[Reading] ➶ The Four Pillars of Investing : Lessons for Building a WinningPortfolio By William J. Bernstein – Tshirtforums.co.uk

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10 thoughts on “The Four Pillars of Investing : Lessons for Building a WinningPortfolio

  1. says:

    An investment adviser and I were talking about the financial books we had read, and he highly recommended this book as the next on my list I can see why Instead of immediately offering advice on how to invest, Bernstein takes a step back and makes sure you understand market theory, the history of the markets, the role of psychology in choosing investments, and the very real impact of expenses and the media s influence The book contains statistics, tables, graphs, analogies, examples, and theory in a decently proportioned mix my eyes never glazed over because of too many numbers All this background information ensures that your investment decisions will be based on a wealth of data, rather than blindly following his recommendations.I agreed with Bernstein in almost all areas, with the exception of tilting or overweighting market sectors There are 2 camps of stock fund investors those who slice and dice the market and those who hold the total market Bernstein points to the higher returns of value and small caps demonstrated by Fama and French and others, and recommends overweighting them and underweighting growth John Bogle, on the other hand, preaches that the market is so efficient that there s no free lunch higher returns in any one sector over the long term, so it s better to just hold the entire market in a market cap weighted fund I m not entirely convinced either way, but I tend to side with Bogle.Bernstein advocates wide diversification, passively managed index funds, and buy and hold for the long term This book is similar to The Little Book of Common Sense Investing, The New Coffeehouse Investor, and The Lazy Person s Guide to Investing, but provides a better explanation of the theory behind the practice As a lazy buy and hold investor, I put myself squarely in the camp of these authors.The book presents the Four Pillars of Investing, then shows how to use the pillars to assemble a portfolio Pillar 1 Investment Theory High returns require high risk The market is efficient Own it all by indexing Build a portfolio of mostly the total US stock market, some small US, and some large international If desired, add small and large value and REITs Pillar 2 Investment HistoryThe history you know, the better prepared you ll be for the market s ups and downs Pillar 3 Investment Psychology Focus on long term data Large and small value outperform large growth Returns are random don t imaging patterns Pillar 4 Investment Business Pay attention to fees and expenses Ignore almost all investing media.Here are detailed notes NotesPillar 1 Investment Theory High previous returns usually indicate low future returns low previous returns usually mean high future returns Because of their higher risk, small caps outperform large caps by 1.5% year on average Good growth companies are generally bad stocks bad value companies are generally good stocks Value stocks have higher return than growth When the political and economic outlook is brightest, returns are lowest When things look darkest, returns are highest.You can have 1 of 2 mutually exclusive investing goals 1 maximize your chances of getting rich2 minimize your chances of missing goals or dying poor You can t time the market or pick winning stocks, so asset allocation is the only factor you can control Index the whole market Start with a percentage of bonds equal to your age Hold 15 40% of stocks in foreign stocks REITs have returns about equal to the stock market allocate a max of 15% Young people should have a max of 75% in stocks, with the rest in short term bonds.Pillar 2 Investment History Bubbles have occurred throughout the market s history canals, railroads, 1920s, 1960s and will continue Basic rule of technology investing users, not makers, profit most.Pillar 3 Investment Psychology In the next decade, the last decade s worst performing investment usually does better than the last decade s best performing investment The most exciting assets have the lowest returns the most boring ones have the highest.Pillar 4 Investment Business Ignore financial media The collective wisdom of the market is the best adviser The only guidance you need is with getting your asset allocation right after that, it s self discipline.Investment Strategy Taxable accounts Own the market in a tax efficient index fund tracking the Russel 3000 or Wilshire 5000 Hold municipal bonds, Treasuries, and corporate bonds Rebalance only with fund distributions, inflows, and outflows Tax sheltered accounts Split the market into large market, large value, small market, small value, and REITs Hold government and corporate bonds Rebalance every 2 3 years Don t hold growth stocks they re overvalued and have the lowest long term returns For less than 5,000 10,000 in bonds, use a bond index fund For larger amounts, buy Treasuries directly, and use the Vanguard Short Term Corporate fund for the non Treasury portion Don t hold than 80% in stocks Keep the maturity of your bond portfolio 1 5 years Portfolio for age 20 30Assumes 60 40 stock bond split Adjust as necessary for other proportions.32.5% large cap12.5% international7.5% REIT7.5% small value40% cash and bondsLater, add large value, small cap, corporate bonds, precious metals, split international by region, and add TIPS.Use value averaging instead of dollar cost averaging try to hit a target amount each month If the fund declines, you must invest If the fund goes up, invest less This forces investment at market bottoms rather than tops.


