The Little Book of Safe Money
Jason Zweig

“The keys to investing are simple: diversify, keep costs low, buy and hold.”

“Like dieting, investing is simple but not easy.”

“It is absolutely mandatory for you to keep a reservoir of liquidity in your portfolio at all times.”

“No matter how valuable an investment may be or appear to be, it’s of no practical value to you unless it’s liquid when you need to cash out.”

“The biggest single holding in your portfolio is you: the income that your career will generate over the rest of your life.”

“Anyone whose human capital is vulnerable to the escalating cost of living should consider investing heavily in TIPS.”

“Wall Street is forever inventing another newfangled way to promise higher yield at low risk.”

“In Japan at the end of 1989, the leading Nikkei 225 stock index was at 38,915.87; two decades later, it languishes below 10,000.”

“Invest as if stocks are likely-but not certain-to beat all other assets. Keep some money in bonds, cash, and real estate just in case they do better.”

“Stocks are not certain to outperform bonds and cash no matter how long you hold on.”

“Men should make a special point of having their wives review any choices the husbands regard as a sure thing.”

“It is irresponsible for a husband to keep such tight control of the family’s investments that his wife will find them completely unfamiliar after he is gone.”

“In the stock market, much of what seems to be patterns is, in fact, just random noise.”

“You should never act on an investing idea the same day you get it.”

“Never invest in anything on the recommendation of a friend or family member alone.”

“Commit to a dollar-cost averaging or automatic investment plan that require you to add a little bit of money every month.”

“If you are investing for retirement 30 years away, buy a total stock-market index fund and hold it continuously for the next three decades.”

The Millionaire in You
Michael LeBoeuf

“Money should be invested passively. Passive investing means buying and holding no-load, low-cost index mutual fund with performances reflecting that of entire markets.”

“Don’t waste your time playing the market. Own the Market, live your life and enjoy the journey.”

“Taylor Larimore–summarized the index advantage best: “Index funds offer much more than superior returns. They also provide maximum diversification, no overlap, no style drift, no manager changes, lower turnover, lower expenses, lower taxes, greater simplicity and peace of mind.”

“The master key to wealth can be summed up in just one word: Simplicity.”

“The main reason index investing is so successful is because fewer people have their hands in your pocket.”

“Timing the market is for losers. Time IN the market will get you to the winner’s circle, and you’ll sleep a lot better at night.”

The Only Guide to Alternative Investments
Larry Swedroe and Jared Kizer

“Some investment products are so complex in design that it is very difficult, if not impossible, for the average investor to fully understand the risks entailed and the costs incurred.”

“When considering an asset class for inclusion in a portfolio, — investors need to consider the diversification benefit of the investment.”

“Recency is the tendency to give too much weight to recent experience, while ignoring the lessons of long-term historical evidence.”

“The evidence from academic studies demonstrates that equity REITs, both domestic and international, offer an attractive risk/return trade-off” and provide meaningful diversification benefits to portfolios.”

 ”The bottom line is that investors should consider devoting at least some significant portion of their fixed-income allocation to inflation-protected securities.”

” “Only informed and disciplined investors should consider including commodities in their portfolio.” 

“Unless they are highly risk-averse, investors should probably not buy an immediate fixed annuity until approaching age eighty.”

“Despite its low correlation with other portfolio assets, high-yield debt provides almost no unique benefit in terms of portfolio diversification.”

“In times of crisis, the markets for illiquid assets can virtually dry up.”

“For most investors the only way to obtain sufficient diversification of the risks of investing in speculative securities is through a mutual fund.”

“After ten years the survival rate of private firms was only about 34%.” (2002 study)

“Private equity investors forgo the benefits of liquidity, transparency, broad diversification, and the access to daily pricing that mutual fund investors enjoy.”

“Understanding the difficulty of identifying superior hedge-fund, venture-capital, and leveraged-buyout investments leads to the conclusion that hurdles for casual investors stand insurmountably high.”

“While preferred stocks offer relatively high yields, in general, they possess enough negative attributes to make them inappropriate choices for individual investors.” 

“One of the rules of prudent investing is to avoid complex securities because the complexity is likely to favor the issuer.”

“The bottom line on hedge funds is this: They are ’sinkholes’ for investors.”

“Variable annuities are products that are sold, not bought.”

“Variable annuities (VA) convert what would otherwise be long-term capital gains into ordinary income.”

“Education, or a good fee-only advisor who is not influenced by commission-based compensation, can be the armor that protects investors.”

To be continued …

The Investor’s Manifesto
William Bernstein

 ”Wall Street is littered with the bones of those who know just what to do, but could not bring themselves to do it.”

“Very high returns are almost always made by those brave enough to invest when the sky is blackest.”

“Many investors lean heavily on past returns to gauge future ones. This is a mistake.”

“No risk matters more to investors than that of running out of assets before they die.”

“The most spectacular example of luck masquerading as skill was the recent case of William Miller, skipper of the Legg Mason Value Trust.”

“Mr. Buffett is not so much a money manager as a businessman.”

“The Morningstar database suffers from so-called ’survivorship bias,’ meaning that hundreds of poorly performing funds have disappeared from their fund universe, all of which would have underperformed the index funds.”

“Over the long haul, the differences in the amount of wealth provided by different stock asset classes can vary enormously, and owning all of them helps minimize your chance of dying poor.”

“The investor should forget trying to pick stocks and mutual funds or to time the market. The best the investor can do is to maximize returns by minimizing expenses.”

“Age is the first factor determining the overall stock/bond allocation. Investor risk tolerance is the second.”

“The most important asset allocation decision is the overall stock/bond mix. Start with the “age=bond allocation’ rule of thumb.”

“Be highly skeptical of sophisticated ‘black box’ methods of asset allocation.”

“China as had one of the world’s highest economic growth rates, yet between 1993 and 2008 its stock market has lost 3.31 percent per year.”

“Nations with the most rapidly growing economics quite often have the lowest stock returns.”

“Nothing last forever: more often than not, recent extraordinary economic and financial events tend to reverse.”

“The sooner you turn off CNBDC, get out into the bright sunshine, and take a walk, the sooner you’ll feel better about your investments.”

“You’re not going to impress the crowd at your country club by telling them you own shares of an index fund. Let them laugh; the joke’s on them.”

