A Gem: "The Little Book of Safe Money" by Jason Zw

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A Gem: "The Little Book of Safe Money" by Jason Zw

Postby Taylor Larimore » Thu Nov 12, 2009 2:50 pm

Hi Bogleheads:

I have just finished reading Jason Zweig's "Little Book of Safe Money." Jason was mutual funds editor at Forbes; senior writer for Money magazine; and is now the personal finance columnist for The Wall Street Journal. These are a few of the valuable excerpts from his latest book:

"Diversification and liquidity are dandy, but they both vanish when we need them the most."

"In 17 murderous months (October 9, 2007--March 9, 2009) 60 percent of the world's stock market wealth was destroyed."

"The world's largest insurance company, AIG, went bust buying securities so complex its own managers were incapable of understanding them."

"The keys to investing are simple: diversify, keep costs low, buy and hold."

"Like dieting, investing is simple but not easy."

"It is absolutely mandatory for you to keep a reservoir of liquidity in your portfolio at all times."

"No matter how valuable an investment may be or appear to be, it's of no practical value to you unless it's liquid when you need to cash out."

"If you invest in stocks one company at a time, you could easily rack up expenses of more than 2% annually, and in the end might lose 100% of your money."

"The biggest single holding in your portfolio is you: the income that your career will generate over the rest of your life."

"Anyone whose human capital is vulnerable to the escalating cost of living should consider investing heavily in TIPS."

"Money-market funds don't belong in your retirement account, but TIPS do."

"There is no such thing as absolute safety."

"In 2008, the Schwab YieldPlus short-term bond fund lost -35.4%."

"Wall Street is forever inventing another newfangled way to promise higher yield at low risk."

"You can have low risk, or you can have high yield. But you can never have both in the same investment."

"A good reputation does not ensure safety."

"Don't count on SIPC insurance to bail you out of your investment mistakes or every kind of dishonesty by a financial advisor."

"Historically, bonds have tended to zig when stocks have zagged--thus providing a cushion for the bond-crunching roller coaster of the stock market."

"For most small investors, an indexed bond mutual fund is the best way to go."

"Never reach for yield. Remember: It's total return that matters."

"Avoid high-cost bond funds as if they were poison. They are."

"In Japan at the end of 1989, the leading Nikkei 225 stock index was at 38,915.87; two decades later, it languishes below 10,000."

"Invest as if stocks are likely-but not certain-to beat all other assets. Keep some money in bonds, cash, and real estate just in case they do better."

"Too many investors devote all their attention to figuring out the odds of being right. Every investor also needs to think about the odds of being wrong."

"Stocks are not certain to outperform bonds and cash no matter how long you hold on."

"Why do so many investors choose not to own the whole pie, but rather just some ragged slices here and there?"

"Dazzled by their own knowledge and oblivious to the fact that other people are at least as knowledgeable, millions of investors move their money around every day.-- The end result is not a portfolio, but a hodge-podge, a mishmash, a slop bucket full of market goulash."

"You can own the whole casino--effortlessly, cheaply, and reliably by buying a total stock-market index fund."

"We spend a lot on things we could, and perhaps should, live without (restaurant meals, booze, and smokes)."

"Above all else, manage your credit-card spending wisely."

"Pennies saved today turn into dollars down the road-the surest and safest way of all to increase your wealth."

"For many, perhaps most, a prepaid 529 plan may be a better choice than the standard 529 savings plan that has caused so much grief."

"Don't invest in leveraged and inverse ETFs."

"The return of the average hedge fund may be overstated by a shocking margin: as much as 8% a year."

"When hedge funds (like mutual funds) go out of business, they disappear from databases of performance. The average return includes only the winners."

"What the bulls don't tell you is that, adjusted for inflation, gold was around $2,200 an ounce back in 1980."

"For most people, commodities are too risky and expensive to try at home."

"Incredible as it may sound, the faster a country's economy grows, the worse an investment its stock market tends to be."

"Owning an emerging markets fund permanently makes sense. Buying one when they're hot--does not."

"In the testosterone-poisoned sandbox of the male investor, the most important thing is beating somebody else; the second most important, bragging about it."

"Men should make a special point of having their wives review any choices the husbands regard as a sure thing."

"It is irresponsible for a husband to keep such tight control of the family's investments that his wife will find them completely unfamiliar after he is gone."

"If someone says you could double your money if you are right, ask how much you could lose if you are wrong."

"Dont just size up the probabilities and rewards of being right. Be sure you also make an honest effort to evaluate the consequences of being wrong."

"Life cycle funds are usually well-diversified and can provide a strong foundation for the entire household portfolio."

"The managers of hedge funds (like mutual funds) wait to see which portfolios are the pick of the litter, then quietly euthanize the losers without ever having reported their existence."

