Derek Sivers

The Smartest Investment Book You'll Ever Read - by Daniel R. Solin

The Smartest Investment Book You'll Ever Read - by Daniel R. Solin

Go to the Amazon page for details and reviews.

An itty-bitty quick-read no-fluff book with the wisest succinct advice to investors: You can't predict the future, and neither can anyone else. Determine your asset allocation, stick with cheap broad indexes, and rebalance occasionally.

my notes

"Smart" Investing = investing for market returns by investing in all the stocks and bonds in broad market indexes.
"Hyperactive" Investing = trying to beat the market by picking winners and timing the market. (aka "Dumb")

Investing for market returns is easier than investing hyperactively because:
- you don't have to pay any attention to the financial media
- you don't have to sift through mountains of conflicting information from self-styled experts
- it's less expensive
- the results are demonstrably superior
- most investors do not need any advisor or broker : you can deal directly with brand-name mutual fund families
- it should only take you 90 minutes or so per year

There is ample data indicating that, over the long term, simply achieving market returns will beat 95% of all professionally managed investment portfolios.

A majority of the volume of trading in the U.S. are just index ("smart") investing.

Worst Single Calendar Year Loss, Average Annual Return
LOW RISK = 3% loss, 8% gain
MEDIUM-LOW RISK = 7% loss, 9% gain
MEDIUM-HIGH RISK = 13% loss, 10% gain
HIGH RISK = 18% loss, 11% gain

Hold investments in a group of funds that, in turn, have investments in all the securities (stocks or bonds) in a particular index - that represent three broad indexes.
#1 = An index fund representative of the US stock market in its broadest terms. (Fidelity: FSTMX, Vanguard: VTSMX, Schwab: SWTSX)
#2 = An index fund representative of the international stock market in its broadest terms. (Fidelity FSIIX, Vanguard: VGTSX, Schwab: SWISX)
#3 = An index fund representative of the US bond market in its broadest terms. (Fidelity: FBIDX, Vanguard: VBMFX, Schwab: SWLBX)

LOW RISK = 14% stocks, 6% int'l stocks, 80% bonds
MEDIUM-LOW RISK = 28% stocks, 12% int'l stocks, 60% bonds
MEDIUM-HIGH RISK = 42% stocks, 18% int'l stocks, 40% bonds
HIGH RISK = 56% stocks, 24% int'l stocks, 20% bonds
(NOTE: all stock-holdings are 70% domestic, 30% international. Only choice is how much are stocks and how much are bonds.)

Asset allocation accounts for 90% or more of the expected return from any particular portfolio. The specific securities held only account for 5%. Market timing accounts for 2%.
Your cash requirements should amount to 6-12 months of living expenses. has interactive asset-allocation wizard.

############## THE FOUR-STEP PROCESS #################

1. Decide on your asset allocation (low, medium-low, medium-high, or high)
2. Open an account with Fidelity, Vanguard, or similar passive deep-discount index
3. Invest as described in your asset allocation plan
4. Rebalance your portfolio twice a year to keep your portfolio either aligned with your original asset allocation or to a new asset allocation that meets your changed investment objectives or risk tolerance.


CHOOSING ACCOUNT (if not Fidelity):
Very few fund families have a single stock market index fund that spans the entire U.S. stock market.
Many fund families have an S&P 500, but that doesn't include the necessary small stocks.
So you could find one that has both S&P 500 and a small stock index fund.
If so, do 60% of stocks in S&P 500, 10% in small stock index fund, 30% in international.

New and increasingly popular option is ETF, Exchange-Traded Fund, designed to replicate returns of a particular index. Because they trade on exchange, they can be traded at any time. Fees are very low, which makes them a reasonable alternative to index funds. But they incur commissions like stocks, each time you trade. As a practical matter, it doesn't make a difference whether you use ETFs or index mutual funds.
If doing ETF, easiest way is to do "iShares" from 70% of stocks in iShares Russell 3000 Index (IWV), 30% of stocks in iShares MSCI EAFE (EFA), 100% of bonds in iShares Lehman Aggregate (AGG)


In November 2000, Fortune magazine released the "top picks" from its panelists of "top" stock analysts. Between November 2000 and November 2003, here's how those predictions fared:
S&P 500 = -22%
NASDAQ = -41%
Fortune Picks = -80%

In August 1979, Business Week featured a story called "The Death of Equities", saying it's a near-permanent position. Almost immediately after publication, stocks began one of the great bull markets in history.

Smart investors pay no attention to the predictions made in the financial media, and never use them as a basis for their investment decisions.



For larger investors with over $1M, some investment advisors can add value by adding a layer of complexity and fine-tuning to the asset allocation strategies named here.

Fine-tuning for market returns usually adds some measure of extra benefit, without taking on extra risk, but it comes at a price : the management fee charged by an investment advisor.

Some add real value by putting together relatively complex portfolios that seek a premium over market returns by using a fund family called Dimensional Fund Advisors (DFA)
(NOTE: Dan Solin, the author, is a registered advisor and uses DFA funds for his clients.) DFA manages more than $100 billion for large institutional and individual investors.
It does not engage in market timing or stock picking. All of its funds are passively managed, using a variant of index funds. DFA makes its funds available through selected fee-based advisors, listed on their site.
Be wary of any advisor who does not consider the lowest-cost options to implementing investment portfolios, including Exchange-Traded Funds (ETFs), Fidelity/Vanguard index funds, low-cost index funds, or the entire lineup of passively managed DFA mutual funds.

DFA and its network of consultants offer passive portfolios that are slightly different than ETFs and typical Fidelity index funds.
These differences are due to the way in which stocks are assigned to indexes, by their real size (for example) without waiting for market index reconstitution.
DFA also offers funds that concentrate on more precisely defined sectors, like more flavors of ice cream. (Versus Fidelity's vanilla, chocolate, strawberry.)
For example : Fidelity doesn't offer index funds in the international small-cap or international value markets.

There is strong academic evidence that tilting a portfolio optimially toward value and small-cap equities will, over long holding periods, outperform the broader equity markets by as much as 1-2% per year.
But I do not believe this is worth it for investors with less than $1M to invest, when you consider the cost of advisors' fees.


#1 greatest threat to your financial well-being is the hyperactive broker or advisor.

#2 greatest threat to your financial well-being is the false belief that you can trade on your own and attempt to beat the markets by engaging in stock picking or market timing.

It is reasonable to expect your portfolio to achieve annualized returns from 7-11% over the long term. Attempting to achieve returns higher than 11% involves speculating.

If you choose one of the portfolios described here, you are likely to beat the returns of 95% of actively managed mutual funds over the long term.