“If you’ve never been tested before, I strongly urge that you encounter your first bear market conservatively invested.”

“The most important investment ability of all is emotional discipline.”

“Do not invest with any mutual fund family that is owned by a publicly traded parent company.”

“Most retirees should purchase ‘longevity insurance’ by postponing Social Security until age 70, and perhaps by adding a commercial immediate fixed annuity as well.”

“In general, variable annuities come wrapped in enormous fees and are offered by insurance companies, that as a group constitute some of the worst players in the financial business.”

“Rebalance your portfolio approximately once every few years.”

The Lazy Person’s Guide to Investing
Paul Farrell

Investing really is very simple stuff. You can do it yourself.”

“Lazy portfolios are keep-it-simple, no-hassel, low-stress, time-saving, low-maintenance portfolios–so you can get on with the business of everyday life.”

“The only solution is to be in the market all the time and stop jumping in and out.”

“In a study of 66,400 Merrill Lynch investors, professors Odean and Barber discovered that buy and hold investors actually beat the more active investors by a fairly sizeable margin, 18.5% to ll.4% over a six-year period.”

“You don’t need to complicate your life–just stick to the basic Scott Burns Couch Potato Portfolio (50% S&P/50% Total Bond Market) with no stress, except your little ten-minute annual rebalancing efforts.”

“Taxes, Time, and Psychology favor the laziest portfolios.”

“A penny saved is a dollar earned, thanks to compounding.”

“Charles Schwab says that for every five years you wait to start saving for retirement, you’ll have to double your annual savings.”

“Kahneman was asked by a CNBC anchorman the day afer his Nobel was announced what investment tips he had for viewers. He responded, ‘Buy and hold.’”

“Experience has taught me that the relentless noise from breaking news sources, like CNN and CNBC, easily distracts most investors from what really works in the long run.”

“Where does Fama invest his retirement money? In index funds. Mostly the Wilshire 5000–.”

“Perhaps the most amazing insight I got out of this review of the investment habits of Nobel laureates is the simplicity of their investing strategies.”

The Little Book of Common Sense Investing
John C. Bogle

“Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.”

“Common sense tells us–and history confirms-that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost.”

“The brokers, the investment bankers, the money managers, the marketers, the lawyers, the accountants, the operations departments of our financial system are the only sure winners in the game of investing.”

“The lower the costs that investors as a group incur, the higher rewards that they reap.”

“Common sense tells us the obvious; while owning the stock market over the long term is a winner’s game, beating the stock market is a loser’s game.”

“We investors as a group get precisely what we don’t pay for. So if we pay nothing, we get everything.”

“It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

“Investment of $10,000, 1980-2005:

Index Fund….Managed Fund
$179,200…….$179,200…….Gross Return
$170,800………$98,200…….Pre-Tax Return
$149,000………$61,700…….After-Tax Return
$65,000………..$23,100…….After Inflation Return”

“Don’t look for the needle–buy the haystack”

“The average fund portfolio manager lasts just five years.”

“Of the 355 equity funds in 1970, fully 233 of those funds–almost two thirds–have gone out of business. Only 24 outpaced the market by more than one percentage point a year–one out of every 14. Let’s face it: These are terrible odds!.”

“A mutual fund portfolio continuously adjusted to hold only Morningstar’s five-star funds earned an annual return of just 6.9% between 1994 and 2004, nearly 40 percent below the 11.0% return of the Total Stock Market Index.”

“Of the 35 newsletters (tracked by Hulbert) that existed in 1980, only 13 are still in business today. Only 3 outperformed the market.”

“Index funds endure, while most advisers and funds do not.”

To be continued …. here.

The Intelligent Investor (Rev Ed)
Benjamin Graham and Jason Zweig

“It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits.”

“Allocating at least 10% of your retirement assets to TIPS is intelligent.”

“The worse the future looks, the better it usually turns out to be.”

“The primary cause of failure is that investors pay too much attention to what the stock market is doing currently.”

“The key to rebalancing is having a predictable schedule”

“For most investors, intermediate bonds are the simplest choice, since they enable you to get out of the game of guessing what interest rates will do.”

“For most investors, bond funds beat individual bonds hands down.”

“If you had invested $1 in U.S. stocks in 1900 and spent all your dividends, your portfolio would have grown to $198 by 2000. But if you had reinvested all your dividends, your portfolio would have been worth $16,797.” (Stock indexes do not include dividends.)

“It is essential that (the intelligent investor) entrust himself only to firms of the highest reputation.”

If you find yourself trading more than twice a year–or spending more than an hour or two per month on your investments–then something has gone badly wrong.”

“If you started investing $100/month in September 1929, your money would have grown to $15,571 by August 1939. That’s the power of disciplined buying–even in the worst bear market of all time.”

“The knowledge of how little you can know about the future, coupled with the acceptance of your ignorance, is an investor’s most powerful weapon.”

“Alan Greenspan said on January 7, 1973: “It’s very rare that you can be as unqualifiedly bullish as you can now.” (1973 and 1974 turned out to be the worst years for the stock market since the Great Depression.)”

“A great company is not a great investment if you pay too much for the stock.”

The Intelligent Portfolio
Christopher Jones

“Sadly, our educational system has been woefully behind the curve in preparing people for the heavy new financial responsibilities of a self-directed investment world.”

“Be careful of how your advisor gets paid. Conflicts of interest can yield advice that is not in your best interest.”

“There are many ways to measure risk other than looking at just the volatility of returns.”

“A study of investor behavior by the research firm DALBAR found that market timers in stock mutual funds lost -3.29% per year on average relative to investors who pursued a consistent strategy.”

“Unlike a mutual fund, it is quite possible for a single stock to lose all its value by going bankrupt.”

“Never make the critical mistake of being too concentrated in your employer’s stock.”

“Fund expenses are like termites. They can quietly eat away at the returns of your investment without you even realizing there is a problem.”

“From the analysis of 22,472 mutual funds–only about one quarter of mutual funds were able to demonstrate performance that exceeded what you could achieve with a low-cost index fund.”

“Evaluate diversification at the household level, not at the individual account level.”

“If you own a home already, you probably have enough real estate in your household portfolio.”

“Asset allocation explains more than 90% of the variation in returns for most mutual funds.”

