The Elements of Investing E-Book

Burton G. Malkiel

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

Seitenzahl: 130

Veröffentlichungsjahr: 2010

Beschreibung

A timeless, easy-to-read guide on life-long investment principles that can help any investor succeed The Elements of Investing has a single-minded goal: to teach the principles of investing in the same pared-to-bone manner that Professor William Strunk Jr. once taught composition to students at Harvard, using his classic little book, The Elements of Style. With great daring, Ellis and Malkiel imagined their own Little Red Schoolhouse course in investing for every investor around the world-and then penned this book. The Elements of Investing hacks away at all the overtrading and over thinking so predominant in the hyperactive thought patterns of the average investor. Malkiel and Ellis offer investors a set of simple but powerful thoughts on how to challenge Mr. Market at his own game, and win by not losing. All the need-to-know rules and investment principles can be found here. * Contains sound investment advice and simple principles of investing from two of the most respected individuals in the investment world * Burton G. Malkiel is the bestselling author of A Random Walk Down Wall Street and Charles D. Ellis is the bestselling author of Winning the Loser's Game * Shows how to deal with an investor's own worst enemies: fear and greed A disciplined approach to investing, complemented by conviction, is all you need to succeed. This timely guide will help you develop these skills and make the most of your time in today's market.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Introduction

IT ALL STARTS WITH SAVING

I - SAVE

FIRST DO NO HARM

START SAVING EARLY: TIME IS MONEY

THE AMAZING RULE OF 72

SAVVY SAVINGS

SMALL SAVINGS TIPS

BIG WAYS TO SAVE

LET THE GOVERNMENT HELP YOU SAVE

OWN YOUR HOME

HOW DO I CATCH UP?

II - INDEX

NOBODY KNOWS MORE THAN THE MARKET

THE INDEX FUND SOLUTION

DON’T SOME BEAT THE MARKET?

INDEX BONDS

INDEX INTERNATIONALLY

INDEX FUNDS HAVE BIG ADVANTAGES

ONE WARNING

CONFESSION

III - DIVERSIFY

DIVERSIFY ACROSS ASSET CLASSES

DIVERSIFY ACROSS MARKETS

DIVERSIFY OVER TIME

REBALANCE

IV - AVOID BLUNDERS

OVERCONFIDENCE

BEWARE OF MR. MARKET

THE PENALTY OF TIMING

MORE MISTAKES

MINIMIZE COSTS

V - KEEP IT SIMPLE

REVIEW OF BASIC RULES

ASSET ALLOCATION

ASSET ALLOCATION RANGES

INVESTING IN RETIREMENT

GETTING SPECIFIC

A SUPER SIMPLE SUMMARY: KISS INVESTING

APPENDIX: SAVE ON TAXES LEGALLY

RECOMMENDED READING

Acknowledgements

ABOUT THE AUTHORS

INDEX

Copyright © 2010 by Burton G. Malkiel and Charles D. Ellis. All rights reserved.

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

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Malkiel, Burton Gordon.

The elements of investing / Burton G. Malkiel and Charles D. Ellis; foreword by David Swensen.

p. cm.

Includes index.

eISBN : 978-0-470-58550-4

1. Investments. 2. Finance, Personal. 3. Portfolio management.

4. Investment analysis. I. Ellis, Charles D. II. Title.

HG4521.M2827 2010 332.6—dc22

2009031708

To our delightful grandchildren, Porter, Mackie, Jade, Morgan, Charles, and Ray

FOREWORD

In The Elements of Investing, Charley Ellis and Burt Malkiel, two of the investment world’s greatest thinkers, combine their talents to produce a remarkable guide to personal finance. Having already written two of the finest books on financial markets, Ellis’s Winning the Loser’s Game and Malkiel’s A Random Walk Down Wall Street, why should the authors revisit the subject of their already classic volumes? The sad fact is that in the cacophony of advice for individual investors, few sane voices are raised. In writing The Elements of Investing, the authors provide an important service to the lay reader, honing their message to the bare essentials by heeding Albert Einstein’s dictum that “everything should be made as simple as possible, but not simpler.”

Investors have three tools to deploy in the portfolio management process—asset allocation, market timing, and security selection. Asset allocation involves setting long-term targets for each of the asset classes in which an investor invests. Market timing consists of short-term bets against the long-term asset allocation targets. Security selection deals with the construction of the asset classes that an investor chooses to employ.

