I have just finished reading the published edition of "The Only Guide You'll Ever Need for the Right Financial Plan"
by Swedroe, Grogan and Lim. This book is not for a beginner, but as I wrote on the cover, If you have investing experience and want to improve your portfolio, this is the book to read.
Below are valuable excerpts:
"Having a well-thought-out investment plan is a necessary
condition for success, not a sufficient
one. The sufficient condition is integrating the investment plan into a well-thought-out estate, tax, and risk management plan."
"Professors Eugene F. Fama and Kenneth R. French revolutionized the way many individuals think about investing."
"Investors and advisers alike must accept that they will never know, ex-ante
, the optimal allocation to international investments or how much an investor's portfolio should tilt toward value stocks or small-cap stocks."
"Asset allocation can be defined as the process of investing assets in a manner reflecting one's unique ability, willingness, and need to take risk."
"Never choose an allocation exceeding your risk tolerance."
"Efficient frontier models attempt to turn investing into an exact science, which it is not."
"It is foolish to pretend we know in advance exact levels for returns, correlations, and standard deviation."
"Investors have demonstrated the unfortunate tendency to sell well after
market declines and to buy well after
rallies have long begun."
"U.S. Large Growth stocks "produced negative returns for the 10 years from 1999 through 2008, an occurrence unprecedented since 1938."
"The mistake many investors make is to focus solely on the high odds of success and ignore the odds of failure."
"Plan B should list the actions to be taken if financial assets drop below a predetermined level."
"The longer the investment horizon, the more likely equities will provide higher returns than fixed-income investments."
"The individual's labor capital must be considered."
"A factor impacting the ability to take risk is the need for liquidity."
"It might be said that one gets
rich by working hard and taking big risks, and that one stays
rich by limiting risk and not spending too much."
"Prudent investors do not take more risk than they have the ability, willingness or need to take. If you've already won the game, why still play?"
"Equities versus Fixed Income is the most important asset allocation decision and the primary determinant of the expected return and risk of an investor's portfolio."
"Investors should consider allocating at least 30% and as much as 50% of their equity holdings to international equities."
"Modern Portfolio Theory (MPT) tells us that sometimes we can add risky assets and actually reduce the risk of the overall portfolio."
"Both domestic and international REITS are excellent diversifiers of equity risks."
"The cost of losing the Federal Tax Credit (FTC) (in international funds) is about 9% of the dividend yield."
"Commodities are worthy of consideration for inclusion in a globally diversified portfolio."
"SRI (Socially Responsible Investing) funds cannot be endorsed if the sole criteria are investment-related issues."
"The main roles of fixed-income assets in a portfoloio are reducing portfolio
risk to the level appropriate for the investor's unique circumstances and providing a reliable source of cash flow."
"Hybrid securities such as high-yield bonds, convertible bonds, preferred stocks, and emerging-market bonds should be avoided."
"The higher the equity allocation, the more (bond) duration risk one should consider taking."
"Because the yield curve for municipal bonds is generally steeper than for taxable bonds, it may be appropriate to extend the maturing of municipal bonds further than would be the case for taxables."
"Inflation Protected Securities have lower correlations to equities than nominal return bonds, making them more effective diversifiers of equity risk. In fact, the correlation of TIPS to equites has been negative."
"Academic papers analyzing TIPS benefits all reach a similar conclusion: TIPS should dominate the fixed-income portfolios of most investors, at least for assets in tax-advantaged accounts."
"Bonds rated below AA are not recommended. Most convertibles fall below that level."
"There is no evidence of persistent ability to generate profits from currency speculation."
"One reason to consider EE bonds is the special tax benefit available for education savings."
"Emerging market debt is a risky asset class, characterized by extreme volatility.--An investment in emerging market bonds should be considered an allocation to the asset class of equities."
"Equity indexed annuities have so many negatives no one should consider investing in them."
"All things considered, there is no compelling reason to include gold in a well-diversified portfolio."
"From 2003 through 2008, the HRFX Index of hedge funds gained just 0.7% per annum, underperforming every single major equity asset class."
"Investors should not make the mistake of confusing yield with return."
"Investors seeking higher returns can do so more efficiently than using high-yield bonds, by adding a bit more equity risk to their portfolio or by adding more size and/or value risk."
"Over the long term, leveraged funds have provided poor risk-adjusted returns."
"With all their expenses and incentive fees, private equity investments have generally failed to deliver on their promise."
"If a security looks like it has a high yield or high return, then there is a high degree of risk involved. Even if you cannot see the risk, you can be sure it is there."
"While variable annuities have some positive attributes, the negatives far exceed the benefits."