“You are virtually guaranteed to outperform more than two-thirds of the actively managed funds with low-cost index funds.”

“It is very expensive to guarantee that you will have a certain amount of money in the future, but if you can tolerate some uncertainty, you can likely fund your future goal with significantly less savings.”

“The only way to be more confident of reaching a financial goal is to invest more conservatively and save more.”

“All other things held equal, it will cost a woman more to fund her retirement than a man of the same age due to her longer expected lifespan.”

“As an investor, you want to be cautious about investing in a fund just prior to it making a distribution to shareholders.”

The Individual Guide to the Top Mutual Funds
American Association of Individual Investors

“The most important factor when diversifying a portfolio is selecting investments whose returns are not highly correlated.”

“Bond mutual funds are attractive to investors because they provide diversification and liquidity, which is not as readily attainable in direct bond investments.”

“The higher the turnover, the greater the brokerage costs incurred by the fund.”

“The market risk measure used for common stocks is beta; for bond funds, average maturity is used.”

“Dollar-cost averaging works especially well with more volatile portfolios.”

“Top Performance lists are dangerous.”

“The classic response of funds that focus on small stocks is to migrate investments to mid-cap and large stocks when they start to achieve a large asset base.”

“Don’t forget that almost all fund performance data is reported without adjusting for front-end or back-end loads.”

“One reason beyond low expense ratios that make index funds are tough to beat is that they are always 100% invested in the market.”

To be continued …. here.

The Great Mutual Fund Trap
Greg Baer & Gary Gensler

“You cannot improve your returns by spending more time or money trying to pick funds or stocks. You can, however, significantly improve your returns by choosing vehicles that offer the lowest possible costs and the greatest tax efficiency.”

“With returns corrected for survivorship bias, the average actively managed funds trail the market by about 3 percentage points a year.”

“In October 2001, less than two months before Enron declared bankruptcy, 19 of the 22 analysts who covered the stock rated it a “buy.”

“Every study we have ever seen on the subject shows that the more frequently individual investors trade, the worse they perform.”

“The only way for an investor to earn predictably higher returns over time is by taking on more risk.”

“The basic thrust of efficient market theory, is relatively simple and extremely important: Information currently known about a company is reflected in the prices for its bonds and stock.”

“Accept the fact that you are unlikely to beat a market where prices are set by the consensus of thousands of professionals and where you have to pay a steep price for every attempt.”

“The most likely way for a fund manager to generate a high ranking is to take on additional risk.”

“If you simply buy and hold — you don’t need to read investing magazines, watch financial news networks, subscribe to newsletters, or pay a broker to execute new trades.”

“Hulbert’s data show more than 84% of newsletters underperform the market over 5-years. Over 10-years, that number rises to 90%.”

Kahneman/Tversy Study: “A loss of $1 is approximately twice as painful to investors as a gain of $1 is pleasant.”

“The financial services industry spends billions in advertising to keep investors excited about the prospect of better returns around the corner.”

Daniel Kahneman, winner of the 2001 Nobel Prize in Economic Science: “Asked how he invested his money, he said that he favors index funds.”

How a Second Grader Beats Wall Street
Allan Roth

“Investing isn’t rocket science. Wall Street experts want you to believe that it is.”

“Kevin’s magic portfolio: Vanguard Total Stock Market Index Fund; Vanguard Total International Stock Index Fund; Vanguard Total Bond Market Index Fund.”

“We strongly resist thinking of ourselves as average.”

“There is one way, and only one way, to build a stock portfolio that is guaranteed to beat the average dollar invested. For the U.S stock market, that one way is to buy the entire market in proportion to the value of each company.”

“With only three index mutual funds, we can own many thousands of securities that own the whole world.”

“Cramer is a human cartoon character who rants about buying and selling and encourages others to engage in foolishness.”

“Lehman Brothers was the most admired securities firm in 2007 according to Fortune magazine. In 2008 it filed for bankruptcy.”

“A recent study found that funds sold by advisors underperformed those that were bought directly by the consumer.”

“We all know that most mutual funds greatly underperform the appropriate index, but did you know that the average investor underperforms the average mutual fund by another 1.5% percent per year?”

“The beauty of a 3-fund portfolio is that it automatically builds the global portfolio without having to worry about standard deviations, correlatons, Sharpe ratios, and the like.”

“Never buy an instrument that has a fancy name like Enhanced collateralized debt obligation investment unit trust.”

“Investing is much more than maximizing our wealth. It also involves minimizing the chances we will run out of money.”

“Our willingness to take risk isn’t easy to quantify because it is difficult to measure and very unstable.”

“Remember that staying with your asset allocation is every bit as important as choosing the right one in the first place.”

“Make it a rule never to buy a financial investment you couldn’t describe to an average second grader.”

“If the Wall Street brokerage firms were really so good at giving investment advice and managing risk, why did it take taxpayers to bail them out?

Index Your Way to Investment Success
Walter R. Good and Roy W. Hermansen

For most individual investors, the benefits of indexing remain a well-kept secret because brokers, mutual funds, and other familiar sources of investment information routinely focus on products that offer substantially higher commissions or fees.”

“Expenses and other deductions from returns are extremely important, but other considerations, such as services and access to other funds provided by the same fund family, may also influence your choices.”

“This time is different is a message that resurfaces in every bear market.”

“The index fund advantage consists of lower costs, deferral of capital gain taxes, and control of risk through more complete diversification.”

“Index funds save on management and marketing expenses, reduce transaction costs, defer capital gain, and control risk–and, in the process, beat the vast majority of actively managed mutual funds!”

The Informed Investor
Frank Armstrong

“Each brokerage house or investment manager wants the public to believe that somewhere in the back office is a genius who can make you rich.”

“If we don’t establish the discipline to live on less than we make — no amount of investment advice will help.”

“Market risk means that sometimes your equities will go down. It is only a function of when, and we can’t know that. — If you can’t get used to the idea, don’t go into the market.”

“Risk and returns will be driven far more by asset allocation than stock selection or market timing.”

“Investors must understand that a superior portfolio will underperform from time to time. If they are prepared for this disconcerting reality, they are less likely to find themselves abandoning their superior portfolio in favor of Wall Street’s deal of the day.”

