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The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk Hardcover – October 13, 2000
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“Bernstein has become a guru to a peculiarly ’90s group: well-educated, Internet-powered people intent on investing well—and with minimal ‘help’ from professional Wall Street.”
--Robert Barker, BusinessWeek
William Bernstein is one of today’s most unlikely financial heroes. A practicing neurologist, he used his self-taught investment knowledge and research to build a popular investor’s website. Now, in the plain-spoken The Intelligent Asset Allocator, he shows independent investors how to build a diversified portfolio—without the help of a financial advisor. A breath of fresh air for investors tired of overly technical investment tomes, this book will help investors:
- Learn the risk/reward characteristics of various investment types
- Understand and apply portfolio theory for an improved risk/reward ratio
- Sharpen their focus, and take control of their investment programs
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I enjoy thinking about asset allocation and how to best structure a portfolio. No matter what studies you may trust the most, asset allocation is clearly a major driver of portfolio returns. This book invites you to deconstruct your assumptions and build them back up again. I would have liked a book ten times as long, but then I really enjoy seeing all the intricacies. Even so, there is a lot hinted at in these pages that gives you further directions to explore. Even if you are familiar with diversification, various asset classes, portfolio theory and the reasons for indexing, there is a lot of value here. I will admit the book is growing somewhat dated with respect to the time frame it discusses, but the book loses nothing in relevance.
I am still building assets, and because this book referenced both standard and aggressive growth portfolios (I employ a portfolio very similar to the 'Madonna' Portfolio he mentions, with a couple key differences), I knew I was on the same trail as the author, which was incredibly gratifying for me. For those with different backgrounds, the insights you find relevant may differ.
I will say the book would benefit from a greater discussion of various portfolios. How important is it to mimic the market (or rather, what is the risk associated with failing to look like the market, which is true to some degree of every portfolio?) What is the role of TIPS in a portfolio (or rather, when does Inflation become a central risk? I maintain that you only need them in retirement, but am eager to hear different opinions.) How much risk should you take with the credit portion of your portfolio (I use intermediate term treasuries myself - covariance vs equities is just too superior not to, even with the risk of rising rates. Again, I like to hear other opinions.)
With reference to portfolios I've read about: the 'Gone Fishing Portfolio' was also amazingly comprehensive, if not as focussed on portfolio building as the IAA, and the portfolio it proposes is pretty solid. Swenson's books are very good, and his suggested portfolio is top notch, if history is any judge. Swedroe suggests a pretty bullet-proof portfolio, so even though returns won't blow you out of the water, they should be solid, and the ride should be serene (which can be very important in a retirement portfolio, as lack of volatility both increases SAFEMAX and decreases the odds of running out of money early... i.e. the trade-off for lower returns can yield a higher cash flow.) All of these authors are worth the read.
What Bernstein does do well is to collect the results of much academic research with his own analysis, and clearly show the
facts about investment performance. The principle findings are that each type of financial instrument - large cap stock, small cap stock, bond, etc., have characteristic historical performance; and that the most important decision investors face is their allocation of their investments across these classes. He gives simple but powerful suggestions.
Bernstein's goal is to make this information available to all, whether or not the reader understands financial math and statistics. I believe that he does a good job at this, separating the mathematical and statistical details for those who want to see them.
I would strongly recommend this to any investors who are still purchasing individual stocks or actively managed mutual funds.
What I liked about this book are the explanations about risk and reward in a straight-forward understandable math context. Risk is defined as the standard deviation of the annual returns for a particular asset (e.g, stock, fund, bond). Dr. Bernstein uses a set of interesting coin toss investment examples throughout several of the chapters to illustrate this risk/reward strategy. Nice approach to introducing the topic for each chapter. By Chapter 3, simple risk/reward plots are shown based on different ownership percentages of two assets. The book does a great job explaining the rationale for selecting portfolio percentages for various asset classes.
Actually, Dr. Bernstein has published a collection of books on asset allocation, each with a different level of technical content.
The Intelligent Asset Allocator
The Four Pillars of Investing
The Investor's Manifesto
I found the following quote on his website appealing: "When I wrote The Intelligent Asset Allocator, I thought I was producing a volume for the average investor. Turns out I was wrong: the book's audience was closer to the average electrical engineer. So I tried a little harder and produced The Four Pillars of Investing. Close, but no cigar: still lots of complaints about all the math and graphs."
Regardless of which book you acquire, asset allocation and portfolio theory is worth understanding for any investor.
Most recent customer reviews
The first calculation of standard deviation is wrong. What he said about long term SD vs.Read more
Does it work? Ask again in 30 years. Will it hold true then? Who knows