The Smartest Portfolio You Will Ever Own: Book Notes

This post contains my personal notes from the book, ” The Smartest Portfolio You Will Ever Own” by Daniel Solin.

1. The real skinny on investing: It is not complicated. No one has a clue where the markets are headed. Holding individual stocks or bonds exposes you to higher risk without higher expected returns. Holding any actively managed mutual fund increases your costs and decreases your expected return. Using the services of brokers or advisers who claim to be able to beat the markets significantly reduces your chances of capturing market returns. The free market system works. Stock prices are random and efficient. There is mispricing. There is a wealth of irrefutable data supporting these views.

2. Your brain is wired to push you towards the thrill of making short-term decisions, while your focus should be on the long-term ones. Fear and greed are two emotions which make us do this. We also believe in first impressions and what others say about an investment even though they may be wrong.

3. The brokerage firms and Wall Street want to make money off you and are not concerned about your financial well-being. The securities industry is a wolf in sheep’s clothing and will eat you if you allow it .

4. The judgment of all investors world-wide is wise. You should heed it. When you trade you do not know who is on the other side of the trade and whether they are more intelligent than you are.

5. Predictions have zero reliability. Smart investors ignore them.

6. You should be investing in a globally diversified portfolio of stock and bond index funds, with low management fees, dividing your investments among stocks, bonds and cash, in an asset allocation suitable for you.

7. The returns for stocks in excellent companies is not excellent.

8. You can achieve the same expected return, with significantly less risk, by holding index funds instead of  individual stocks.

9. Bond index funds give you more diversification, superior management and lower costs comparing to holding individual bonds.

10. The myth of skill is this: Wall Street is not completely lacking in skill. It takes considerable skill to convince you that it has an expertise that does not exist and that you should pay for this non existent skill.

11. Gold, hedge funds, principal protected notes and private equity companies as investment strategies are all myths. Ignore market theories and investments that encourage you to invest in a globally diversified portfolio of low management fee index funds in an asset allocation that is suitable for you.

12. The fees charged by active fund managers  who are usually engaged in the futile effort ” to beat the markets” reduces return significantly.

13. There is a lot of overwhelming data that index-based investing is superior to active management.

14. Your tolerance for risk is driven by your time horizon and your tolerance for short-term volatility. The following figure will demonstrate this:

Asset location based on risk tolerance

15. You should invest in index funds or index ETFs. You can lose a substantial portion of your total return when you invest in actively managed funds.

16. Rebalancing once or twice a year when your allocation alters your risk level by more than 5% makes sense. Rebalance by directing your funds and dividends to the lagging components of your portfolio.

17. There are four smartest portfolios: the supersmart portfolio, the smartest target date portfolio, the smartest ETF portfolio and the smartest index fund portfolio. Any of these four smartest are likely to yield vastly superior returns when compared to active fund management.

18. The factors which affect the return of the stock component of your portfolio are these: how much money you have in stocks, how much money you have in small company stocks and how much money you have in value stocks. The factors which affect the bond component of your portfolio are these: term of the bond and the default risk of the bond. You can now engineer a portfolio to maximise expected returns and properly compensate you for the risk you undertake.

19. The supersmart portfolio consists of 20% US large cap, 20% US large value, 20% US small value, 10% US real estate,10% international value,10% international small cap and 10% emerging markets for the stock component of the portfolio. It consists of 50% short-term US bonds and 50% short-term international government bonds.

20. The smartest target date portfolio uses one of Vanguard target date funds with the asset allocation that you personally want.

21. The smartest ETF portfolio consists of total world stock ETF for the stock portion of the portfolio and 50% short-term US government bond ETF and 50% short-term international government bond ETF for the bond portion of the portfolio.

22. The smartest index fund portfolio consists of 70% Total US Stock Market and 30% Total International Stock Market for the stock component of the portfolio. It consists of 100% Total Bond Market for the bond component of the portfolio.

23. All these portfolios have similar returns over long periods of time.

24. You can invest by yourself or you can take help. When you take help you should be aware of the adviser’s investment philosophy and see whether it fits in with what we have said so far. The adviser can help you keep personal discipline in following the plan and can help you with tax loss harvesting.

25. DFA versus Vanguard versus ETFs is an important debate, but the real issue is active versus passive management.

26. You have the power and now you have the tools to be a smart and responsible investor.


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