“My view is that, properly practiced, investing should be reasonably boring.”

“Rating services such as Morningstar’s star awards or the ‘Forbes’ honor roll attest to the futility of applying past performance to tomorrow. If these two organizations can’t make useful predictions with all their resources, how can the rest of us hope to?”

“Do the right thing: In every asset class where they are available, index!”

“Mutual fund independent directors lack any discernible backbone and appear to be born with rubber stamps attached to their hands.”

“Discipline is the key to success for the long-term investor. He or she must not fall into the trap of managing holdings by newspaper headline, sound bites, mindless prediction, gut feelings, or the last time period’s results.”

“The primary cause of investor failure is the behavior of the investors themselves.”

“The ‘buy and hold’ strategy outperforms the average investor by more than three to one after ten years.”

To be continued ….

Enough
John C Bogle

“Not knowing what enough is, subverts our professional values. It makes salespersons of those who should be fiduciaries of the investments entrusted to them.”

“In 2007 alone, the 50 highest-paid hedge fund manager together earned $29 billion (yes, billion). If you didn’t make $360 million in that single year, you didn’t even crack the top 25.”

“Today, if fund managers can claim to be wizards at anything, it is in extracting money from investors. In 2007, the direct costs of the mutual fund system totaled more than $100 billion year after year paid by the investors themselves.”

“It is essential that we demand that the financial sector function far more effectively in the public interest and in the interest of investors than it does today.”

“The 2003 failure of Arthur Anderson, and the earlier bankruptcy of its client Enron, was but one dramatic example of the consequences of this conflict-riddled relationship.”

“In 1980 the compensation of the average chief executive officer was 42 time that of the average worker. Since then it has risen to 520 times.”

“Until we pay CEOs on the basis of corporate performance rather than on the basis of corporate peers, CEO pay will, almost inevitably continue on its upward path.”

“Nearly 2,800 of the 6,126 mutual fund that existed in 2001 are already dead and gone.”

The ETF Book : All You Need to Know About Exchange-Traded Funds
Rick Ferri

“It is prudent to dig deep into the indexing methodology so that you can make an informed investment decision about the ETFs you are interested in.”

“There are four methods of capitalization weighting used by index providers: full cap, free-float, constrained, and liquidity.”

“Beating the market is not just achieving a higher return — risk adjusted returns are a more sophisticated approach to measuring the performance of a portfolio or fund.”

“To be a successful passive investor, you need to have an unwavering belief that the strategy will work in the long-term.”

“The correlation between asset classes change, sometimes frequently and suddenly.”

“During a time of crisis, the correlation between major asset classes increase, for example, global stocks.”

“If an investor wants to take more risk and explore other options, a core and explore strategy is a good compromise between passive and active management.”

“The key component for starting to accumulate wealth is savings consistency. Ideally, a young person will start a savings plan at the same time he lands his first job.”

“If done successfully, tax loss harvesting will increase an investor’s after-tax returns.”

The Four Pillars of Investing
William Bernstein

“Anyone promising high returns with low risk is guilty of fraud.”

“Stock picking and market timing are expensive, risky, and ultimately futile exercises.”

“A prudent course is to make the broad market and a lesser amount of small U.S. and large foreign stocks your core stock holdings.”

“Financial history provides us with invaluable wisdom about the nature of the capital markets and of returns on securities.”

“The message to the average investor is brutally clear: expect at least one, and perhaps two, very severe bear markets during your investment career.”

“Most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy.”

“A young person saving for retirement should get down on his knees and pray for a market crash, so that he can purchase his nest egg at fire sale prices.”

To be continued … here.

The Bogleheads’ Guide to Retirement Planning
Taylor Larimore, Mel Lindauer, Rick Ferri & Laura Dogu

“Early retirement planning should begin when you have your first full-time job.”

“No matter what your risk tolerance is, your asset allocation should become more conservative as you approach retirement age.”

“Joint accounts are a great option for ensuring that assets are immediately available to a surviving spouse, child, or partner.”

“Count yourself lucky if you still have a defined benefit plan, but also keep in mind that it may go away in the future.”

“Variable annuities or equity-indexed annuities are products to be avoided.”

“Rather than rebalancing by the calendar, many people make changes only when their portfolio allocations are off by a certain percentage.”

“Each time you need to withdraw money from your investments, simply look at your asset percentages and take the money out of the one that is overweight.”

“Reverse mortgages should be a last resort for providing income.”

Your greatest asset is your ability to earn a living for yourself and your family.”

For younger breadwinners, term insurance is the only practical way to provide needed protection at affordable costs.”

“The more complex the product, the worse it is for you, and the better it is for the adviser.”

“Certain assets, such as life insurance … pass to designated beneficiaries if you die. A divorce decree will not change the designations.”

“In the real world, people lose jobs, good health turns bad, more than half of marriages end in divorce, and other setbacks occur that can ruin a good retirement plan.”

The Coffeehouse Investor
Bill Schultheis

“The investor who starts saving and investing $300 monthly at 8% in a retirement account at age 25 instead of age 35–ends up with an additional $604,195 in her portfolio at age 65.”

“When fear and greed aren’t controlled, buying and selling individual stocks can quickly become a miserable experience.”

“As long as Wall Street has a vested interest in lots of transactions and busy portfolios, investors will continue to latch on to the hype and hysteria of Wall Street, perpetuating the misconception that by carefully reviewing market trends, diligently studying mutual fund tables, religiously researching global economies and closely watching interest rates, anyone and everyone can own a successful portfolio.”

“Let go of the mistaken belief that the secret to a successful portfolio is to accurately forecast bull and bear markets.”

“The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock market.”

“The top 35 mutual funds from 1978 to 1987 cumulatively under-performed the stock market average by 7% annually during the next ten years.”

“The most important factor when diversifying is to adhere to your asset allocation strategy, because when you stick to your strategy and rebalance your asset at year-end, buy and sell decisions are no longer arbitrary.”

Common Sense on Mutual Funds
John C Bogle

“To invest with success, you must be a long term investor.”

“Suppress the temptation to add redundant layers of diversification.”

“After nearly 50 years in this business, I do not know of anybody who as done it (market timing) successfully and consistently.”

“When stock prices are high, investors want to jump on the bandwagon; when stocks are on the bargain counter, it is difficult to give them away.”

