to the book's companion web site 'calculator'. At the heart of worry-free investing as defined by the authors is the defense of an individual's future buying power rather than the building of incremental wealth.
Stocks have been widely touted as the only reliable hedge to inflation. However, during the 1970's sustained inflation ravaged stock market returns on an (inflation) adjusted basis. Had TIPS and I Bonds existed, they would have outperformed a diversified basket of stocks. Indeed, most investors today should use TIPS and I Bonds alone, we are boldly told. And all investors should invest at least some of their retirement assets in these two investment tools. Unfortunately for those inclined to follow this last advice, it is not clear if many (or any) company sponsored retirement plans (401(K)'s etc.) offer these products.
The author's focus on inflation at a time when it is barely detectable may seem problematic, but a recovering economy, growing budget deficits, and a weakening dollar carry their own consequences. In the end, Bodie and Clowes overplay their case for I Bonds and TIPS. Not all products and services in the economy adjust in lockstep as do these bonds with Bureau of Labor Statistics measures of inflation. As a consequence a near exclusive reliance on these bonds may prove comforting but ultimately ineffective to reach a desired goal. Still, the understanding and use of these investment tools could prove important in a balanced portfolio in the years ahead. Now is the time to look at the issue.
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15 of 19 people found the following review helpful
on June 11, 2003
As a 64 year old entrepreneur, having had a used book store, an art gallery, and small press, I have been very cocky, some would say arrogant, in my investment habits, aided and abetted by my subscription for ten years to the Wall Street Journal, and my Friday night standing date with Louis Ruykeyser, and a bowl of popcorn. I thought I would be living on the Rue de Facile, Easy Street to non-French majors. However, I watched my margin account go from a few hundred thousand, to a miserly 45,000. in two years. The roller coaster at Nantasket Beach was the last time I had that sinking feeling, back in l956.
I am now reading this book by Svi Bodie and Michael Clowes and wishing I had had the intestinal fortitude to sell off and buy TIPS in April of 2001. The sketches of families at three different life stages and the fairly simple formulae (or equations) to help the amateur financial planner like me, to get a grip, all help me to feel more sanguine about the next 20 years of thrifty and practical retirement living.
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15 of 20 people found the following review helpful
Bodie makes the case that stocks are a risky investment, especially when you are withdrawing from a portfolio in retirement.

Bodie advocates using the relatively new inflation protected securities....I-bonds and TIPS.

Even if his recommendation had merit when he wrote this book, times have changed since the book was published. Effective January 1, 2008, I-bonds were pretty much wiped out as a viable investment for individuals. The previous annual purchase limit for I-bonds of $30,000 was reduced to only $10,000 per year. The extremely relatively low limit of $10K basically eliminates I-bonds as a personal retirement investment.

The other major change is that the "real" interest rate on TIPS has declined from 3% down to only 1.77% per September 2008 data.

Per Bengen's seminal work and the Trinity Study, a balanced portfolio of roughly 60:40 stocks to bonds can produce an inflation adjusted 4% SWR (safe withdrawal rate). This means you need to accumulate 25 times the amount of income you need at retirement from your portfolio. With TIPS at 1.77% real return, it would take 56 (1/.0177) times the amount of income you need.

Times have also changed since this book was published with respect to immediate annuities. Bodie conflicts himself in the book. In one place he says inflation adjusted immediate annuities are not available.........but in another place in the book he says they are available. I checked Vanguard's web site......and Vanguard offers inflation adjusted immediate annuities (including joint and survivor options).

I was surprised to see Bodie suggest a combination of either CD's, I-bonds, or TIPs with call options on the S&P 500. With the current low level of interest rates, this option no longer makes sense. I also think this is too complicated of an option for most Americans. Since we don't teach basic investing in our American school system, most Americans receive F grades on tests covering basic investing.

I was also surprised to see Bodie stick with the age old 70% income replacement ratio. Conventional wisdom (coming from the AON/Georgia State studies) says you need 70 to 80% of your income in retirement. If you run the numbers on different family situations, you will find the income replacement ratio can vary from 40% to over 100%....depending on the specific situation of that family. Bodie includes a worksheet to calculate expenses, but he says not to worry about your exact spending until you are already in retirement! It is not that difficult to estimate your actual spending using your pay stub if you are a W2 worker. The 70% rule of thumb might be close enough if you are 30 years from retirement........but once you get within 10 years of retirement you should calculate your spending to give you a more accurate idea of the nest egg you need.
Bodie correctly points out that TIPs mutual funds do generally track inflation over time and the average return is the average of the TIPs securities held by the fund.

I do believe about ½ of your bond portfolio should be comprised of TIPs. For example, 50% of your bond portfolio can be invested in Vanguard's Total Bond Fund (VBMFX) and 50% in Vanguard's TIPs fund (VIPSX). This gives your bond portfolio some protection against inflation.

TIPs have not been in existence very long. Vanguard's TIPs fund VIPSX has had a 7.76% compounded return from 2001 through 2007. Vanguard's Total Bond fund VBMFX had a 5.48% return over the same time period.

I also agree with Bodie that low cost immediate annuities can have a place in a retirement portfolio. Milevski's work indicates retirees should wait until they are in their 80's before purchasing immediate annuities (the payout ratio is high in your 80's because your expected life span is short). The real trick is figuring out the optimum percent of your portfolio to annuitize. The general rule of thumb is to annuitize 20% to 50% of your portfolio.

Given today's low inflation and low interest rate environment, plus the basic elimination of I-bonds due to their new $10K max annual limit....Bodie's recommended tools don't really work as effective as when the book was published.