"Those with mortgages with a loan-to-value of more than 80% should consider paying down the mortgage to that level, eliminating the cost of mortgage insurance."
"A good rule of thumb is that the first 'investment' an individual should make is to pay credit-card debt before any equity investing."
"In most cases, we believe that individuals should not use margin to buy equities."
"Many bond funds, particularly closed-end funds that trade like stocks, use leverage in an attempt to increase returns. Funds employing leverage should be avoided."
"Vanguard offers a broad array of low cost, passively managed funds."
"Total market funds should be used to the extent possible as they reduce the need for, and costs of, rebalancing."
"Past performance of active managers is a very poor predictor of their future performance."
"The Russ Wermer study covered the 27 year period from 1975-94 and included a universe of 1,788 funds in existence during the period. He found the average (managed fund) underperformance on a risk-adjusted basis was -2.2% per annum."
"While it is easy to identify money managers with great performance after the fact
. There is no evidence of the ability to do this before the fact
"Trading costs for mutual funds are on average greater in magnitude than the expense ratio."
"We have not made progress in predicting the stock market, but this has not stopped the investment business from continuing the quest, and making $100 billion annually doing so." (Wm. Shereden quote)
"While the markets may not be perfectly efficient, the prudent investment strategy is to behave as if they were."
"Taxable investors should have a preference for holding equities (versus fixed-income) in taxable accounts."
"Investors should always prefer to first fund their Roth IRA or deductible retirement accounts (IRA, 401K or 403b) before investing any taxable dollars."
"If the use of a balanced or lifestyle fund leads to an inefficient choice of location, its use should be avoided unless the investor is in a relatively low tax bracket."
"Rebalancing a portfolio means minimizing or eliminating its 'style drift' caused by market movement. Style drift causes the risk and expected return of the portfolio to change."
"The second myth about rebalancing is that it increase returns. That will not be the case most of the time."
"Whenever new cash is available for investment purposes it should be used to rebalance the portfolio."
"Consider delaying rebalancing if it generates significant short-term capital gains."
"A loss should be harvested whenever the value of the tax deduction significantly exceeds the transations cost."
"A significant amount of ETF dividend distributions are not considered qualified dividends."
"When selling shares, to minimize gains and maximize losses, investors should generally choose the highest cost-basis purchases to sell first."
"A 529 plan is a tax-advantaged college savings vehicle that lets you save money for college."
"529 plans offer an excellent estate planning advantage in the form of accelerated gifting."
"Analyzing the need for life, health, long-term care, disability and umbrella (insurance) coverage is a critical part of the financial-planning process."
"Universal, Variable Life, and Variable Whole Life insurance is not recommended."
Deciding to purchase an immediate annuty is a decision to insure against longevity risk: the risk of outliving one's financial assets."
For a healthy couple, both 65, there is a 50% change one will live beyond the age of ninety-two and a 25% chance one will live beyond the age of ninety-seven."
"The most appropriate candidates for payout annuities are those whose portfolios are borderline for supporting their desired lifestyle."
"In general, the research indicates it is preferable to delay annuitization until the mid 70s or early 80s."
"Long-term care is a tool that can help reserve and protect financial assets."
"A traditional IRA is identical to a Roth IRA if the tax rate at the time of contribution is the same as the tax rate on withdrawal."
"The decision of making a contribution to a traditional or Roth IRA should be based on whether the tax rate on withdrawal is expected to be higher or lower at the time of contribution. If lower, the preferred choice should be the traditional IRA."
"If the only index funds in the (401k/403b) plan are an S&P 500 Index fund and a total stock market fund with similar expenses, choose the latter. It is more diversified."
"If you have charitable deductions, carry-forwards, or other tax-favored items, but not much income one year, conversions (to a Roth IRA) may make sense."
"Social Security benefits are guaranteed income that is inflation adjusted, investment risk-free, longevity protected, and comes with a spousal death benefit."
"Current health, life expectancy, employment status, and taxes all affect the decision of when to take Social Security benefits."
"The Monte Carlo simulator can add significant value in the finacial-planning process."
"The general rule of thumb is to first withdraw from taxable accounts."
"An estate plan is important no matter your net worth."
"A great resource for learning about estate planning is attorney Denis Clifford's book, Plan Your Estate
"It is estimated tha 70% of estates lose their assets and family harmony following the transition of the estate."
"Treat family wealth as a private matter, but not private within the family."
"Reverse mortgages provide an alternative financing method (though an expensive one) that can help homeowners maintain their independence as well as an adequate standard of living."
"A significant advantage of reverse mortgages is that there are no income requirements."
"Good advice does not have to be expensive, bad advice almost always costs you dearly."
Thank you Larry, Kevin and Tiya!
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