“The key to fund selection is to focus, not on future return–which the investor cannot control–but on risk, cost, and time–which the investor can control.”

“Backtesting, of course, should always be viewed with skepticism.”

“Choose a balance of stocks and bonds according to your unique circumstances–your investment objectives, your time horizon, your level of comfort with risk, and your financial resources.”

“Asset allocation is critically important; but cost is critically important, too. — All other factors pale into insignificance.”

“Most of all, beware of wrap accounts–packages of mutual funds assembled within a ‘wrapper’ for which an additional fee is paid.”

“The ‘Equity Risk Premium’ is the extra return required by investors to compensate them for taking the extra risk of owning common stocks rather than risk-free U.S. Treasury bonds. The average since 1802 has been 3.5%”

“The simplest of all approaches is to invest solely in a single balanced market index fund–just one fund. And it works.”

To be continued …. here.

Going over the quotes, newbies can get a feel for the passive indexing approach without the time-consuming task of reading each book (although some of them must be read by the serious student). As for experienced passive index investors, they can get a good refresher plus a reinforcement of their discipline.

I’ve been going through the quotes myself and filtering them down into a more manageable list that still conveys the essential themes in each book. My original idea was to create a reference for myself but others might find it useful too. Here is what I have compiled so far (with more to come).

All About Index Funds (2002)
Rick Ferri

“When you are finished choosing a bond index fund, a total U.S. stock market index fund, and a broad international index fund, you will have a very simple, yet complete portfolio. This approach offers broad diversification, low fees, tax efficiency, and ease of maintenance”

“John Bogle, founder of the Vanguard Group, is one of those who believe in the one-fund concept. If you take Bogle’s advice, you will buy one bond index fund, and one total U.S. stock market index fund. There is absolutely nothing wrong with this approach.”

“Adding bond index funds to a portfolio of stock index funds lowers investment risk without significantly lowering returns.”

“Quote from Allan Greenspan: ‘This decade is strewn with examples of bright people who thought they built a better mousetrap that could consistently extract abnormal returns from the financial markets. Some succeed for a time. But while there may occasionally be mis-configurations among market prices that allow abnormal returns, they do not persist.’”

All About Asset Allocation (2005)
Rick Ferri

“Successful investing hinges on three steps: the development of a prudent investment plan, the implementation of that plan, and a commitment to follow the plan in good times and bad.”

Asset allocation is the cornerstone of a prudent investment plan and is the single most important decision that an investor will make in regard to a portfolio.”

“Simply stated, asset allocation is a means of spreading your investment risk across many different types of securities, thus reducing overall portfolio risk and subsequently increasing portfolio return.”

“Asset allocation eliminates the need to predict the future direction of the markets and eliminates the risk of being in the wrong market at the wrong time.”

“The starting point of a portfolio is its equity and fixed-income mix.”

“If you are going to add only one additional U.S. common stock mutual fund to a core position in a U.S. stock market fund, I recommend placing about 30% in a small-cap value index fund.”

The Bogleheads’ Guide to Investing (2005)
Michael LeBoeuf, Mel Lindauer & Taylor Larimore

“Knowing nothing about investing might be a benefit. You won’t have to unlearn many popular beliefs propagated by Wall Street and the media that aren’t true.”

“Index investing is an investment strategy that Walter Mitty would love. It takes very little investment knowledge, no skill, practically no time or effort–and outperforms about 80 percent of all investors.”

“The most important key to successful investing can be summed up in just two words–asset allocation.”

“An asset allocation plan is based on your personal circumstances, goals, time-horizon, and need and willingness to take risk.”

“It’s important for you to understand that stock and bonds go up–and they go down. You need to be comfortable with that fact.”

“We know that by simply changing our allocation between stocks and bonds, we can lessen the amount of volatility in our portfolio until we reach our comfortable sleep level.”

“A Financial Research Corporation study determined that the expense ratio is the only reliable predictor of future mutual fund performance.”

To be continued… see  Part II.

• much shorter and more to the point than Four Pillars
• readers of Bogle, Swedroe, Swenson, etc. may not find too much new
• one reader called it 4 Pillars for Dummies
• more emphasis on simpler index portfolios
• e.g. portfolios based on three broad-market funds
• tilt toward small cap/value indexing not as prominent
• seems more concerned about implementation risk and burden
• “More complex portfolios, particularly those with value and small stock emphasis, may have higher returns, but come at the cost of time and effort.”
• if young with less than $250k, recommends All World, Total Stock and Total Bond ETF; once older and richer, then slice and dice
• less emphasis on short-term bonds, more open to total bond market 
• “A perfectly simple and serviceable portfolio [for U.S. investors] might be: 42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market. That’s it.“
• Bernstein’s distaste for financial services industry as strong as ever: “If rigorous precautions are not taken, the financial services industry will strip investors of their wealth faster than they can say ‘Bernie Madoff …The average stock broker services his clients in the same way that Baby Face Nelson serviced banks … Unlike your doctor, lawyer, or accountant, your broker is not a ‘fiduciary’: that is, he is under no legal obligation to place your interest above his … Don’t come anywhere near a stock broker or brokerage firm; sooner rather than later you will get fleeced … Do not invest with any mutual fund family that is owned by a publicly traded parent company.”

Hardy would have us believe their fates were intertwined with their characters but in speculating on grain prices, the efficient market theorists of today would say both men cast their lot to the random winds of chance. One, Farfrae, got lucky while the other, Henchard, did not. Needless to say, in both cases, today’s adherents to the school of buy-and-hold, passive investing would be appalled by their endeavors in this realm.

In the early going, Farfrae was Henchard’s right-hand man in a thriving grain-dealing business that had made Henchard one of the wealthiest men in Casterbridge as well as its mayor. But Henchard was, as Hardy wrote, a person, “…who might not inaptly be described as Faust has been described – as a vehement gloomy being who had quitted the ways of vulgar men without light to guide him on a better way.”

