Risk Less and Prosper E-Book

Zvi Bodie

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 276

Veröffentlichungsjahr: 2011

Beschreibung

A practical guide to getting personal investing right Somewhere along the way, something has gone very wrong with the way individuals save and invest. Too often, households are drawn in by promotional suggestions masquerading as impartial investment advice. Consumers get saddled with more risk than they realize. Authors Zvi Bodie and Rachelle Taqqu understand the dilemma that today's investors face, and with Risk Less and Prosper they will help you find your financial footing. Written in an accessible style, this practical guide skillfully explains why personal investing is all about you--your goals, your values and your career path. It shows how to understand investment risk and choose the particular blend of risk and safety that is right for you. And it lays out several simple yet powerful ways for small investors to cast a reliable safety net to achieve their financial goals and truly prosper. Coauthors Bodie and Taqqu challenge the myth that all investments require risk, then highlight some important risks that families often disregard when deciding where to put their money. Later, they connect the dots between investment and investor, showing us all how to grasp our own investment risk profiles and how we may use these insights to make more fitting investment choices. * Outlines a straightforward way to invest by aligning your investments with your goals and the risk levels you can bear * Provides basic investment abc's for readers who are otherwise literate * Lays out a simple, actionable plan for achieving your goals * Explains the role of risk-free assets and investment insurance in assuring that you reach your most essential goals Contrary to popular belief, investing doesn't have to be complicated. You can build wealth without taking great risks. Risk Less and Prosper will show you how to make investment decisions that will make your financial life less stressful and more profitable.

Leseprobe

Contents

Preface

Acknowledgments

Part I: All About You

Chapter 1: Changing the Game

New Rules

Reframing Risk

Chapter 2: Picturing Your Destination

The Challenge

Target Practice in Six Easy Steps

Defining Success

Chapter 3: Paying Up

From Dreaming to Planning

Different Kinds of Capital

Creating a Lifetime Budget

Insights from Behavioral Finance

Summing Up

Part II: Risk Matters

Chapter 4: The Mismeasure of Risk

Defining Risk

Sleeping Tigers

The Lure of Hype

How We Learned to Stop Worrying and Love the Market

Chapter 5: The Allure of Hope

Too Much Confidence

Probability Blindness

The Perils of Probability

Chapter 6: Your Personal Risk Profile

Capacity for Audacity

Risk Tolerance

Part III: Building Blocks

Chapter 7: Finding the Safe Investment Zone

Inflation: The View from Your Destination

What’s the Real Interest Rate Anyway?

Real-Return Bonds

Putting It All Together

Chapter 8: The Art of Matchmaking

Creating a Ladder for Retirement

Why Match Dates?

Do You Need a “Reset” Moment?

The Power of Annuities

Choosing from the Annuity Menu

Just In Case: Insurance

Chapter 9: Investing Safely for Education

I Bonds for Education

529 Prepaid Tuition Plans

529 Savings Plans

Coverdell Education Savings Accounts

Chapter 10: Choosing Risky Investments

How Much Risk Is Right?

Controlling Costs

Curb Your Enthusiasm

Sam Learns to Take More Risk

Patrick Puts on the Brakes

Sue Wonders Whether to Shoot the Moon

Julia Invests Her Inheritance

Chapter 11: How to Choose an Advisor

Getting Started

Screening for the Right One

Interviewing Candidates

About the Authors

Index

Copyright © 2012 by Zvi Bodie and Rachelle Taqqu. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Bodie, Zvi.

Risk less and prosper : your guide to safer investing / Zvi Bodie,

Rachelle Taqqu. – 1

p. cm.

Includes index.

ISBN 978-1-118-01430-1 (hardback); ISBN 978-1-118-20623-2 (ebk);

ISBN 978-1-118-20624-9 (ebk); ISBN 978-1-118-20625-6 (ebk)

1. Investments. 2. Risk. 3. Finance, Personal. I. Taqqu, Rachelle,

1947- II. Title.

HG4521.B5643 2011

332.024—dc23

2011035470

For my grandchildren, my most precious assets

—ZB

For Yael and Jonathan

—RT

Foreword

The arrival of Risk Less and Prosper, with its innovative perspective on how households can take charge of their essential financial decisions involving life-cycle saving and investment, could not have been better timed. These are difficult decisions in difficult times, surrounded by considerable uncertainty involving where we might be, what we might want, and the state of the economic environment, often decades into the future. We are amid a perplexing financial and economic crisis affecting most of the Western world, which further amplifies the uncertainty. How it will play out in the impending future, we do not know. But what we do know is that it is critically important to take charge of one’s financial affairs now.

Even before the current crisis, as a result of major technological innovation and widespread deregulation, households have been called on to make a wide range of important and detailed financial decisions that they did not have to in the past. For instance, there is a widespread trend away from defined-benefit pension plans that require no management decisions by the employee toward defined-contribution plans that very much do. In the United States alone, there are more than 8,000 mutual funds and a vast array of other retail investment products to choose from. Along with insurance products and liquidity services, the household thus faces a daunting task to assemble these various components into a coherent effective lifetime financial plan and then implement it.

Some see this trend continuing and widening. Perhaps so, especially in the more immediate future, with the widespread growth of relatively inexpensive Internet access to financial “advice engines” to assist households with financial decisions. However, the creation of all these alternative investment products combined with financial advice offered from so many different sources has consequences: Households have been left with the responsibility for making important and technically complex microfinancial decisions involving risk—decisions that they did not have to make in the past, they are not trained to make in the present, and they are not likely to execute efficiently in the future, even with attempts at education. Financial planners, corporate pension-plan sponsors, and independent pension funds can be helpful, but still the complexity for the individual can be overwhelming.

