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The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between Hardcover – November 2, 2009
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"So how do we take care of ourselves? Easy. I believe The Investor's Manifesto: Preparing for Prosperity, Armageddon and Everything in Between is the shortest and most lucid explanation of index investing and simple asset allocation yet written. . . . This is a must-read book."
—Scott Burns, Syndicated Columnist and Principal of Assetbuilder.com
From the Inside Flap
As recently as a generation or two ago, the lack of financial ability wasn't a handicap for the average person. But in today's world—where most of us have been forced to manage our own investment and retirement portfolios—it has become essential to understand the finer points of our financial life.
While the meltdown of 2008–2009 has compounded the complexity of the investment landscape, timeless investment principles can help you navigate even the toughest investment terrain. That's why bestselling author William Bernstein—a grassroots hero to independent investors—has written The Investor's Manifesto.
Approaching the problems of investing and saving from the perspective of someone who has had to figure it out for himself, Bernstein knows firsthand how difficult these endeavors can be—especially for those with little professional experience in this arena. Now, with the current market maelstrom as a backdrop, he skillfully describes what it takes to plan for a lifetime of investing, discussing stocks and bonds as well as the relationship between risk and return. Written in a straightforward and accessible style, The Investor's Manifesto:
Explores the theoretical basis of investing and designing portfolios, drawn in large part from financial history
Offers insights on dealing with the emotions and attitudes that routinely cripple investors
Discusses how to deal with the investment industry when executing strategies designed for anything from saving for retirement to putting a child through college
Addresses ways in which individual investors can construct diversified portfolios that can blunt potentially damaging market forces
Covers the concept of Pascal's Wager—which will enable you to identify and avoid worst-case investing scenarios
If there were ever a time to take control of your financial future, it is now. Potentially generous returns are available to the brave, the disciplined, and the liquid. If you follow the advice found here and keep your head while others lose theirs, then you will have a fighting chance of avoiding the financial pitfalls in front of you and profiting over the long-term.
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Top Customer Reviews
I have enjoyed Bernstein's previous books, and I really like his Retirement Calculator from Hell story posted on his Efficient Frontier web site. I looked forward to reading the Investor's Manifesto.
Bernstein correctly points out that every few years we experience a Bear Market in stocks, but nobody knows when to predict when the next one will begin. If you examine history from WWII, you will find we have experienced about 13 Bear Markets in 65 years.....or roughly a Bear Market about every 5 years. Bernstein's solution to the dilemma of not knowing when the next Bear Market will begin is to hold a diversified portfolio of low cost index funds, including both stocks and bonds. Bernstein's recommendation is not new with regards to holding a portfolio of both stocks and bonds. Benjamin Graham back in his 1934 book Security Analysis recommended roughly a 50:50 split between stocks and bonds.
At first, I was a little surprised that Bernstein said the field of finance (and investing) is a relatively small one compared to other fields. He said the number of major ideas is small compared to medicine, engineering, or the social sciences. After I thought about it, I realized Bernstein is right. A while back I was doing research for a short story on investing. My research showed very few major ideas and most of them were just within the last 20 years or so. For example, it took until 1994 for William Bengen (engineer turned financial advisor) to study past stock market returns and conclude that retirees should not withdraw more than an inflation adjusted 4% of their initial portfolio during retirement. Up until that point, many people suggested you could withdraw 10% annually, the historic return of the stock market. In 1998, the famous Trinity Study was published with findings similar to Bengen's. Fama and French's 3-factor study identifying small value stocks as giving the highest returns was published in 1992. Monte Carlo analysis of retirement withdrawals did not start until 1997.
In recent years, the financial planning profession has started to recommend SPIA's (single premium immediate annuities) for retirement. There are pros and cons of SPIA's including giving up control of your money to an insurance company for 20 or 30 years. In most states, there is a State Insurance Guaranty Association which is a group of insurance companies which are supposed to pitch in and maintain annuity payments to policy holders if the issuing insurance company goes bankrupt. As the Sub-Prime Crash of 2008 pointed out, many insurance companies (think AIG) participated in the mortgage security shenanigans and almost went bankrupt. Because of the risk of insurance company bankruptcy, Bernstein is recommending avoiding SPIA's. He speculates that maybe the Federal Government will issue SPIA's in the future.
Bernstein correctly points out that the best annuity you can buy....is to wait until age 70 to start drawing Social Security.
Bernstein also correctly points out that very few people can be their own financial advisors. To be your own effective financial advisor, you have the following four traits: 1) interested in investing, 2) math skills, 3) knowledge of history, 4) understand and control your own behavioral finance tendencies.
Bernstein believes the Gordon equation should be used to predict the future returns of stocks. When the book was written, the Gordon equation predicted future stock market returns of 4-8% in inflation adjusted terms.