Jealous of Farfrae’s growing popularity in the town, Henchard dismisses him from his employ, whereupon Farfrae sets up shop in the same trade and shortly emerges as a rival. His commercial aggrandizement seems largely based on an active, short-term trading approach in grain markets. In Farfrae’s own words (speaking to Lucetta):

“Yet I’ve done very well this year. O yes,” he went on with ingenuous enthusiasm. “You see that man with the drab kerseymere coat? I bought largely of him in the autumn when wheat was down, and then afterwards when it rose a little I sold off all I had! It brought only a small profit to me; while the farmers kept theirs, expecting higher figures– yes, though the rats were gnawing the ricks hollow. Just when I sold the markets went lower, and I bought up the corn of those who had been holding back at less price than my first purchases. And then,” cried Farfrae impetuously, his face alight, “I sold it a few weeks after, when it happened to go up again! And so, by contenting mysel’ with small profits frequently repeated, I soon made five hundred pounds–yes!”– (bringing down his hand upon the table, and quite forgetting where he was)–”while the others by keeping theirs in hand made nothing at all!”

When Lucetta spurns Henchard for Farfrae, it’s the final straw. Henchard sets out to ruin Farfrae financially by outsmarting him in the grain speculation business. He says to his new foreman, Jopp:

“I sometimes think,” he added, “that he [Farfrae] must have some glass that he sees next year in. He has such a knack of making everything bring him fortune.”

“He’s deep beyond all honest men’s discerning, but we must make him shallower. We’ll undersell him, and over-buy him, and so snuff him out” ….

The season’s weather seemed to favour their scheme. The time was in the years … when … the wheat quotations from month to month depended entirely upon the home harvest. A bad harvest, or the prospect of one, would double the price of corn in a few weeks; and the promise of a good yield would lower it as rapidly ….

It was June, and the weather was very unfavourable. Casterbridge, being as it were the bell-board on which all the adjacent hamlets and villages sounded their notes, was decidedly dull.

Henchard, supported by Jopp, “read a disastrous garnering [harvest], and resolved to base his strategy against Farfrae upon that reading.” But before acting, he sought confirmation from a weather prophet. After paying him a crown, Henchard hears the following prediction:

“By the sun, moon, and stars, by the clouds, the winds, the trees, and grass, the candle-flame and swallows, the smell of the herbs; likewise by the cats’ eyes, the ravens, the leeches, the spiders, and the dungmixen, the last fortnight in August will be–rain and tempest.”

The last part was just what Henchard wanted to hear.

“The next Saturday Henchard bought grain to such an enormous extent …. When his granaries were full to choking all the weather-cocks of Casterbridge creaked and set their faces in another direction …. The temperament of the welkin passed from the phlegmatic to the sanguine; an excellent harvest was almost a certainty; and as a consequence prices rushed down ….

Henchard had backed bad weather, and apparently lost. He had mistaken the turn of the flood for the turn of the ebb. His dealings had been so extensive that settlement could not long be postponed, and to settle he was obliged to sell off corn that he had bought only a few weeks before at figures higher by many shillings a quarter….

But he had to enter the Casterbridge Bank that day for reasons which had never before sent him there …. It was rumoured soon after that much real property as well as vast stores of produce, which had stood in Henchard’s name in the town and neighbourhood, was actually the possession of his bankers.

Product integrity

The ETF vs. mutual-fund debate often overlooks important side issues, notably the stability of the products. After an investor purchases a mutual fund or ETF, it may change in various ways. But the changes for ETFs appear to be on a much smaller scale compared to mutual funds. Examples of the changes affecting mutual funds  include:

• turnover in portfolio managers – many investors may buy into a fund because of a well-regarded manager only to see the star later jump ship for another fund, leaving unitholders faced with the decision to stay with a less skilled manager or redeem and pay a rear-end load fee as high as 5%

• changes in the manager’s investing style (style drift) – portfolio managers may stay put but then start trying investment approaches different from what unitholders expected, increasing, for example, the proportion of risky securities in an attempt to juice returns

• termination or merging of a fund with another fund – which again presents unitholders with a disruption in their investing plans

Tax efficiency

While some ETFs may distribute taxable capital gains to unitholders, the incidences are more the exception to rule. Mutual funds, on the other hand, tend to distribute capital gains as a rule rather than the exception. At least that is what the averages would seem to indicate: for example, David Swensen’s book Unconventional Success shows that the average annual distribution of S&P 500 index mutual funds was 1.8% of assets from 1993 to 2002, compared to 0.01% for the SPDR S&P 500 (SPY)

Flexibility

The more one can tailor an investment vehicle to their needs, the more one can maximize their utility; having extra options is a valuable trait to many investors. Some examples:

• ETFs can be bought and sold at a known price throughout the trading day while mutual funds are bought and sold at the price prevailing at the end of the day.

• ETFs can be purchased on margin, sold short, and combined with ETF options to create covered trades and other hedging strategies

Diversification

Mutual-fund defenders say Canadian equity ETFs i) expose investors to the risk of stocks growing to a large weighting in the index, (Nortel effect) and in the case of Canadian broad-market indexes, ii) leave investors weighted toward financial and resource stocks. Let’s deal with these two points in turn:

• as for the “Nortel effect,” Canadian ETFs are no longer exposed to such risk; the fundamental ETFs offered by Claymore in Canada are not market-cap weighted and ETF families using market-cap weighting now limit the weights of individual stocks so that none can have the influence Nortel once had.

• as for achieving a portfolio less weighted toward energy and financial stocks, that would seem to be an asset allocation choice perhaps better left to the individual investor (they can tailor exposures to their preferences better than an equity mutual fund can); ETF investors typically achieve their desired level of diversification through holding a portfolio of ETFs tracking a variety of asset classes such as small caps, U.S. stocks, and international stocks.

Performance

Mutual fund apologists say mutual funds: i) offer the potential to outperform the market, ii) show periods of outperformance, and iii) have relatively better performance in sectors like small caps and U.S. stocks. Let’s deal with these three points in turn.

• as for the potential to outperform indexes, some mutual funds may be able to do so (studies show less than 5% over the long run) — but identifying them ahead of time is hit and miss; odds are that the investor will end up an underperforming fund

• as for periods of outperformance, using more extensive time sampling and adjustments for survivorship and other biases, virtually all mutual-fund-performance studies published in peer-reviewed journals indicate “that mutual fund managers on average underperform their risk-adjusted benchmarks,” to quote Professor Richard Deaves in his book, What Kind of Investor are You? (Deaves own study of the Canadian stock market found that equity mutual funds on average fell short of their indexes by more than 1% a year over the period 1988 to 1998)

• as for relatively better performance in sectors like small caps and U.S. stocks, the odds of picking an outperforming fund may be higher but then again, it is hard to identify ahead of time which funds will do so (or at least avoid management changes, style drift, closure, etc.)

