The smartest investment book you will ever read

Part one: Become a smart investor: Change your investment life forever

Chapter 1 An unbelievable chimp story

The investor’s chief problem - and even his worst enemy - is likely to be himself - Benjamin Graham, author of The Intelligent Investor

There are some excellent peer-reviewed studies that demonstrate that the stocks most highly rated by financial analysts consistently underperform the market.

The most-touted skill of stock picking is not something that any smart investor would want to bet the farm on.

Chapter 2 An unbelievable true story

Most individual investors would be better off in an index mutual fund - Peter Lynch, former manager of the Fidelity Magellan Fund, Barron’s, April 2, 1990

Trillions of dollars of assets of pensions, foundations and university endowments are invested the right way - by money managers who seek market returns by investing in all of the stocks and bonds in broad market indexes. This is smart money.

Ironically, investing for market returns - being among the smart money - is much easier than investing hyperactively, because:

1. You don’t have to pay any attention to the financial media.

2. You don’t have to sift through mountains of often-conflicting and confusing information from self-styled experts.

3. It is less expensive.

4. The results are demonstrably superior.

5. The vast majority of investors do not need any advisor or broker. You can deal directly with brand-name mutual fund families or use Exchange Traded Funds (ETFs).

6. It should take you only ninety minutes or so a year.

   The securities industry adds costs. It subtracts value. The market return is really the best return. You should invest for market returns.

Chapter 3 Smart investing takes less time than brunch

The first key to wisdom is defined, of course, as assiduous and frequent questioning - Pierre Abelard, 1079 - 1142, Sic et Non, translated by W.J.Lewis

Achieving market returns is a big deal. That is because there is ample data indicating that, over the long term, simply achieving market returns will beat 95 percent of all professionally managed investment portfolios.

It shouldn’t take you more than ninety minutes a year to make sure your investment portfolio continues to be structured the way you want it to be.

Chapter 4 Drop me to the bottom line

More often (alas), the conclusions (supporting active management) can only be justified by assuming that the laws of arithmetic have been suspended for the convenience of those who choose to pursue careers as active managers. - William F. Sharpe, Nobel Laureate in Economics, 1990., “The Arithmetic of Active Management”, Financial Analysts’ Journal, Vol. 47, No.1, January/February 1991

Different funds available from the Vanguard Group:

• VTSMX - Total Stock Market Index Fund
• VGTSX - Total International Stock Index Fund
• VBMFX - Total Bond Market Index Fund

Chapter 5 Smart investing simply makes sense

In there are 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that’s all that’s going on. It is a game, it is a chance operation, and people think they are doing something purposeful… but ther are really not. - Merton Miller, Nobel Laureate in Economics, Transcript of the PBS Nove special “The Trillion-Dollar Bet”, 2000

Other terms historically used for market-return investing are “index-based investing”, “passive investing”. There is nothing passive about investing for market returns.

Smart Investing is very simple. In a Smart Investment portfolio, you hold investments in a group of funds that, in turn, have investments in all the securities (stocks or bonds) in a particular index. This portfolio is very easy to implement.

You will hold investments in funds that represent three broad indexes. The three types of index funds you will hold are:

1. An index fund representative of the United States stock market in its broadest terms
2. An index fund representative of the international stock market in its broadest terms and
3. An index fund representative of the United States bond market in its broadest terms

Part 2: Your broker or advisor is keeping you from being a smart investor

Chapter 6 Brokers make money when they are hyperactive

Q: “So investors shouldn’t delude themselves about beating the market?”

A: “They are just not going to do it. It is just not going to happen.”

• Daniel Kahneman, Nobel Laureate in Economics, 2002. Interview reported in the Orange County Register, Jan.2, 2002

Virtually all actively managed funds have, as a goal, beating a benchmark index. For example, many funds have, as their benchmark index, the goal of beating an index consisting of all of the stocks that make up the S&P 500. Clearly, these funds can even provide a negative value to investors - if they cannot beat their designated indexes, because investors could assure themselves of achieving the returns of the index - every year - by simply investing in an index fund that holds all of the stocks in that index. It is of great significance that, in excess of 90% of actively managed mutual funds fail to equal or beat their benchmark indexes over the long term.