"The quality of advice is not contingent on the adviser's clothes."

"In the stock market, much of what seems to be patterns is, in fact, just random noise."

"The human mind jumps to conclusions about long-term trends from very short-term samples."

"The most dangerous bias of all: Your belief that you are unbiased."

"You think it is silly for the average person to believe that he or she is above average-and yet you remain convinced that you are above average!"

"What is your risk tolerance? No one knows."

"You should never act on an investing idea the same day you get it."

"In a perfect world, a financial adviser puts your best interest ahead of their own. The world isn't perfect."

"A good adviser can be worth at least his or her weight in gold."

"In the United States, you can easily run afoul of the hundreds of highly technical laws and reulations that mandate how to invest, manage, exchange, withdraw, bequeath, account for, and pay taxes on your money."

"Visit www.napfa.org to identify financial planners who charge only fees, not commissions, and http://pfp.aicpa.org to find certified public accountants who are also qualified to provide financial advice."

"Every year, shysters separate thousands of innocent investors from their money."

"Here are some words and phrases that shysters are fond of and that financially legitimate people are very unlikely to use: Secret; can't lose; offshore; guaranteed; opportunity of a lifetime; you have to hurry; trust me; transfer money; there's no downside, a sure thing."

"Never invest in anything on the recommendation of a friend or family member alone."

"Getting rich quick isn't just difficult or a secret art; it's an impossibility."

"From the beginning of 1998 thru the end of 2001, Kinetics Internet fund generated an average annual return of +42.4%. Yet the average investor in the fund lost -15.8%."

"Investors do not buy low and sell high. They do not even buy and hold. Instead, they buy high and fold."

"Very high returns are likely to be followed by very low returns."

"Greater risk does not always mean greater return."

"The evidence suggests that trading will reduce your return by at least 1.5% per year-before tax and any trading costs!"

"In investing, less is more."

"Commit to a dollar-cost averaging or automatic investment plan that require you to add a little bit of money every month."

"In investing, what separates the victims from the victors is discipline and skepticism."

"It's vital to remember that absolutely anyone can be hooked by crude appeals to greed."

"In the real world, costs matter--and they matter a lot."

"If you are investing for retirement 30 years away, buy a total stock-market index fund and hold it continuously for the next three decades."

"The intelligence, wisdom, and integrity of investors are a never-ending inspiration to me. I hope you will share your inspiration (and offer your criticism) at info@jasonzweig.com."

Thank you Jason Zwig!

More Investment Gems
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Postby gotherelate » Thu Nov 12, 2009 3:15 pm

"Money-market funds don't belong in your retirement account, but TIPS do."


I disagree. What if you anticipate needing the money within the next year or so?

-Grandpa
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Postby sschullo » Thu Nov 12, 2009 8:30 pm

gotherelate wrote:
"Money-market funds don't belong in your retirement account, but TIPS do."


I disagree. What if you anticipate needing the money within the next year or so?

-Grandpa


At least MM funds are paying something, but TIPS? Heck if the trend continues into deflation, pretty soon I will be owning VG money each and every month :cry: . Oh well, whats a fellow to do but make more mistakes....and wish, really wish, for inflation so tips start paying?
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Money Market and TIPS returns

Postby Taylor Larimore » Thu Nov 12, 2009 9:03 pm

At least MM funds are paying something, but TIPS? Heck if the trend continues into deflation, pretty soon I will be owning VG money each and every month :cry: .


Hi sschullo:

Year-to-date, Vanguard's Prime Money Market Fund (VMMXX) has returned 0.52%

Meanwhile Inflation-Protected Securities (VIPSX) returned 11.16%
"Simplicity is the master key to financial success." -- Jack Bogle
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Postby pkcrafter » Fri Nov 13, 2009 10:03 am

gotherelate wrote:
I disagree. What if you anticipate needing the money within the next year or so?

Then it should not be in your long-term asset allocation (retirement portfolio.) :)

Great list of gems, Taylor. A book that will do very well now, but will be pushed aside at market highs.

Thanks,


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Postby Nosferatu » Fri Nov 13, 2009 10:33 am

"For many, perhaps most, a prepaid 529 plan may be a better choice than the standard 529 savings plan that has caused so much grief."


Prepaid as in prepaid tuition? Isn't this what Texas just defaulted on?
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Postby Lucio » Fri Nov 13, 2009 10:43 am

gotherelate wrote:
"Money-market funds don't belong in your retirement account, but TIPS do."


I disagree. What if you anticipate needing the money within the next year or so?

-Grandpa


No offense intended, Grandpa, but my recent experience proves you very, very wrong. I had a nice chunk of cash safely sitting safely in the Reserve Primary Fund on Sep. 15, 2008. Then Lehman Brothers failed. I finally received my funds in March of 2009.