Ellis and Malkiel correctly focus on asset allocation since asset allocation accounts for more than 100 percent of investor returns. How can it be that more than 100 percent of returns come from the asset allocation decision? Market timing and security selection involve significant costs in the form of management fees paid to outside advisors and commissions extracted by Wall Street brokers. Such costs ensure that investors will underperform by the totality of investment management costs, which represent transfers from investors to their agents. Hence, the expensive activities of market timing and security selection reduce the returns available for the community of investors and that is the reason asset allocation explains more than 100 percent of investor returns.

Ellis and Malkiel observe that investors consistently make perverse market timing decisions, chasing hot performers and dumping laggards. Study after study of mutual fund trading concludes that investors buy high and sell low, subtracting value with their timing decisions. Ellis and Malkiel sensibly advise investors to adopt a coherent long-term strategy and stick with it.

Security selection decisions further reduce returns. Ellis and Malkiel cite depressing statistics regarding the failure of the majority of mutual fund managers to exceed the returns of low-cost, passive, market-matching index strategies. The documented dismal numbers only begin to capture the enormity of the situation. Ellis and Malkiel cite numbers only for funds that survived, a relatively successful subset of the mutual fund universe. The failures, which as a group produced miserable returns, are nowhere to be measured. Many funds disappeared. The Center for Research in Security Prices collects data on all mutual funds, dead or alive. As of December 2008, the Center tracked 39,000 funds, only 26,000 of which are active. The 13,000 failed funds do not show up in the authors’ studies of past returns because the failed funds do not have current track records. (They disappeared, after all.) Considering the experience of mutual funds, dead and alive, reinforces Ellis and Malkiel’s advice to take the low-cost, passive approach.

Of course, even in a slim volume, quibbles arise. I view home ownership more as a consumption good and less as an investment asset. I cast a skeptical eye on Ellis and Malkiel’s implicit endorsement of stock picking in their confessions regarding personal success in security selection. (Is it surprising that two of the greatest figures in modern finance would figure out how to beat the market? Yes, they can pick stocks—the rest of us cannot.) I more emphatically recommend Vanguard, which, along with TIAA-CREF, operates on a not-for-profit basis and thereby eliminates the money management industry’s pervasive conflict between profit motive and fiduciary responsibility. Quibbles aside, The Elements of Investing delivers an important and fundamentally valuable message.

When I was a doctoral student at Yale in the late 1970s my dissertation advisor, Nobel laureate James Tobin, suggested that I read A Random Walk Down Wall Street to learn about how markets really work. Burt Malkiel’s wonderful book provided a critical foundation for my academic work. When I returned to Yale in the mid-1980s to manage Yale’s endowment, I came across Investment Policy, the predecessor to Winning the Loser’s Game. Charley Ellis’s marvelous volume informed my approach to investment management in countless ways. Now, Charley Ellis and Burt Malkiel have produced a magnificent primer on investing for all of us. Follow their recommendations and prosper!

David F. Swensen Author of Unconventional Success:A Fundamental Approach to Personal InvestmentChief Investment Officer, Yale University

July 2009

INTRODUCTION

In 100 years of study and experience,1 here are the Elements of Investing we wish we’d always known. Experience may well be the best teacher, but the tuition is very high. Our objective is to provide individual investors—including our delightful grandchildren—the basic principles for a lifetime of financial success in saving and investing, all in 176 pages of straight talk that can be read in just two hours. There are many good books about investing. (Indeed, we’ve even written a few ourselves.) But most investing books run to 400 pages or more and go into complex details that tend to overwhelm normal people.

If you’re like most people, you have neither the patience nor the interest to plow through that much detail. You want to get the main things right. Still, having unbiased information about financial decision making and avoiding costly investing errors is critically important.

That’s why we present the most important lessons in this easy-to-read, jargon-free little book. If you happen to be familiar with William Strunk Jr. and E. B. White’s classic book, The Elements of Style, you will recognize one of the original sources of inspiration for this book—and why we are so brief. If you are unfamiliar with Strunk and White, don’t worry. All you need to know is that they whittled down the art of powerful writing to a few basic rules of usage and composition. In less than 92 pages, they shared everything about writing that truly mattered; brevity and precision became instant virtues. Strunk and White’s wafer-thin classic has chugged along for decades. No doubt it will outlive us all.