  2. says:

    In short, Bernstein advocates wide diversification through a portfolio of passively managed index funds in different asset classes, and buy and hold for the long termPillar 1 Investment Theory High returns requires high risk The market is efficient Own it all by indexing You can t time the market or pick winning stocks, so asset allocation is the only factor you can control, hence index the whole market.Pillar 2 Investment HistoryThe history you know, the better prepared you ll be for the market s ups and downs Basic rule of technology investing users, not makers, profit most.Pillar 3 Investment Psychology Focus on long term data Large and small value outperform large growth Returns are random don t imaging patterns.Pillar 4 Investment Business Pay attention to management fees and expenses, they are costly in the long run Ignore almost all investing media Start with a percentage of bonds equal to your age Hold 15 40% of stocks in foreign stocks REITs have returns about equal to the stock market allocate a max of 15% Young people should have a max of 75% in stocks, with the rest in short term bonds.Portfolio for age 20 30Assumes 60 40 stock bond split32.5% large cap12.5% international7.5% REIT7.5% small value40% cash and bondsLater, add large value, small cap, corporate bonds, precious metals, split international by region, and add TIPS.Use value averaging instead of dollar cost averaging try to hit a target amount each month If the fund declines, you must invest If the fund goes up, invest less This forces investment at market bottoms rather than tops


  3. says:

    In the introduction to his book, The Four Pillars of Investing Lessons for Building a Winning Portfolio, Dr William Bernstein states that the competent investor never stops learning Yet, because the world of investing can be such a confusing place, it sometimes seems that the you learn, the confused you get As a participant on the Bogleheads message board, I feel I am an educated investor but still I often get lost after reading all the different debates Should I invest in total markets or slice and dice my portfolio Should I invest all my money at once or adopt a dollar cost averaging philosophy How much foreign exposure should I have Is now the right time to buy REITs, or do I need them at all One day, while perusing the message board and sifting through some of these same questions, I found a suggested investing reading list, and this book was listed as the starting point In this straightforward book, explained with easy to understand examples, Dr Bernstein provides a solid framework for investors to begin to answer some of these questions In setting this framework, Dr Bernstein introduces readers to four basic concepts, or what he terms the four pillars of investing the theory, history, psychology, and business of investing The first pillar, the theory of investing, gets most of his attention, as it comprises the first 100 pages of the book and explains how the bond and stock markets work In this section, Dr Bernstein emphasizes what he calls the most important concept in finance the relationship between risk and reward If investors want high returns, they must take great risks Following this logic, Dr Bernstein makes some conclusions that may seem foreign to most investors For example, the best time to invest is not when things are going well, but when they are going poorly Those who invest during a bubble are not taking a risk and therefore can expect low returns, whereas those investing during a bear market are taking a risk and therefore can expect but will not be guaranteed higher returns Similarly, those who invest in good companies like Wal Mart can expect lower returns than those who invest in bad companies like K Mart, because good companies, with low risk, are generally bad stocks, while bad companies are generally good stocks This idea that high returns cannot be achieved without significant risk is the key concept Dr Bernstein continues to emphasize throughout the book.While the first pillar gets the most attention, Dr Bernstein terms the second pillar, the history of investing, as the one that causes the most damage to investors What separates the professional investor from the amateur investor is that the professional recognizes that bear markets are a fact of life they inevitably come about once every generation, usually sparked by a new technological advance Professional investors stay the course and don t panic they have a plan and stick with it In fact, for beginning investors, a bear market is a blessing, allowing them to accumulate stocks at low prices This concept again ties to the relationship between risk and return throughout history, in times of great optimism, when prices are the highest and the risk is the lowest, future returns are the lowest, and when times look the bleakest, and risk is the highest, future returns are also the highest In the third pillar, the psychology of investing, this relationship between risk and return is again raised Most investors follow conventional wisdom of the time, investing in specific stocks or asset classes that are currently the most successful and thus buying at high prices Dr Bernstein provides two strategies to counter this psychology He advises readers first to identify the conventional wisdom of the time and do the exact opposite He also advises readers that assets with the highest future returns tend to be the ones that are currently most unpopular The investor that is able to go against the flow to stick with unpopular asset classes and pay attention to his or her entire portfolio return in the long run will be the most successful.Finally, the fourth pillar concerns the business of investing, which details how brokers, analysts, and the media work together to make money at the expense of often ignorant investors by peddling bad or biased information Instead of paying exorbitant fees to brokerage firms or financial advisors, which steer investors to underperforming managed funds, investors can buy low expense index funds through companies like Vanguard and thus tap into the most powerful intelligence in the world of finance the market itself, which is, according to Dr Bernstein, the best advisor available.Dr Bernstein concludes his book by applying lessons learned from these four pillars and giving readers practical advice for how to construct their own portfolios Although this section fell short of answering all my questions, the book as a whole serves as an essential investing guide in providing investors with a basic framework to use in evaluating the myriad of investing choices available As even Dr Bernstein concedes, Four Pillars of Investing is not an all encompassing book on investing It is not the only book you will need to read, and it is probably not the first investing book you should read, but it is nonetheless a book every investor should read.


