Monday, December 19, 2016

The Elements of Investing by Malkiel and Ellis (Book Review #78 of 2016)


The Elements of Investing: Easy Lessons for Every Investor

I read this book after Malkiel's Random Walk Down Wall Street. That's a good and thorough explanation of the WHY in this book, without so much the practical application for the individual-- hence he wrote this with Charles Ellis. The book has a foreword by the CIO of Yale University. If it's good enough for Yale...

Much of the book has the same advice as you'd find in a Dave Ramsey or other financial basics course. Pay off your debts, do not take on credit card debt, save all you can and take advantage of the "magic" of compounding interest, avoid insurance products you don't understand, etc. Where it differs is on investment advice, where some groups (Crown Financial, Dave Ramsey, etc.) advise you to pick one of their own certified investment managers, Malkiel would encourage you to open your own Vanguard fund. Use index funds. Only buy index funds with <=0.2% in fees. Once you factor in fees and risk, you're guaranteed to be better than 2/3 of actively managed mutual funds. (The book also looks a bit at index bonds.) Pick a strategy and stick with it (I recommend Jim Paul's What I Learned from Losing a Million Dollars as also helpful on this point). Asset allocation makes up more than 100% of investment returns. Consider an allocation according to your age, investing more heavily as a percentage of your portfolio in low-risk/low-return assets like AAA bonds as you age. The authors examine Warren Buffett and note his wisdom of avoiding the herd. Dollar cost averaging is one way to ensure you go against the herd, putting in a constant dollar amount that buys more during downturns and less during booms.

I give this book 4 stars out of 5. I would give it to someone before recommending a Dave Ramsey course, it's cheaper for one.

Nobel laureate Harry Markowitz reviewed it best: "These noted authors have distilled all you need to know about investing into a very small package. The best time to read this book is when you turn eighteen (or maybe thirteen) and every year thereafter."

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