Chapter 7 A loser’s game

Even as Wall Street belittles your investment abilities, it also wants you to believe you can beat the stock-market averages. This, of course, is contradictory. But it is also entirely self-serving. The more you trade and the more you invest with active money managers, the more money the Street makes. Increasingly, some of the market’s savviest investors have turned their back on this claptrap. They have given up on active managers who pursue market-beating returns and instead have bought market-tracking index funds. But Wall Street doesn’t want you to buy index funds, because they aren’t a particularly profitable product for the Street. Instead, Wall Street wants you to keep shooting for market-beating returns. That is why you should be suspicious when you hear talk of the supposed “stock picker’s market” - Jonathan Clements, author of You’ve Lost it, Now What?

Mutual funds were originally conceived on the idea that small investors should not be buying and selling individual stocks frequently because transaction costs would eat up any potential profit. Instead, small investors should pool their money into a mutual fund, where a “professional” money manager buys and sells the stocks for them, in large blocks, with much lower commissions that an individual investor could get. In this way, the investor can “buy and hold” a good mutual fund and the fund manager can indulge his or her illusive goal of beating the market through stock picking and market timing. Nice theory. But today, hyperactive brokers and advisors often recommend that their clients sell old mutual funds and invest in the next hot fund.

Chapter 8 Why investors pursue hyperactive investing

Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry (and its fund managers). All three are trying to pull off elaborate hoaxes. But while Santa and the bunny suffer the derision of eight-year-olds everywhere, actively managed stock funds still have an ardent following among otherwise clear-thinking adults. This continued loyalty amazes me. Reams of statistics prove that most of the fund industry’s stock pickers fail to beat the market. For instance, over the 10 years through 2001, U.S. stock funds returned 12.4% a year, vs. 12.9% for the Standard & Poor’s 500 stock index. - Jonathan Clements, “Only Fools Fall in… Managed Funds?”, Wall Street Journal, September 15, 2002

Chapter 9 The activity myth

Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. - William F. Sharpe, Nobel Laureate in Economics, 1990., “The Arithmetic of Active Management”, Financial Analysts Journal, Vol. 47, No. 1, January/February 1991

Chapter 10 Whats wrong with hyperactive investing?

Why does indexing outmaneuver the best minds on Wall Street? Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient. When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another. Active managers who frequently shift from security to security actually detract from performance (compared to an index fund) by incurring transaction costs. - Burton G. Malkiel, “Why The Critics Are Wrong”, Wall Street Journal Interactive Edition, May 24, 1999

Chapter 11 Brokers are not on your side

It is a fundamental dishonesty, a fundamental problem that cuts to the core of the lack of integrity on Wall Street. - Eliot L. Spitzer, Attorney General of New York, interviewed for NOW with Bill Moyers

Smart Investing advisors make no predictions about the future performance of the market as a whole or about any particular stock. Instead, they focus on asset classes (and their returns), asset allocation, and risk management and a solid, academically based belief system that has consistently been demonstrated to outperform hyperactive brokers and advisors over the long term.

Make proper asset allocation your new investment goal. Once you accept the premise that asset allocation is for more important than stock picking or market timing, your financial life becomes a stressfree walk in the park and your money will start to grow.

Chapter 12 Hyperactive brokers, underachieving students

Training for a new broker goes something like this: study and take the Series 7, 63, 65 and insurance exams. I spent three weeks in classes learning about products, mutual funds, and learning to sell. If a broker wants to learn about [asset allocation and diversification] it has to be done on the broker’s own time. - Anonymous former broker, major Wall Street firm, quoted in Daniel R. Solin, Does Your Broker Owe You Money?

Chapter 13 What do you think of these odds?