The One-Minute Portfolio (OMP) is a member of the lazy-portfolio species, consisting of just two exchange traded funds: iShares S&P/TSX 60 Index ETF (XIU) and the iShares Canadian Bond Index ETF (XBB). It was created in early 2003 and has been rebalanced annually since, as described in articles on the MoneySaver and Canadian Business websites. The average annual gain since inception is now about 8%.

As a member of the lazy portfolio species, the unique feature is how the allocation between equities (XIU) and bonds (XBB) is determined. It doesn’t rebalance back to a fixed asset allocation as most lazy portfolios do but takes into account whether the stock market is under or above its long-term average annual return. For more details on the method, check out the December 18, 2008 Canadian Business article.

During the last rebalancing (in December of 2008) the allocation to equities (XIU) was raised from 40% to 60% because stock markets were then noticeably below their long-term average return. By default, the allocation for bonds (XBB) went from 60% to 40%.

Not by a long shot. They will always be around. But not to be denied is how much easier it is to be a do-it-yourself investor these days:

- the Internet has lowered the time and effort required to gather information on investments and personal finances

- exchange-traded funds (ETFs) have lowered the cost of investing while dispensing with the work of picking individual stocks,

- many books, articles and blogs now provide easy-to-follow guidelines on the low-cost and low-effort passive investing approach (as embodied in the Couch Potato Portfolio, One-Minute Portfolio, and other “lazy” portfolios).

So, do YOU need a financial advisor?

A recent study of German investors by three university professors discovered “that advisors actually tend to lower returns, raise portfolio risk, increase the probabilities of losses, and increase trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own.”

A forthcoming Journal of Finance paper confirms that mutual-fund companies with lower investment performance (before fees) charge higher management fees – because they compete with high performance funds by spending heavily on advertising, marketing and distribution-channel incentives to attract “unsophisticated clients.”

Three more studies from academia conclude investors are better off without financial advisors.

Advisors add value but may overcharge for it.

A survey carried out for the Investment Funds Institute of Canada this past spring shows “that 78% of investors surveyed were satisfied or very satisfied with their relationship with their financial advisor,” and that mutual funds enjoyed the confidence of 74% of the respondents despite the bear market of last year.

Do ancillary services such as tax and estate planning help explain why many investors are content to have financial advisors? (1)

But a survey sponsored a while back by the Financial Planners Standards Council (FPSC) showed only 40% of certified financial planners did financial plans for “most” of their clients in 2006, down from 53% in 2002 (it seems mutual funds fly off the shelf during bull markets, without advisors needing to offer complimentary, value-added services as tax and estate planning).

Footnote
1. Here is how one financial planner described (in the comments section of Thicken my Wallet blog) what he does for no direct compensation:

- advising them on managing their debts;
- providing guidance on preparing wills and powers of attorney;
- providing options for estate planning;
- pointing out income tax credits/deductions they may not be aware they are entitled to;
- deciding whether to incorporate or not;
- assisting them in applying for OAS/CPP/Disability/EI Benefits; and,
- many other things.

“I recently assisted a client on an income tax issue involving the Disability Tax Credit: he is to receive tax refunds totaling approximately $20,000. My fee: $0.”

Deaves on the bear market: “I hear some advisors saying you should sell stocks if you are feeling apprehensive. I don’t agree. It’s a lousy time to cash out. It’s hard to image the markets going much lower. If you are young, there is a lot of time left to recover and get back on track. People in their mid-fifties or older who did not diversify properly may not, unfortunately, have time to recover fully. Be sure to pay attention to asset allocation.”

Recommended reading in behavioral finance area: “There is a good, easy-to-read survey book called Investment Madness: How Psychology Affects Your Investing . . . And What To Do About It, by John R. Nofsinger. I enjoyed reading it and many others will too,” said Deaves.

If you need help finding out what kind of investor you should be, you can go to Deaves’ investorgauge.com website and take his InvestorGauge Questionnaire, “a self-assessment tool for investors made up of 50 questions chosen according to the latest investment research.” It generates personalized reports on your investment knowledge, risk tolerance, investment personality and investment temperament. “Knowledge of these personal attributes will be very useful to determine the investment style that is right for you.”

One way to get a smoother ride besides having a higher allocation to bonds (like the One-Minute Portfolio) may be to use sector indexes as building blocks instead of market indexes. With sector indexes, an investor can bring the risk-reduction process of rebalancing and lowering correlations down to a finer level of detail.

Consider a passive index investor just starting out. They can buy and hold the oldest and most liquid of exchange-traded funds (ETFs): the S&P 500 SPDR (SPY). Compared to other major indexes, the S&P 500 has better diversification and lower volatility. But it would have been even better to have owned an equal-weighted portfolio of ETFs tracking the nine sectors making up the S&P 500:

Materials SPDR (XLB)
Energy SPDR (XLE)
Financials SPDR (XLF)
Industrials SPDR (XLI)
Consumer Staples SPDR (XLP)
Utilities SPDR (XLU)
Technology SPDR (XLK)
Consumer Discretionary SPDR (XLY)
Health Care SPDR (XLV)

The investor would have enjoyed lower volatility/higher returns, as Tristan Yates illustrates in Enhanced Indexing Strategies (John Wiley & Sons, November 2008), a book reviewed in my last column. His table on page 49 shows SPY earned 3.9% annually with 14.1% annualized volatility from 1999 to 2006 while the portfolio of sector ETFs earned 7.2% annually with 13.5% annualized volatility (Yates’ figures are dividend adjusted). This result occurs because of rebalancing, i.e. keeping sector proportions equal over the years — as I understand Yates to say.

Yet, the nine-sector portfolio is not optimal in the sense the ETFs were selected so as to minimize volatility and correlations amongst each other. If only sector ETFs with low volatility/correlations are included, that leaves four: Consumer Staples SPDR, Energy SPDR, Financials SPDR and Utilities SPDR. This basket returned 8.8% per year with volatility of 12.7%, on average. “The results show that it’s better to build [your own indexed portfolio] than to buy [an off-the -shelf package],” writes Yates.

