The Smartest Investment Book You’ll Ever Read: Book Notes

This is again a book on the superiority of index/ETF investing in broad global asset classes of stocks and bonds. This is because market-timing and superior stock picking is not consistently possible for the majority of people. Moreover the securities industry/money managers/brokers add a lot of cost which eats into your returns. And also, there is a lot of conflict of interest- for them to make money, you have to lose money.

The three types of index funds/ETFs you need to hold are:

  1. Representative of the total US stock market
  2. Representative of the total international stock market
  3. Representative of the total US bond market

One important thing is to know the standard deviation of your portfolio. It is a measure that calculates the fluctuation of your portfolio without regards to direction.

Investor type             Maximum standard deviation
Conservative 8%
Moderately aggressive 15%
Very aggressive 20%
Very very aggressive 30%

Bonds should always be part of your portfolio to minimise risk.

There is no need to slice and dice your portfolio to overweight value as the total stock market indexes contain 50% value stocks anyway. Having all of portfolio in value might increase returns but those returns are uncertain and you could also incur heavy losses.

Unless your account is more than $ 1 million dollars, DFA funds are not worth it.

Asset allocation: Stocks, Bonds, Cash. Cash should  equal 6-12 months of living expenses.

Four portfolios for varying amounts of risk:(1973-2008 returns)

Porfolio % Stocks % Bonds Worst 12 month loss Average annual return
Low risk 20% 80% -1.69% 9.22%
Medium-low risk 40% 60% -6.60% 9.91%
Medium-high risk 60% 40% -12.65% 10.50%
High risk 80% 20% -18.70% 10.96%

Stocks are further divided into 70% US, 30% international

Rebalance 6 monthly or when your ratio goes more than 5-10%. If you are adding money, buy the lagging asset class. If stocks are lagging, buy stocks. If international is lagging buy international. If US is lagging buy US. If bonds are lagging, buy bonds.

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