Skepticism about past returns is crucial. The truth is, much as you may wish you could know which funds will be hot, you can’t - and neither can the legions of advisors and publications that claim they can. - Bethany McLean, “The Skeptic’s Guide to Mutual Funds”, Fortune, March 15, 1999

Vanguard 500 Index Fund (VFINX) will always give investors the returns of the S&P 500 index (reduced only be the amount of its low fees), because it is set up to do precisely that.

Investors, both individual and institutional, and particularly 401(k) plans, would be far better served by investing in passive or passively managed funds than in trying to pick more expensive active managers who purport to be able to beat the markets.

Chapter 14 Nobody can time the market

If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market. - Benjamin Graham, coauthor of Security Analysis

Any prediction that a financial market will go up or that a financial market will go down is, at some point, going to prove right. The issue is when that time will be.

Market timing, like stock picking is a shell game. Smart investors never engage in market timing because they know it is a sham.

Chapter 15 Nobody can consistently beat the market

The economists arrived at a devastating conclusion: It seemed just as plausible to attribute the success of top traders to sheer luck, rather than skill. - From the PBS Nove special “The Trillion-Dollar Bet”, Feb 8, 2000

Chapter 16 Nobody can pick Hot fund managers

To be fair, I don’t think that you’d want to pay much attention to Morningstar’s star ratings either. - John Rekenthaler, director of research, Morningstar, In the Vanguard, Autumn 2000

Chapter 17 Why recommend this mutual fund?

American Funds dressed up these arrangements with fancy names like ’execution revenue’, ’target commissions’ or ‘Broker Partnership Payments’, said Lockyer. But when you look beneath the cloak of legitimacy, the payments are little more than kickbacks to buy preferential treatment. Investors deserve to know that. The law American Funds violated is based on that simple principle. - California Attorney General Bill Lockyer, commenting on a securities fraud lawsuit filed against American Funds’ Los Angeles based distributor and investment manager, Press release dated March 23, 2005

Chapter 18 Hyperactive investing is expensive

Investing is a strange business. It is the only one we know of where the more expensive the products get, the more customers want to buy them. - Anthony M. Gallea and William Patalon III, coauthors of Contrarian Investing

Chapter 19 If it walks like a duck and quacks like a duck

But before you jump into managed accounts, consider the cost: typically, 2 percent to 3 percent of your assets per year. That sounds like pocket change in a year you earn 20 percent. But it’s up to one-third of your stock profits in an average year, and two-thirds of the average profits in bonds. You are simply giving your money away. It is one of the great marketing gimmicks, said Eli Neusner of Cerulli Associates, a Boston-based consulting firm. - Jane Bryant Quinn, Washington Post.com, May 19, 1996

Chapter 20 Brokers understand fees but not risk

Odds are, you don’t know what the odds are. - Gary Belsky and Thomas Gilovich, coauthors of Why Smart People Make Big Money Mistakes

Chapter 21 Too many stocks, too few bonds

Investment policy [asset allocation] is the foundation upon which portfolios should be constructed and managed - Charles D. Ellis, author of Investment Policy

Chapter 22 Risk and reward

The only way to “beat an index” is to invest in something other than the index. Why would you, when the only source of long-term risk and return data is the index? - Mark Hebner, founder, Index Fund Advisors, Inc.

Chapter 23 Beware of B and C shares

There is almost no justification for selling B shares in large blocks - Douglas Schulz, coauthor of Brokerage Fraud

Chapter 24 Beware of House funds

I find it very disturbing that Morgan Stanley’s culture put sales contests ahead of customers. This is the kind of sales culture you’d expect at a used-car lot, not from your stockbroker, to whom you’ve entrusted your money. - William Francis Galvin, Secretary of the Commonwealth of Massachusets, August 11, 2003, commenting on a complaint filed against Morgan Stanley for sales practices concerning Morgan Stanley owned and affiliated mutual funds, for which brokers allegedly received higher commissions than on other funds

Chapter 25 Beware of margin

People want to maximize their return so they borrow to buy. And it can work, as long as the market doesn’t go down. The smart money sells to the stupid money, and the stupid money usually borrows to buy. - Charles Biderman, TrimTabs.com, a market-research company

Chapter 26 Beware of hedge funds

It’s amateur hour in the hedge fund business. This sideshow of sometimes bizarre (and always costly) investing is on a tear like never before. It’s attracting some of the shrewdest and sharpest minds on Wall Street - and also shills, shysters, charlatans and neophytes too crooked or too stupid to make any money for you. - Forbes, The Sleaziest Show on Earth, May 24, 2004

The “hot” investment of the twenty-first century is the hedge fund.

