Bernstein wrote this short booklet on the five key basics to modest wealth as a gift to the millennial generation. He gives it away for free online. But I think the concepts outlined, though simple, are intelligent and invaluable. Most financial experts would agree with these basics. Each chapter covers a key concept of investment wealth, and gives an easy-to-read book recommendation for further study. I think this little book is foundational education for the young and because it is so accessible, should be required reading.
- A simple investment strategy that takes 15 minutes per year, will outperform 90% of investment professionals, and will make you a millionaire: save at least 15% per year, and divide it into 3 index funds: U.S., international, and bond; and rebalance once a year. However, you will have to overcome five hurdles.
- Hurdle One: save
- Save at least 15% of salary, max out employer match in 401(k), eliminate high interest debt, set up an emergency fund.
- Reading assignment: The Millionaire Next Door, by Thomas Stanley and William Danko.
- Hurdle Two: understand financial theory
- Understand expectedreturns, and how risk relates to it.
- Nobody can market-time (in the short term) reliably. However, returns can be estimated reliably over the very long term.
- Mutual fund managers cannot beat the market. Those who do are temporarily lucky. Most extreme example: Bill Miller, who beat the S&P 500 for fifteen straight years but then gave it all back in a couple of years.
- Reading assignment: Common Sense on Mutual Funds, by Jack Bogle.
- Hurdle Three: know financial history
- Learn market history to recognize market sentiment. Learn when naïve, inexperienced investors enter the market, it usually signals a top. Counterintuitively, when friends recommend stocks, it is a good time to avoid them. Use this knowledge not to market-time, but to maintain discipline to established strategy/ process.
- Reading assignment: Devil Take the Hindmost, by Edward Chancellor; The Great Depression: A Diary, by Benjamin Roth.
- Hurdle Four: tame yourself
- Our human nature can derail the best designed strategy: overconfidence, extrapolating recent performance, seeking patterns where none exist. We are hard-wired to respond quickly and instinctively for survival, not for long-term planning.
- Reading assignment: Your Money and Your Brain, by Jason Zweig.
- Hurdle Five: avoid financial professionals
- Most financial brokers and advisors are trained to sell, not to invest.
- Stick to low-cost index funds. Vanguard is a trustworthy company, since it is investor-owned.
- Reading assignment: How a Second Grader Beats Wall Street, by Allan Roth; All About Asset Allocation, by Rick Ferri.
- Retirement spending is best accomplished with an inflation-adjusted annuity or a TIPS ladder that matures every few years. These will provide inflation-adjusted income stream.
Finished: 31-Aug-2015. Rating 8/10.