We now dare state our goal on the equally important topic of investing. How surprising to us that everything of importance on such a heady topic can be reduced to rules you can count on one hand. Yes, investing can be that simple if your brain remains unclouded with taxing complexities. These rules will truly make a difference.

Our promise: Reading this book will be the best time you could spend to put yourself on the right path to long-term financial security. Then, over your lifetime, you can pick this book up again to scan its lessons and remind yourself what is elemental if you want to turn a loser’s game into one you can really win.

IT ALL STARTS WITH SAVING

This is a short, straight-talk book about investing. Our goal is to enhance your financial security by helping you make better investment decisions and putting you on a path toward a lifetime of financial success and, particularly, a comfortable and secure retirement.

Don’t let anyone tell you that investing is too complex for regular people. We want to show you that everybody can make sound financial decisions. But it doesn’t matter whether you make a return of 2 percent, 5 percent, or even 10 percent on your investments if you have nothing to invest.

So it all starts with saving.

It doesn’t matter whether you make a return of 2 percent, 5 percent, or even 10 percent on your investments if you have nothing to invest.

I

SAVE

Save. The amount of capital you start with is not nearly as important as organizing your life to save regularly and to start as early as possible. As the sign in one bank read:

Little by little you can safely stock up a small reserve here,but not until you start.

The fast way to affluence is simple: Reduce your expenses well below your income—and Shazam!—you are affluent because your income exceeds your outgo. You have “more”—more than enough. It makes no difference whether you are a recent college graduate or a multimillionaire. We’ve all heard stories of the school-teacher who lived modestly, enjoyed life, and left an estate worth over $1 million—real affluence after a life of careful spending. And we know one important truth: She was a saver.

But it can also go the other way. A man with an annual income of more than $10 million—true story—kept running out of money, so he kept going back to the trustees of his family’s huge trusts for more. Why? Because he had such an expensive lifestyle—private plane, several large homes, frequent purchases of paintings, lavish entertaining, and on and on. And this man was miserably unhappy.

In David Copperfield, Charles Dickens’s character Wilkins Micawber pronounced a now-famous law:

Annual income twenty pounds, annual expenditurenineteen pounds nineteen and six, resulthappiness. Annual income twenty pounds,annual expenditure twenty pounds ought andsix, result misery.

Saving is good for us—for two reasons. One reason for saving is to prevent having serious regrets later on. As the poet John Greenleaf Whittier wrote: “Of all sad words of tongue and pen, the saddest are ‘It might have been.’”2 “I should have” and “I wish I had” are two more of history’s saddest sentences.

Another reason for saving is quite positive: Most of us enjoy the extra comfort and the feeling of accomplishment that comes with both the process of saving and with the results—having more freedom of choice both now and in the future.

No regrets in the future is important, or will be, to all of us. No regrets in the present is important, too. Being a sensible saver is good for you, but deprivation is not. So don’t try to save too much. You’re looking for ways to save that you can use over and over again by making these new ways your new good habits.3

The real purpose of saving is to empower you to keep your priorities—not to make you sacrifice. Your goal in saving is not to “squeeze orange juice from a turnip” or to make you feel deprived. Not at all! Your goal is to enable you to feel better and better about your life and the way you are living it by making your own best-for-you choices. Savings can give you an opportunity to take advantage of attractive future opportunities that are important to you. Saving also puts you on the road to a secure retirement. Think of saving as a way to get you more of what you really want, need, and enjoy. Let saving be your helpful friend.

FIRST DO NO HARM

The first step in saving is to stop dissaving—spending more than you earn, especially by running up balances on your credit cards. There are few, if any, absolute rules in saving and investing, but here’s ours: Never, never, never take on credit card debt. This rule comes as close as any to being an inviolable commandment. Scott Adams, the creator of the Dilbert comic strip, calls credit cards “the crack cocaine of the financial world. They start out as a no-fee way to get instant gratification, but the next thing you know, you’re freebasing shoes at Nordstrom.”

Credit card debt is great—but not for you (or any other individual). Credit card debt is great for the lenders, and only the lenders. Credit cards are a wonderful convenience, but for every good thing there are limits. The limit on credit cards is not your announced “credit limit.” The only sensible limit on credit card debt is zero.

Credit card debt is