You need only be concerned about hedge funds if you have a large net worth, because they cannot be sold to investors who don’t meet certain minimum-net-worth requirements. And many hedge funds voluntarily require a minumum investment of $1 million.

The frenzy is driven by fees. Hedge funds typically charge 20% or profits plus 1 to 2 percent of assets manages. This is a previously unheard-of fee structure.

The original hedge funds were pools involving few investors (usually fewer than fifty) who each put up a large minimum investment ($500K or even $1 million required). Hedge fund managers go the Securities and Exchange Commission to let them run these pools essentially unregulated by arguing that someone with that much money to invest is, by definition, a “sophisticated investor”, and therefore hedge funds should be able to avoid all of the regulatory requirements that govern regular mutual funds and brokerage firms.

Many hedge funds specialize in making large investments in a few positions, which sets up the possibility for either outsized returns or outsized losses. Others have used a so-called market neutral strategy, which hedges these big bets with counterweight investments (hence the term , hedge fund).

All you need to know about why you should not invest in hedge funds is found in an article in the May 24, 2004 issue of Forbes magazine entitled “The Sleaziest Show On Earth”.

For starters

• The performance of these funds is often overstated. (In the summer os 2005, a hedge fund called Bayou imploded, costing its investors over $300 million. It turns out the fund never earned the gains it claimed it did, and covered up its losses by creating a fictitious accounting firm to audit its annual results).
• Hedge funds are illiquid; you generally must leave your full investment in the fund for a predetermined period of time before it can be redeemed.
• You hear about the winners, but not about the losers.
• The cozy relationship between some funds and some major brokerage firms is troublesome.
• Hedge funds have an extremely short life span, averaging less than 3.5 years, thereby depriving investors of the ability to analyze long-term returns
• There is no way investors can predict which of the 8000 or so hedge funds might outperform a broad U.S. market index in the future.

Most investors should not invest in a hedge fund. For those who do, the investment should be limited to a very small percentage of their portfolio.

Chapter 27 Value stocks - reward without risk?

Most people want candy, when what they really need is a balanced meal. - John J. Bowen, Jr., coauthor of The Prudent Investor’s Guide to Beating Wall Street at Its Own Game

Chapter 28 Why hasn’t anyone told you?

There are two kinds of investors, be they large or small: Those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know. - William Bernstein, author of The Intelligent Asset Allocator

Chapter 29 The financial media is part of the problem

It is not easy to get rich in Las Vegas, at Churchill Downs or at the local Merrill Lynch office. - Paul A. Samuelson, Massachusets Institute of Technology, Economist, Nobel Laureate in Economics

Chapter 30 Financial pornography

I was getting at the newspapers and magazines that make investing sound easy. “Three ways to double your money.” “Ten hot stocks.” The articles that make it sound like the journalist knows the right stocks or mutual funds to buy. And the fact is, we don’t know. Journalists don’t have any business pretending they’re investment analysts. We can talk about stocks, investment ideas and what people are saying. But journalists shouldn’t say that certain stocks will increase in value. Nobody knows. Soft-core though, the Net is hard-core. - Jane Bryant Quinn, August 1998 interview with ABC News

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

Chapter 31 Surprise - your broker does not have to act in your best interest

Unfortunately, the SEC’s latest decision leaves in place a flawed regulatory structure that lets broker-dealers tell clients that they are giving objective, independent financial advice when, in fact, they might not be doing that. - Jamie Milne, charman, National Association of Personal Financial Advisors

Brokerage firms and their employees are regulated by not only the Securities and Exchange Commission (SEC), but also by the National Association of Securities Dealers (NASD). Under the regulations enacted by the NASD, they are held to what is known as the suitability rule - a producer or service they offer must only meet the standard of being “suitable” for a client’s situation - it does not have to be the product or service that is in the client’s best interest.

