Most helpful positive review
84 of 85 people found the following review helpful
Brilliant, important, imperfect
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*.