Allan Roth, CPA, CFP, shatters the Wall Street myth that investing is too complicated for ordinary investors. We can all learn from these valuable excerpts in his new book, "How a Second Grader Beats Wall Street":
"Design a portfolio composed of a few basic building blocks than can be "tweaked" to fit your personal needs."
"Reengineer your portfolio to stop needlessly paying taxes."
"A simpler approach to today's market can put you on the path to financial independence."
"Morningstar's ability to turn large amounts of data into simple, understandable information helps investors make better decisions."
"Cut through the baloney that Wall Street wants us to believe and return to basic simplicity."
"It is what we learn after second grade that turns out to be so destructive."
"Common-sense investing isn't actually all that common."
"Investing isn't rocket science. Wall Street experts want you to believe that it is."
"Kevin's magic portfolio: Vanguard Total Stock Market Index Fund; Vanguard Total International Stock Index Fund; Vanguard Total Bond Market Index
"By "Wall Street," I mean everybody who's after your money, not just the large brokerage houses."
"Our emotions consistently steer us toward the path that leads only to giving away our hard-earned nest egg."
"Good luck in your process of unlearning the many complicated mental models that we have all blindly accepted as true."
"We strongly resist thinking of ourselves as average."
"For every investor who beats the market in a given year, there is another who's lost by the same amount."
"Always remember that market return less costs equals the average investor return."
"There is one way, and only one way, to build a stock portfolio that is guaranteed to beat the average dollar invested. For the U.S stock market, that one way is to buy the entire market in proportion to the value of each company."
"It's impossible to add a second U.S. stock fund that would improve diversification as it could only begin to overweight one of the style boxes or industry sectors."
"I'm a strong believer in the KISS principle (keep it simple, stupid)."
"Often the right answer is knowing you don't know the answer."
"There are two types of investors when it comes to predicting next year's stock market: 1) Those who don't know. 2)Those who don't know they don't know."
"Over a 20-year period, the stock market has always bested inflation."
"The higher historic returns from small-cap value investing are not a free lunch. They are compensation for taking greater risk."
"With only three index mutual funds, we can own many thousands of securities that own the whole world."
"Cramer is a human cartoon character who rants about buying and selling and encourages others to engage in foolishness."
"I want those money managers to keep bragging. I never know when I'll need more material for another book."
"We investors have no clue as to what we are paying for our investments, and even worse, there is no easy way to find out."
"Lehman Brothers was the most admired securities firm in 2007 according to Fortune magazine. In 2008 it filed for bankruptcy."
"The only thing associated with the market's daily ups and downs that is predictiable is the pontifications of analysts who attempt to explain the often unexplainable."
"A recent study found that funds sold by advisors underperformed those that were bought directly by the consumer."
"People aren't out to make you rich. -- What you don't pay goes to you and will get you to your financial goals much sooner."
"Losing a dollar causes about twice as much pain as the pleaure we get from making a dollar."
"We all know that most mutual funds greatly underperform the appropriate index, but did you know that the average investor underperforms the average mutual fund by another 1.5% percent per year."
"Left to our own devices, we will find patterns for everything. This phenomenon is known as data mining."
"When enough people have a tool to predict stock prices, it ceases to be of any use since the stock would have already reacted to this knowledge."
"Most of us can't get past anchoring to the purchase price."
"We tend to remember our brilliant investments and forget our what-were-we-thinking ones."
"We have a tendency to carefully review any information that supports our decision and dismiss any new information that leads us to believe we may have made the wrong choice."
"There are thousands of financial professionals figuring out how to use your emotions to separate you from your money."
"If you had to close your eyes and pick one of three U.S. stock funds, one of three international funds, and one of three bond fund, what are your odds of picking ones that are in the top third for all three categories? (Answer: One in twenty-seven)"
"Quit paying taxes that you don't need to."
"By some estimates, real estate has more than twice the value of the global stock market."
"Just say No to hedge funds."
"Remember that 10 years is an incredibly short period of time (for investors)."
"The beauty of a 3-fund portfolio is that it automatically builds the global portfolio without having to worry about standard deviations, correlatons, Sharpe ratios, and the like."
"Keep precious metals and mining stocks to no more than 10% of your international holdings."
"A mix of bonds with a global stock portfolio dramatically impacts the amount of risk we are taking."
"The higher the default risk, the higher the interest rates bonds must pay."
"I see many people chase yields to get a higher return. I think this is a huge mistake."
"Don't get swindled by investment research that pretends to know what interest rates are going to do."
"Top economists have correctly predicted the direction of long-term interest rates about 30% of the time."
"No-load bond funds can trade bonds with much lower commission and spreads than individuals can."
"I'm still leaning against international bond funds for Americans."
"Never buy an instrument that has a fancy name like Enhanced collateralized debt obligation investment unit trust."
"There has never been a shortage of ways Wall Street had devised to separate you from your money."
"Banks must both return a profit to their shareholders and pay income taxes. Credit unions are exempt from these obligations and can often offer superior rates."
"Investing is much more than maximizing our wealth. It also involves minimizing the chances we will run out of money."
"Our willingness to take risk isn't easy to quantify because it is difficult to measure and very unstable."
"The more we move into and out of the market, the lower our returns end up being.
"I recommend one-third of one's total equity portfolio be in international stocks."
"Remember that staying with your asset allocation is every bit as important as choosing the right one in the first place."
"Rebalancing forces us to sell stocks during up periods and buy during down periods."
"Just say No to instruments like preferred stocks or convertible bonds."
"Wall Street wizards will always be optimistic in an up market and pessimistic during a down market. My advice is to ignore them."
"Investing is simple, but it isn't easy. I tell people to 'dare to be dull.'"
"The most beautiful thing is that low-cost index investing happens to be incredibly tax efficient."
"Locating our assets where they are most tax-efficient can be every bit as important as asset allocation."
"Under nearly any scenario, we are better off to place tax-efficient investments in our taxable account and tax-inefficient investmens in our tax-deferred accounts."
"There is not such thing as a free (investment) seminar."
"Jack Bogle gave any second grader the tools to beat Wall Street."
"In all but a few cases, I recommend staying away from whole life, universal life, and anything in the general vicinity of an annuity."
"If you need life insurance, buy low-cost term insurance."
"Taylor's favorite portfolio is now the same three total market index funds I recommended for Kevin."
"It's human nature to believe these newsletter are offering insights that will make us rich, but actually they are far more likely to lead to underperformance."
"The financial industry can twist logic into a pretzel if it will get you to hand over your hard-earned money to them."
"Make it a rule never to buy a financial investment you couldn't describe to an average second grader."
"Any product that is easy to buy and hard to get out of should raise a red flag."
"Break that old rule of keeping six month's cash on hand. I think a better rule is that we should always have access to six month's cash."
"If the Wall Street brokerage firms were really so good at giving investment advice and managing risk, why did it take taxpayers to bail them out?
"Don't play a loser's game by paying money for one expert to outsmart another expert."
"When you get that irresistible urge to do something, let it pass."
"If you are betting on sectors or even countries, you are speculating rather than investing."
"Remember the goal of your nest egg is to give you the freedom to do exciting things, not to provide the excitement itself."
Thank you Allan Roth.
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