Friday, January 29, 2010

The Four Pillars of Investing Part 6

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
The Four Pillars of Investing: Lessons for Building a Winning PortfolioNumbered Page references are from the hardcover edition.

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

Chapter 11 – The press isn’t very helpful either
Financial journalists do not have financial degrees – they just write for their jobs. Those that know the truth are few and it is boring to advocate dull index funds. Do not listen to the media, instead focus on the history books. With that are some book recommendations.
•    A Random Walk Down Wall Street, by Burton Malkiel
•    Common Sense on Mutual Funds, by John Bogle
Common Sense on Mutual FundsA Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Revised and Updated)
My own thoughts here. The book thrives on the idea that the more history that you learn, the better off that you will be. This book is filled with stories of the past to illustrate its points. Sometimes it can be a bit much if you are already sold on the idea. The last half of the book looks to be the part that many people actually pick it up: Putting it all together. Everyone just wants the end game result and forgets that much can be learned from the journey.

Chapter 12 – Will you have enough?
There is little difference in calculating the money you will need for retirement if you live for 35 years or forever. Best case scenario is Roth IRA, pulling 4% annually from your funds earning 4% real returns. No taxes, constant returns. For $40,000 you need $1 million. Reverse amortization to die with nothing left over after 35 years = $746,585.

Best case scenario yet presented is pages 231-234 and the plots showing sample asset allocations with varying degrees of stocks and bonds and different withdrawal rates.  Starting at the beginning of a bear market in 1966, only the funds pulling out 4% survived with cash to the end from an initial balance of $1 million. (Fidelity’s my plan works these numbers nicely, as does Ing’s What’s my number?)
Moral of the story. Save lots of money and start early. These are the mantras of investing for retirement.
A note on making sure before you start that you have an emergency fund (following Dave Ramsey’s steps) before you begin. Do not invest with money you need in five years into stocks. College savings in a 429 are suggested to be heavy on the bond side since the term is intermediate and stocks can have a bout of bad years. 

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