This book offers a clear, foundational, analytical framework that explains how to go about determining the financial goals you want to achieve; creating a realistic plan to achieve those goals; and then implementing that plan. Writing in plain, jargon-free language, the authors patiently develop their theme and thesis that properly measuring and managing risk of well-specified goals is the foundation for good investment decisions, and they develop guiding principles to do so, based on finance science and informed by practical experience. These principles are applied to develop a risk-management strategy for investment success defined by achievement of goals and to help you avoid paths of error by exposing the flaws of frequently heard, but erroneous, investment rules.

You could not do better than have the Bodie-Taqqu team as your guides. A professor of finance at Boston University for more than 35 years, Zvi Bodie is a premier scientific researcher on retirement finance and investing, particularly on the risk of inflation and the incorporation of human capital into the investment optimization process. He has long been dedicated to creating financial literacy and is the coauthor of a best-selling investment textbook, now in its 9th edition. Rachelle Taqqu is a financial consultant practitioner who, like Bodie, is committed to improving financial decision making for households. She brings hands-on experience of working with individuals on setting and executing their financial course.

The book employs a clever and effective pedagogical approach by creating a story about a group of people with a common need to make financial decisions, who meet to discuss their individual challenges and opportunities with the idea of learning from one another’s knowledge and experiences. Although the group and its leader are hypothetical, their characters and challenges are composites drawn from real people and carefully crafted to illustrate a wide range of situations. Through the interactions among the characters, you come to recognize interests, types, and issues in common, and in that way feel a sense of active participation as a virtual member of the group. The journey of the group from knowing little about financial planning and feeling overwhelmed to learning how to execute a well crafted custom-fit plan, including how to select an advisor to help, is presented in three parts.

Part I is all about you, focusing on unlearning ineffective habits from the past and learning a better way to determine a feasible and desirable life-cycle financial plan tailored to you. The process starts with setting financial goals, determining what the risks are that they may not be achieved, and then cycling back to modify those goals until a combination of goals and the risk of not achieving them reaches a comfortable balance. This is undertaken in six steps: (1) Set the goals, (2) know how to monitor progress toward the goals, (3) establish a priority list for the goals, (4) create a time line for achieving those goals, (5) consult with others whose life plans will be directly affected by your plan, and (6) determine what the cost is to achieve those goals. From this, we learn how to create a lifetime budget and convert a dream into a concrete plan.

Part II is dedicated to understanding the critical element of risk in financial decision making. Chapter 4 covers the most commonly encountered fallacies about measuring risk and investing. Chapter 5 takes you through the common psychological mistakes humans make in making decisions under uncertainty. These important and challenging subjects are explained in an intuitive fashion so that you can both understand the fallacies and cognitive errors and become sensitized to recognize them when they are experienced.

The central message is clear: You may easily get less than you pay for, measured either in terms of money or risk protection, but you rarely, if ever, will get more. If it seems too good to be true, it is almost surely not true. There is no free lunch, and if you seem to be offered one, check again—you have probably missed some cost. All important financial decisions involve making trade-offs between what we desire and what we must give up to get it. So if you want a higher-priced lifestyle in retirement, then there are only three ways to improve the chances of getting it: Save more (and consume less) now, work longer (retire later), or take more risk (and accept a larger loss in the event that you do not succeed).

Armed with this sound preparation, Chapter 6 leads you affirmatively through the process of creating a personal risk profile. From all of this emerges a lifetime financial plan framed in reality and specificity with an explicit recognition of the balance between the desired goals and the risks of not achieving them. The process is thus structured to accommodate unpredictable change as one goes through life and the future unfolds into the present.

Part III addresses the implementation of the lifetime plan with ample detail and description of the various financial instruments that can be used to go after the desired goals within the accepted risk profile. Featured are the role of annuities in the retirement part of the life cycle and specialized tax-efficient plans for saving for children’s education or for accumulating resources for retirement. You receive a primer on the tools for protecting against the risk of inflation, interest rate risk, and mortality and longevity risks. There is a chapter devoted to risky investing in equities and other asset classes.

Although the book prepares you for financial decision making and implementation, determining a plan and investing to implement it is time consuming and often complicated. Many readers will thus decide that it makes sense to hire a professional, an advisor, to manage and implement their financial plan. Building on the foundation of the preceding chapters, the concluding Chapter 11 takes you through the process, step by step and thoroughly, beginning with helping you determine if you need an advisor, and if you do, then how systematically to go about selecting one.

Risk Less and Prosper is an accessible, bold, and largely self-contained offering of the principles and steps of implementation to achieve your lifetime financial goals, and to better understand, measure, and manage risk in the evolving financial system. Whether you’re a first-time investor, a seasoned financial advisor, or a regulator of retail financial services, you are in for a treat: Bon Appétit!

Robert C. Merton

MIT, Sloan School of Management

Preface

Something has gone terribly wrong with the way we think about personal investing. Trustworthy investment advice for individuals is hard to find. Much of what goes for advice is filled with misleading promotions masquerading as education, and the result has been pervasive misinformation. Investors are not aware of how much risk they are bearing. Two stock market collapses in seven years have made these failings all too clear.

What’s needed is a better investment path—one that leads investors to their financial goals without risking calamity.

This mission has become all the more pressing following the financial earthquake that began in the fall of 2008. Few people have fared well and markets remain volatile. The phasing out of company-sponsored pension plans darkens the picture. Without an employer’s pension to rely on, most individuals are left to manage their investments on their own—for retirement and more. When they do look to a trusted advisor for help, it’s still the ordinary investor’s responsibility to find and pay for such counsel. If individuals and families are to shoulder such a large responsibility, they’ll need to be better prepared.