Taking Yates’ line of thought further, someone with a high aversion to volatility might conceivably index the equity component of their portfolio to a basket of non-cyclical ETFs, notably Consumer Staples, Healthcare, and Utilities. Over the five years to Jan. 9, they individually outperformed SPY. Two of them show a positive return for the period and the third a smaller loss than the S&P 500, which was down over 15%.

The first edition, published in 2005, was brevity personified, at about a hundred pages. It attracted several reviews including one from the Financial Post’s Jonathan Chevreau. He gave it a “thumbs up” for its asset-based, passive, low-cost, low-turnover, time-in-the-market, diversified, indexing approach — in the mold of John Bogle, Larry Swedroe, and William Bernstein.

Chevreau also hailed it for being the first book to introduce Canadians to the three-factor French/Fama approach whereby portfolios are tilted toward small caps and value stocks. As the book notes, research carried out by Professors French and Fama show that these asset classes have historically outperformed the market over the long run.

A reviewer on chapter.indigo.ca thought the 2005 edition was too short. “I finished it thinking is that all there is?” he wrote. I think he was also making the point that much of the writing was at a general level and a rehash of what Bogle, Swedroe, and Bernstein have already covered.

The new material in the 2008 version, which extends the book’s length by over 50%, is more interesting. The two chapters on international investing, especially, were an interesting, fact-filled defense of the merits of diversifying into foreign assets and currencies.

The other chapters in the new section advised avoiding: i) boilerplate asset allocations, ii) alternative assets such as hedge funds, iii) the “slippery-slope” explore part of core-and-explore portfolios, iv) sector ETFs, v) excessive pessimism or optimism regarding future returns on stocks, and vi) excessive optimism on real long-term returns from real estate.

Drilling down on asset allocations, we see they all had high exposures for stocks. The designers, as has been popular this decade, appear to have been influenced by the empirical studies showing stocks historically have averaged about 9% annually over the long run, better than bonds (5%) and cash (3%).

However, during the recent bull market, dividend yields got down to the 1.5% to 2% range. That was not a good omen because about half of the long-run return on stocks derives from dividend yields of 4.5% earned during the historical periods.

Lazy Portfolios constructed during the bull market were thus destined to earn about 6% annually on their stock exposure (ceteris paribus). The recent crash digs a deep hole for them but the impact may be just to lower long-run equity returns by a third or so (assuming dividends hold up reasonably well during the recession).

In retrospect, by taking valuation levels into account, the boom-era Lazy Portfolios may have captured a better risk-reward ratio by allocating less to stocks and more to investment-grade bonds.

Sensitivity to market valuations is what William Bernstein urged in Chapter Two of The Four Pillars of Investing when he recommended the dividend discount model (DDM) as an alternative to extrapolating expected returns from the past (more on this in next post). Another approach, which also takes valuations into account, adjusts allocations to stocks according to departures from their historical average return (see the One-Minute Portfolio).

The One-Minute Portfolio is a passively indexed portfolio, one that runs with a minimum of effort. It was set up in 2003 and has been rebalanced annually. It consists of just two exchange-traded funds (ETFs): iShares Canadian Bond Index ETF (XBB) representing bonds, and iShares S&P/TSX 60 Index ETF (XIU) representing equities.

The idea is to keep it really simple and just allocate funds across the two ETFs as guided by a comparison of the three-year average return on stocks to the historical average on stocks. The January 4, 2008 update explains the portfolio and its approach more.

The reason the decline hasn’t been worse was the large weighting given to bonds — the iShares Canadian Bond Index Fund (XBB) has a 60% allocation. The equity component, the iShares S&P/TSX 60 Index Fund (XIU), has a 40% allocation.

Portfolio allocations have strayed quite far from the desired allocations. So we are looking forward to the annual rebalancing exercise in December or January. Indeed, with equities far below their long-run average annual rate of return, we anticipate raising equity exposure from 40% to 60%.

Blogger Canadian Capitalist took Mr. Mandelman to task on this point in his July 22 post; what CC said also seems applicable to Mr. West’s thesis. And as the creators of MoneySense’s Couch Potato Portfolio have said all along, buying and holding broadly based index funds and/or exchange-traded funds takes “only 15 minutes a year” and “will beat “about 80% of the money managed by professionals.”

How so? Markets are efficient. So financial managers and advisors are able to deliver no better than the market average over time. But after deducting their fees, they will underperform the market by 1.5% to 2.5% a year. Simply holding an index fund will yield the market average at a lower cost, between 0.3% and 0.6% a year. Over the long run, keeping fees low adds up big time.

Some of the best index funds in terms of cost, as CC has noted, are the TD eFund family. Blogger wheredoesallmymoneygo.com also recommends the DFA family of index funds. Providers of exchange-traded funds in Canada include iShares and Claymore Investments.

According to S&P’s research, just 38.9% of actively managed equity funds in Canada outpaced the S&P/TSX Capped Composite Index during the bear market from August 2000 to December 2002. In the U.S, only 29% outpaced the S&P 500.

True, actively managed funds can hold cash balances, shift into defensive stocks, etc. – so there is a presumption they would do better. In fact, the average return earned by active Canadian equity funds does exceed the index during bearish phases.

But this average return “reflects the strong performance of only a few funds,” declares Jasmit Bhandal, director of Standard & Poor’s Index Services. “The majority of Canadian Equity funds still underperformed their benchmark.”

There are plenty of other model portfolios around. Here are more Canadian examples. Here are more U.S. examples. Canadian Capitalist has the Sleepy Mini Portfolio and even yours truly has the One-Minute Portfolio.

One thing I find interesting is how top active investors recommend passive indexing for most investors. You can’t find better endorsements than that.

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” Warren Buffett, CEO of Berkshire Hathaway Inc. (1996 shareholder letter to investors)

“Most investors would be better off in an index fund.” Peter Lynch, former star manager of Magellan Fund (Barron’s interview, April 2, 1990)

“I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.” Benjamin Graham, father of value investing (1976 Financial Analysts Journal interview).

“Most of my investments are in equity index funds.” William F. Sharpe, 1990 Nobel Laureate in Economics (1998 Business Week interview)