The Four Pillars of Investing Part 2

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return

Chapter 4
(pg 107)
Let's summarize the practical lessons from the first three chapters:
•    Risk and reward are inextricably intertwined. If you desire high returns, you will have to purchase risky assets - namely, stocks.
•    You are not capable of beating the market. But do not feel bad, because no one else can, either.
•    Similarly, no one-not you, not anyone else-can time the market. As Keynes said, it is the duty of shareholders to periodically suffer loss without complaint.
•    Owning a small number of stocks is dangerous. This is a particularly foolish risk to take, since, on average you are not compensated for it.
pg(108)
In other words, since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because ti is the only factor affecting your investment risk and return that you can control.

Word to the wise. If you cannot handle the down years-then you should find a reputable financial advisor. Otherwise, the emotional response will ruin your investments.


The remainder of the chapter focuses on asset allocation. For most investors the target should be a 50/50 mix of stocks/bonds. The more risk you can handle, or the more bear markets you can weather, the higher the stock allocation. The suggested maximum is 75% stock.  As you near retirement age the % towards bonds increases because naturally your risk decreases accordingly. Additionally, the bonds should be short term instruments, and remember inflation.

Step two is to diversify abroad. Why? It spreads out the risk. This portion only affects the stock portion of the allocation. Again risk and return are the guidelines, but the suggested limits are a 15% min and 40% max of your stock holdings. Regardless, stick with it through thick and thin.

Step three is size and value. large cap and small cap, value. generally putting more to the larger side with balance in value and growth, the small cap should be more weighted to value.

Step four is sectors. REIT, precious metals are the two recommendations. Everything else is covered in the S&P 500.

Conservative example includes 35% US Total Market; 10% foreign; 5% REITs; 50% short term bonds
Middle ground example includes 25% US total market; 10% US large value;10% US small value; 5% REITs; 10% foreign; 40% short term bonds
Riskier example includes 10% S&P; 10% US large value; 5% US small; 7.5% US small value; 7.5% REITs; 2.5% precious metals; 10% European;7.5% Japan and Asia; 7.5% Emerging markets; 7.5% International value; 25% short term bonds;