With the 67 million Baby Boomers starting to retire, my prediction is that we will see new tools for better managing the distribution phase of our lives.

Since Bodie's recommendations don't really make sense for the reasons noted above, it might make sense to skip this book and read some of the books noted below. They cover the range from the basics of index fund investing to asset allocation, and to the use of immediate annuities.

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
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2 of 2 people found the following review helpful
on June 1, 2013
I first read this book around its initial publication. That was ten years ago and I was trading the market, mostly Covered Calls, and the occasional more risky option long shot. In fact, upon my retirement nearly 20 years ago, when we were flush with cash, we divided the money up into three accounts or buckets as I called them. One of the buckets was IBonds which my wife demanded to balance off the risk nature of stock trading. Another bucket was cash. So, let's see what happened since the 2001 purchase of IBonds with all three buckets at $60,000 in each. (Real life instead of all the hype from Financial Advisors and supposed Gurus.) My wife is a bit cautious because an annuity that was supposed to pay her $5000 a month at age 65 for life, went belly up. That is, the largest insurance company in California, went bankrupt. So if you think Annuities are guaranteed, forget it. Like the market, insurance companies come and go.

1) The IBonds were purchased at 3% guaranteed fixed income in 2001 plus annual inflation (CPI). We have averaged about 5-6% a year over the past 12 years. They will double in value by next January (2014) to $120,000. Seems slow to me yet the stock market fared worse over the past ten years and many funds actually lost money. The important thing is I never worried about the ups or downs, we were protected from inflation, and it was truly risk free investing. When I cash them out some day (good for 30 years), there will be no state tax and only a federal tax based on how much we cash out at the time. In retirement today we are able to live off our social security income and we have not paid any taxes for the past ten or more years.

2) Now...let's examine the other two buckets. The Trading bucket with the so called safety of Covered Calls was an interesting experience at the time but a disaster in the long run. It was a hard lesson to learn, to swallow my pride, and to agree that my wife was indeed correct. Some months I would be up $20,000. Other months down $20,000. It was fun, provocative, stimulating, and challenging. But...in the long run, due to the nature of stock trading, I lost everything in that bucket. Zero, nada, zilch.

3) Cash Bucket. We love to travel so we bicycle toured over much of the world for several years. it was an incredible experience. Eventually much of our cash ran out and I invested $30,000 into going back to school to get another MA to Teach English abroad at the university level. That was a great investment as I made money teaching in the Middle East for four years, saved our social security income, and brought our cash back up to $60,000. Upon returning back to the USA six years ago, cash rich once again, we bought a used motorhome, eventually a Honda CRV as a tow vehicle, and live the life of a travel vagabond exploring the American West. By occasional seasonal work (Christmas season) and spending beneath our social security income, we have been the living the "Life of Riley" keeping our cash bucket full.

Moral of story ... read and reread the book, "Worry Free Investing". The author was correct. The best invesments for most Americans are guaranteed I-Bonds. I notice that as I age (now in mid-seventies), financial peace of mind becomes more important. The razzle-dazzle days of stock trading and the market are gone, replaced with the certainity of I-Bonds. My wife is happy, I am happy, and we continue to travel and bicyle tour, and kayak our way through our retirement. We probably won't touch our I-bonds until they have doubled again to the $240,000 mark. It's all about compounding as Einstein once observed. And IBonds are right for most people. One other suggestion...Read the book, "Your Money or Your LIfe", by Joel Dominguez and Vicki Robin. It literally may change your life as it did mine!
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15 of 21 people found the following review helpful
on June 22, 2003
This book has major flaws. First the "worry free" investment strategy relies on a base of Social Security Income, an unrealistic assumption given the demographics of our country. Second the yields on Ibonds and TIPS are too low and the savings rate required too high to be a realistic plan for most American's to become financially independent. The book relies on unrealistic examples to illustrate that a 3% return could provide for retirment (even if 3% was available today). One example used in the book is "Paul Younger" a 30 year old male planning to retire at age 67. Using a target income at retirement of $21,000 (!!)and social security income of $13,812 per year (worry free?), the calculation for retirement shows Paul must produce only $7,188 per year from his retirement savings.
Even in the chapter on finding a financial advisor, the Author offers the designation "RIA" as a way of determining the competence of an advisor. The qualifications for an "RIA"- filling in the paperwork to register with the state or SEC and paying a fee.
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1 of 1 people found the following review helpful
on September 20, 2009
The bottom line, the stock market is intrisically unpredictable and we are not saving enough. He makes a strong case for diminshing reliance on the stock market. He also has a great chapter on inflation that makes a strong case for I bonds and TIPS. The key issue is can we save enough money beginning at an early age to generate a large enough account to supplement social security. Bodie goes through specific examples and offers an on line calculator to help figure out what you need. I thought the formulas in the book were too complicated for the average person to use, but you can bypass them and go to the easy to plug in online calculator at [...] . Bodie suggests a way to invest safely. As of Sept 2009 I-bonds and TIPS are paying 0% interest. The US government Bond site lists the inflation rate at a -5%. However the principal is safe and will not go down. The interest rates change every 6 months. E bonds are paying 1.5% and are based on 5 year treasury notes. The book forced me to diminsh my holdings of stock and that has given me more comfort. This is a must read for any serious investor.
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on December 1, 2014
It seems to me a bit too simple that all we need to save our money from inflation is to invest in TIPS and Inflation adjusted TBONDS.
I hope the author knows what he is talking about.
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on August 22, 2011
Best source I've seen on advantages of Inflation Protected Securities . Written for non-financially sophisticated readers who want to avoid the risks inherent in the stock market.
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