  4. says:

    Very interesting book, well written but it isn t for people who want a quick buck I liked how informative this book was I just didn t really learn anything new But then there are no new things under the sun If you are serious about investing your money, remember diversification, patience, spend less, forget about deceiving the market and remember no one can predict the future, no matter how their track records may indicate otherwise Finance 101 Past performance isn t indicative of future performance.


  5. says:

    Bernstein argues that the successful investor must understand four essential content areas the theory, history, psychology, and business of investing Practically speaking, he argues that the best portfolios build on that understanding will be based on indexed mutual funds in several key asset classes.Bernstein s theoretical understanding of the market is complex, and any short review will not do it justice It is fair to say, however, that he argues that the market is much smarter and efficient than any one of its actors Trying to beat the market consistently, year after year, is a pursuit doomed to failure Also key to his understanding is the assessment that risk and reward go hand in hand The latter does not come without the former.His history of the market is to some extent a way to support the theory outlined in the book s first section, but he s a good storyteller, and many of the theoretical technicalities are easier to understand in historical narrative than pure mathematics Berstein emphasizes the historical fact that the market periodically goes mad, resulting in bubbles and bursts.Bernstein s market psychology can be summed up by saying that the investor is his own worst enemy It s easy to understand buy low, sell high It s quite another thing to buy when the whole world is selling, or vice versa Following fads, however, is a quick way to deplete a portfolio It s not unusual to hear insiders critique their own industry Politicians, educators, athletes, academics, and many others routinely dismiss others in their fields It was still surprising, however, to read the near utter contempt in which Bernstein holds the profession of finance They re all out to get your money Stock brokers, mutual fund managers, and finance writers he heaps scorn on them all Which isn t to say he doesn t back up his scorn with lots of data He certainly does, but in the end the people who profess to want to help you earn money are really interested in taking it from you.It may be trite to boil Bernstein s investment advice down to if you can t beat, join em, but that s pretty close to it Since the individual investor or fund manager is highly unlikely to beat the market consistently over the life of a decent portfolio, the best thing to do is bet with the market indices themselves His advice is subtle than that, of course, but playing the index is a pretty close approximation of his thesis.Other than a long ago reading of Peter Lynch s Beat the Street, this is the first serious treatment of investing that I ve read, so I m not particularly qualified to critique Bernstein s arguments It is fair to say, however, that he argues clearly, backs up his assessments with understandable data, and is quick to point out the weaker or questionable points of his thesis.


  6. says:

    Re reading this in light of the money meltdown One of the best books about investing I ve read By no means the first one you should read, but once you ve got some of the basics under control, this helps takes it to a very sensible level Asset allocation and the history of booms and busts are key here Though I just finished it a couple of weeks ago, I d like to start re reading it again soon Very readable and interesting, though I can do without ever hearing about the tulip bulb bubble yet again.


  7. says:

    This book exceeded my expectations If Nassim Taleb were to write a book on investment advice early in his career that s probably what it would look like The book covered some financial theory and history as well as offered very practical advice.


  8. says:

    Awesome Contains a LOT of theory, maths and can be hard to read But it really defines a framework to work on your own portfolio I always love the books that starts from the beginning of theory, from basics principles, deriving step by step the correct conclusions, and not by making you accept a lot of assumptions and jumps of faith The author talks freely about his opinion of active managed funds.This one and A Random Walk Down Wall Street are my favorites to introduce somebody to investing.And remember, if your family and friends talk about some trendy investment, just run, run


  9. says:

    After years of studying technical and fundamental analysis, I can finally rest Dr Bernstein William J Bernstein, a buy and hold, dollar cost averaging, index investing, portfolio rebalancer has made me a believer I would have created a synopsis of the book for quick reviews down the road, but Bernstein conveniently included one at the end of each chapter, and one in the last chapter covering the whole book The book is well written, intelligent, and extraordinarily practical.


  10. says:

    A very good book I d recommend to anyone interested in investing It covers all the fundamentals one should know to try to avoid making big mistakes Though I do disagree with his assumption that the market is rational in that risk and return will always be proportionally related.


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