This is Daniel Solin's fourth "Smartest" investment book written to help individuals become better investors. Dan's website is www.smartestinvestmentbook.com.
Below are excerpts from The Smartest Portfolio You'll Ever Own which I call: Investment Gems.
Here’s the real skinny on investing: It’s not complicated.
Smart investing is actually quite simple and straightforward, once you understand the fundamentals.
No one has a clue where the markets are headed.
There is always the possibility of a ‘black swan’ event, which would make all predictions meaningless.
Holding any actively managed mutual fund increases your costs and reduces our expected return.
Before you can invest the right way, you need to understand what you are doing wrong.
Studies show that emotions drive investment decisions as much (or more) than objective data.
Understand that your brain may be pushing you toward the thrill of short-term decisions, when your real focus should be on long term ones.
In April 2003, ten of the largest brokerage firms agreed to pay $1.4 billion to settle charges their research had mislead investors.
This is an industry infected by systemic greed and the absence of an ethical or moral code of conduct.
The judgment of all investors worldwide is wise. You should heed it.
Buying and selling is the lifeblood of the securities industry. In the first nine months of 2010, trading fees accounted for 36% of Morgan Stanley’s revenues and a much higher proportion of its profits.
From January 2000 through December 2010, the Barclays Aggregate Bond Index was up 96.84%, which validates the importance of holding bonds in your portfolio.
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.
Knowledge of risk, rebalancing, and the effect of taxes are critical to investing successfully.
Just say no to market timing, buying individual stocks or bonds, actively managed mutual funds, alternative investments, variable annuities, equity indexed annuities, private equity deals, principal-protected notes, currency trading and commodities trading.
Jason Zweig, a highly respected financial journalist and author, put it this way: “Thou shalt take no risk that thou needest not take.”
Your tolerance for risk is driven by your time horizon and your tolerance for short-term volatility.
Doing research to uncover the next hot stock or mutual fund to include in your portfolio is a terrible, counterproductive idea.
All information about publicly traded securities is already in the public domain and factored into the price of those securities.
You can achieve the same expected return, with significantly less risk, by holding index funds instead of individual stocks.
According to Larry Swedroe, author of The Only Guide to a Winning Bond Strategy You’ll Ever Need, broker dealers can add spreads of 2% to 6% on purchases and sales of bonds.
With rare exceptions you would be better off holding a bond index fund than individual bonds.
Wall Street is not completely lacking in skill. It takes considerable skill to convince you it has an expertise that doesn’t exist and that you should pay for this nonexistent skill.
From 1802 to 2001, $1 invested in gold would have been worth $0.98. If you invested the same dollar in stocks, you would have ended up with $599,605.00.
There’s big money to be made in hedge funds…running them, not investing in them.
In the last 10 recessions in the United States, stocks increased in value by an average of 32% one year after the market low.
John Bogle studied the tax effects on returns of actively managed versus index funds from 1980 through 2005. $10,000 invested in the average actively managed stock fund was worth $108,000 before taxes and $71,000 after taxes. The same investment in an S&P 500 index fund returned $181,000 before taxes and $158,000 after taxes.
The news about ETFs isn’t all rosy. You will need to open a brokerage account, which will expose you to all the sales pitches and gimmicks employed by those firms.
I recommend only large, liquid ETFs, which tend to have the smallest bid-ask spreads.
Rebalancing once or twice a year when your allocations alter your risk level by more than 5% makes sense.
An allocation range of 20% to 40% to foreign stocks is likely to capture most of the benefits of diversification.
Just because a portfolio delivers a higher return than another portfolio, doesn’t mean it is a better portfolio. The higher return may be the result of taking more risk which means a greater possibility of loss.
The Sharpe ratio should be used with some caution because it is calculated based on historical returns, which are not necessarily predictive of future results.
A wise man finds a smart man and learns from him.
The amount of your portfolio allocated to stocks and bonds is a critical decision that will have the most significant impact on your expected returns.
Currently, Vanguard is the only option if you want a target date retirement fund that meets all of my requirements.
A globally diversified portfolio of three low management fee index funds has stood the test of time and market turbulence.
One of the Smartest Portfolios is Vanguard Total Stock Market Index (VTSMX), Vanguard Total International Stock Market Index (VGTSX), and Vanguard Total Bond Market Index (VBMFX).
Higher returns, at a lower risk, are the holy grail of investing.
If your broker engages in active management and attempts to beat the markets by investing in actively managed mutual funds, picking stocks, or timing the market, you are likely to be harmed by this advice.
For many investors, the Internet has either augmented the services received from brokers and advisers, or replaced them altogether.
There are 36 million households who rely on advisors for investing guidance. Unfortunately, most of them have chosen the wrong adviser and have paid the price.
Personal discipline and tax loss harvesting are two issues to consider when deciding whether to use an adviser.
If you are using a broker or adviser who claims to be able to beat the market - withdraw your money and close your account.
In October 2009, net inflows to bond funds and out of equities peaked at $231 billion. These investors missed out on the huge run-up of stocks, which continued through 2010.
There is a heated debate among financial experts about whether DFA’s passively managed funds, Vanguard’s index funds, or a portfolio of ETFs , is the best choice for investors.
If you don’t know the risk of your investments, you have no business investing.
Focus on the after-tax return of your investments. Pre-tax returns can be very misleading.
The single most important decision you can make is to renounce active management.
Research demonstrates that increases in risk to a portfolio are most efficiently implemented by varying the exposure to stocks and not by varying the term or the credit risk of the bonds in a portfolio.
I highly recommend the following books: The Intelligent Asset Allocator; The Little Book of Common Sense Investing; A Random Walk Down Wall Street; Index Funds-The 12-Step Program for Active Investors; The Bogleheads’ Guide to Investing.
Thank you Dan Solin
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