Book Review: The Four Pillars of Investing
Posted by miller on 28 Dec 2006 at 05:00 pm | Tagged as: Book Reviews, Investing, Retirement
I finished reading The Four Pillars of Investing by William Bernstein a good six months ago. Why write a review now? Even half a year later, I refer to this book almost weekly. That’s how good this book is.
I recommend this book to anyone interested in investing and investing strategies. The book is written for both the novice and the seasoned investment reader. This was my first real investing book (I’ve read some “Dummie’s Guide to…” and Suze Orman books… sigh…), but I was in no way overwhelmed by the thorough, complex topics covered. The author simply does a great job speaking to the reader like it were conversation.
And yet the strength of the book is by far its content. I’ll quickly spill the beans: INDEX FUNDS!!! The author outlines a sound, statistically supported argument for using index funds almost excluvisely. This is the traditional “fund managers perform the same as monkeys throwing darts” argument. But he supports it wonderfully and has made a believer out of me.
The author splits the books into four sections (err… pillars): the theory of investing, the history of investing, the psychology of investing, and the business of investing. The theory of investing is a little technical but worth reading to grasp the Wall Street terminology. The history of investing takes you from ancient Roman times all the way to present day — teaching the lessons learned. This was the slowest section for me, but quick enough and definitely worth pushing through. The psychology of investing was very interesting. The author goes into detail of why index investing is best in the long run yet the hardest for us to accept. He roasts the financial investing industry pretty good here. I loved it! =) Finally, the big, big payoff: the business of investing.
This last section is the part I have constantly referred to since. The author tackles all the basic questions from a mathematical standpoint (this stuff is right up my alley). How much do I need to retire? How do I get there? How should I allocate my assets? How should I rebalance over time? I raced through this section of the book because all most every sentence had me nodding and wanting more.
I highly recommend this book to everyone out there. The only people I could imagine not enjoying it are those who already thoroughly fluent in this type of investment strategy (indexing) and already appreciate all the modeling of the questions in the last paragraph. Also, perhaps if you really can’t deal with numbers, this book might be too much. But I really think he went purposely light here, so don’t confuse my last sentence with saying this book is highly technical — that is far, far from the truth. In fact, his previous book The Intelligent Asset Allocator was too statistical, and this book is his answer to that criticism. Hence it is indeed very toned down.
The author does seem to plug Vanguard a lot, but I believe (as he explains in the text) that this is simply because at the time (2002), Vanguard (John Bogle’s company — the “founder” of index funds) was the only big player in index funds. Since, Fidelity has stepped up, and so have others. So try not to take this book as a plug for Vanguard, but rather a plug for index investing and then recognize that at the time, that usually meant Vanguard.
Lastly, I’ll take a sentence to thank Jonathan of MyMoneyBlog for turning me onto this book. It has been a real eye-opener. I hope it is for everyone else too.
[...] 3. Changing your flight I agree with this one completely. Unfortunately, I actually just paid $100 to change my flight back home after the holidays. I knew it was a waste, but sometimes it is worth it. 12. Hotel fees: Mini-bar restocking It’s sooo tempting! But hopefully we all know how ridiculous those prices are. 16. Phone surcharges: Activation fee Either get stuck in a two year cell phone contract or eat an extra $35. Both are pretty unfair in my opinion! 18. Gift card activation fee Like they don’t make enough money off people just forgetting about them anyway! 19. Junk closing costs It’s easy not to worry about an extra $100 here or there when you are signing a mortgage for hundreds of thousands, but whether it’s $50 out of $100, or $50 out of $50,000, it’s still $50. And most people out there wouldn’t leave a fifty laying on the ground. Oh yea, I hope you got your free $100! 22. ATM fees Another one of those “oh, it’s only a few bucks” fees that quickly adds up even over a month if you aren’t conscious of them. 23. Monthly service fee If you pay for a checking account, please please search the blogosphere for something better! Honestly, they should be paying us since they’re making money off of it (and credit unions usually do!). 24. Bad-deposit fee I actually had a roommate in college who did this to me (you know who are you!). I got charged $10 for someone else’s check bouncing? What did I do wrong? 26. Credit-card late fees You should very rarely have to pay a late fee. In fact, maybe never. 29. Same-day payment fee Just day it late and then get the late fee reversed! 30. Index funds I was surprised when I saw “index funds” on there, but happy when all it said was keep the expense ratio down. That is, afterall, the whole point of index funds. 31. Large U.S. stock funds I’ll say it again. Read A Random Walk Down Wallstreet, The Four Pillars of Investing, The Motely Fool (www.fool.com) introductory guides, or any John Bogle book… BUY INDEX FUNDS! 32. Target-date retirement funds You’ll be paying extra expenses on top of the actively managed funds’ already high expense ratio. 35. 529 expenses Same lesson as before: keep expenses low. Now, Fidelity actually is offering index funds within their 529 plans. [...]
[...] Assuming you buy the monetary argument for rebalancing, the next logical question is how often? Is there some periodicity to these trends? I would assume this is pretty hard to predict (how long til the housing bubble bursts again??), but William Bernstein of The Four Pillars recommends rebalancing every 2-3 years. He admits this question is pretty hard to answer. He also mentions that rebalancing gets you about 0.5% higher returns. [...]
I refer to this book all the time too. But a horrible thing happened this week - I lost it!! I’ve searched everywhere. Oh well, this book is worth every penny, even twice
[...] The savvy reader might get nervous about one thing in particular. I am assuming the market returns the same average value (4%) year after year. Of course, we know this isn’t the case. Some times it’s higher, sometimes its lower. How does this affect things? Chapter 12 of William Berstein’s The Four Pillars of Investing goes into detail on this matter — I’ll give the synopsis. For a given average return, the order in which the good years and bad years occur matters quite a bit. This is because you will be taking out a fixed amount of money (B) each year, regardless of the market performance. A few bad years early would reduce your nest egg so that each subsequent year would be eating away at the principle (not living solely off interest). This can be disastrous (especially in our 2nd method later on). As Berstein points out, the truly best way to tackle this uncertainty would be to run thousands of Monte Carlo simulations. But in lieu of this, he suggests subtracting 2% off your return r in your calculations. This safety factor will account for the vast majority of different orders of good and bad years you may encounter. [...]