Bernstein says Markowitz's mean variance optimization is a great teaching tool, but it should never actually be used in the real world of investing.
Bernstein also recommends not investing in the countries with the fastest growing economies. Most studies have found an inverse relationship between economic growth rate and stock market returns.
In regards to asset allocation, Bernstein suggests the starting point of the Rule of 100 (100 minus your age is your suggested stock allocation). Jack Bogle calls this rule "your age in bonds".
Bernstein cites Benjamin Graham's 1934 classic The Intelligent Investor with regards to asset allocation. Graham recommended a 50:50 stock to bond allocation..."We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a converse inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50-50 between the two major investment mediums."
Bernstein is ok with tilting your portfolio towards small-value per the Fama-French 3-factor study, but correctly points out it might take 20-30 years for small cap value to show its out-performance.
In this book, Bernstein recommends including your Social Security and pension as a bond in your asset allocation. When I recently heard Bernstein speak, he said it was much simpler not to include these two items in your asset allocation. In my experience, there is no harm at figuring your asset allocation both ways (with and without SS and pensions).
Bernstein also generally agrees with the current financial planning industry rule of thumb of not withdrawing more than an inflation adjusted 4% of your retirement portfolio. His modification is...2% SWR is bulletproof, 3% ok, 4% you are taking some risk, and 5% you are destined to eating Alpo.
Bernstein believes in the role of behavioral finance impacting investor's decisions. He includes some reference to behavioral finance issues in this book. Separately, I have heard him recommend reading Jason Zweig's book Your Money and Your Brain. I have read Zweig's book, but would instead recommend Pompian's book Behavioral Finance and Wealth Management.
I found Bernstein's story about Venice in the 1300-1500 period very interesting. Venice forced wealthy people to buy government bonds yielding 5%. A secondary market arose where these bonds traded anywhere from 20% to 90% of face value, depending on the condition of the country. Given the U.S. huge deficits, maybe our Federal Government will institute the same law as Venice did.
All-in-all an easy read which covers the basics of investing very well. This book is shorter than most, so hopefully more people will actually read the book. I think Bernstein accomplished his objective of making a shorter and simpler book that more people will read and understand. I'm going to buy a copy for my son to read.
On the importance of saving: "Save as much as you can, and do not stop saving until you die."
On risk versus return: "[I]n the course of earning those higher returns, your portfolio is going to lose a truckload of money from time to time. If you desire perfect safety, then resign yourself to low returns. It really cannot be any other way."
On glib explanations of market behavior: "The reason that 'guru' is such a popular word is because 'charlatan' is so hard to spell."
On buying low: "[M]ost grizzled veterans will tell you that the best purchases are often made when they feel they are about to throw up."
On bad behavior: "Our emotions define our humanity...but in the world of finance, they are death itself."
On performance chasing: "Alas, small investors incessantly chase returns the same way that dogs chase seagulls up and down the beach."
On overconfidence: "In the investment world, you are not above average. You are likely not even close."
Clearly, Dr. Bernstein does not consider it his mission to massage your ego. His goal is to make you a better investor, and I find his direct, no nonsense approach very effective. Even experienced investors who feel they have already learned the basics can benefit from this book. In the cacophony of news and opinion we face every day, it is necessary to take a step back every once in a while and convince yourself that you are not getting caught up in the moment and doing foolish things.
In a chapter devoted to building a portfolio, we are reminded that our investments must be tailored to our personal circumstances. To illustrate this, Bernstein introduces us to four hypothetical investors named Young Yvonne, Sheltered Sam, Taxable Ted, and in-Between Ida. As he constructs an appropriate portfolio for each of these individuals with distinctly different ages and backgrounds, we can see how fundamental principles are put to work in the real world. I found this chapter to be the most insightful in the book.
Be forewarned. The author advocates a long-term perspective and the use of low cost index funds. This book does not discuss stock picking tips or options strategies. If you are looking to beat the market, you will be disappointed. Indeed, the author will try to ween you away from what he considers harmful behavior. He will remind you that the goal of investing is not to get rich - it is to not die poor. The danger here is that you may give up your dream of making the big stock market score and spending the rest of your days sipping Mai Tai's on a beach somewhere. This is not so bad since the odds are that you would have ended up serving Mai Tai's on a beach somewhere.
Readers of Bernstein's previous books as well as the works of other investment luminaries like John Bogle, Jason Zweig, and Jonathan Clements, will not find anything here that they haven't read before. But the presentation is so concise, direct, and effective that it can't help but reinforce your understanding of those basic investing truths which we too often forget when immersed in bear market events. Of all the investments I have made over the years, I consider the purchase of this book one of my better ones.