It was an excellent lesson for me. FDIC insured accounts, Treasurys and savings bonds are the only appropriate cash holdings for me.

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Postby ddb » Fri Nov 13, 2009 11:13 am

Lucio wrote:
gotherelate wrote:
"Money-market funds don't belong in your retirement account, but TIPS do."


I disagree. What if you anticipate needing the money within the next year or so?

-Grandpa


No offense intended, Grandpa, but my recent experience proves you very, very wrong. I had a nice chunk of cash safely sitting safely in the Reserve Primary Fund on Sep. 15, 2008. Then Lehman Brothers failed. I finally received my funds in March of 2009.

It was an excellent lesson for me. FDIC insured accounts, Treasurys and savings bonds are the only appropriate cash holdings for me.

Lucio


Your story could easily have been avoided by using a money market that invested only in Treasuries. When we chase yield, we take on increased risk.

- DDB
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Postby yobria » Fri Nov 13, 2009 11:30 am

Thanks Taylor. Zweig is an outstanding writer.

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Postby Lucio » Fri Nov 13, 2009 12:04 pm

ddb wrote:
Lucio wrote:
It was an excellent lesson for me. FDIC insured accounts, Treasurys and savings bonds are the only appropriate cash holdings for me.

Lucio


Your story could easily have been avoided by using a money market that invested only in Treasuries. When we chase yield, we take on increased risk.

- DDB


Try again.

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Postby Mel Lindauer » Fri Nov 13, 2009 12:08 pm

Lucio wrote:
ddb wrote:
Lucio wrote:
It was an excellent lesson for me. FDIC insured accounts, Treasurys and savings bonds are the only appropriate cash holdings for me.

Lucio


Your story could easily have been avoided by using a money market that invested only in Treasuries. When we chase yield, we take on increased risk.

- DDB


Try again.

Lucio


I think DDB was referring to this part of your post (before you got religion):

No offense intended, Grandpa, but my recent experience proves you very, very wrong. I had a nice chunk of cash safely sitting safely in the Reserve Primary Fund on Sep. 15, 2008. Then Lehman Brothers failed. I finally received my funds in March of 2009.
Best Regards - Mel

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Postby ddb » Fri Nov 13, 2009 12:26 pm

Lucio wrote:
ddb wrote:
Lucio wrote:It was an excellent lesson for me. FDIC insured accounts, Treasurys and savings bonds are the only appropriate cash holdings for me.

Your story could easily have been avoided by using a money market that invested only in Treasuries. When we chase yield, we take on increased risk.

Try again.


Why try again?

Money market funds exist in a wide variety of flavors in terms of allowable underlying holdings. As a money market fund drifts more and more from 100% treasuries, its yield will generally increase, and its risk of principal loss and/or a period of illiquidity increases. To my knowledge, a money market fund which is mandated by prospectus to invest only in Treasuries (or even Treasuries and agency bonds) has never had a problem. Other please correct me if I'm wrong.

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Postby Munir » Fri Nov 13, 2009 1:20 pm

Taylor,

Thank you for the post.

Can you elaborate on Zweig's comment:"Don't count on SIPC insurance to bail you out of your investment mistakes or every kind of dishonesty by a financial advisor."

What is SIPC? Is it some kind of government insurance?
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Postby ddb » Fri Nov 13, 2009 2:07 pm

Munir wrote:Taylor,

Thank you for the post.

Can you elaborate on Zweig's comment:"Don't count on SIPC insurance to bail you out of your investment mistakes or every kind of dishonesty by a financial advisor."

What is SIPC? Is it some kind of government insurance?


SIPC is the insurance protection offered on brokerage accounts which gives an investor a certain level of protection in the event of brokerage firm failure. Zweig is saying (I think) that SIPC is not protection against market downturns or being the recipient of bad advice.

- DDB
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More on SIPC guaranty

Postby Taylor Larimore » Fri Nov 13, 2009 3:02 pm

Munir wrote:Taylor,

Thank you for the post.

Can you elaborate on Zweig's comment:"Don't count on SIPC insurance to bail you out of your investment mistakes or every kind of dishonesty by a financial advisor."

What is SIPC? Is it some kind of government insurance?


Hi Munir:

ddb gave a good answer about what is SIPC. Zwieg devotes 3 pages describing that SIPC does and does not accomplish. This is a portion:

"SIPC plays hardball. The organization will replace assets that are stolen or are frozen when a brokerage firm goes bankrupt. But may victims of Bernie Madoff's investment scam were shocked, in late 2008, to hear that they would recover a potential maximum of only $100,000. -- SIPC coverage is certainly better than nothing. Just remember, however, that it has so many loopholes and limitations that it does not qualify as comprehensive insurance."
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