Chapter 32 Another surprise - your broker is not required to be careful with your money

This message (that attempting to beat the market is futile) can never be sold on Wall Street because it is in effect telling stock analysts to drop dead. - Paul Samuelson, Ph.D. Nobel Laureate

Chapter 33 The perils of mandatory arbitration

The term “arbitration” as it is used in these proceedings is a misnomer. Most often, this process is not about two evenly matched parties to a dispute seeking the middle ground and a resolution to their conflict from knowledgeable, independent and unbiased fact-finders. Rather, what we have in America today is an industry-sponsored damange containment and control program, masquerading as a juridical proceeding. - William Galvin, Massachusets Secretary of the Commonwealth, Congressional testimony befor the U.S. House Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, March 17, 2005

Part 3: Smart investors know better

Chapter 34 Who believes me?

The $4.8 billion Orange County (California) Employee’s Retirement System more than doubled its total indexed assets to $1.2 billion during the twelve months ended September 30, 2001, from $593 million the year before. “We think that (indexed) exposure was a reasonable portfolio for the return characteristics and compared favorably with active management”. - Farouki Majeed, chief investment officer, ASSETS UP 30%. In Fred Williams, “Where the Action is: Funds Embrace Enhanced Indexing”, Pensions and Investments, Jan 22, 2001

Peter Lynch, the longtime manager of Fidelity’s Magellan Fund in the 1980s and early 1990s, and probably the first of the “rock star” managers, is a fan of Smart Investing. This despite the fact that he is one of the icons of active managers, a person who brokers and advisors continue to use to discredit the argument that no active manager can bet the market consistently. Lynch did it year in and year out for about a decade and went out a winner, retiring from active management for Fidelity to pursue other opportunities. As indexes have become more fine-tuned over time, and as the flow of information about investments has become more widespread over time, Lynch feels that the opportunities to find market inefficiencies has been essentially wiped out. The market is the return.

Warren Buffet, the “Sage of Omaha” and still the chairman of the Berkshire Hathaway company, is another legendary stock picker. Buffet’s investments in industries and individual companies have, for years, had the power to move markets. But again, Buffet believes that efficient information flow and more indexing opportunities lead to greater market efficiency. Essentially, he says, market indexing will, over time, drive more market indexing.

So which investors have received the message and account for the majority of the trading volume that engages in Smart Investing? Smart money. Like pensions, trusts and corporate money.

If trillions of dollars - the majority of the volume of all trades in the United States - is invested for market returns, by the most sophisticated funds and asset managers in the world, shouldn’t your hard-earned assets be invested in the same manner?

You can fool the fans, but you can’t fool the players. Smart money represents the players.

Chapter 35 When do smart investors need an advisor?

The expected return of the spectacular is zero. - Louis Bachelier, author of The Theory of Speculation (doctoral dissertation)

Everyone is always looking for something that correlates positively with superior portfolio performance. Every academic who has ever studied this problem has found two things that correlate with superior performance. One is low transaction costs. The other is appropriate asset allocation.

Part 4: The real way smart investors beat 95% of the pros

Chapter 36 The four step process

No matter what, buying stocks by buying the market through an index is a good idea. - David M. Blitzer, chief investment strategist, Standard & Poor’s, author of Outpacing the Prospectus

Being a Smart investor is very simple. Just follow these four basic steps.

1. Decide on your asset allocation.
2. Open an account with any of the fund families
3. Invest the stock and bond portions of your portfolio in the funds described in this book (Remember, even fund companies that have a good group of no-load index funds also have funds that are hyperactively managed, since most individuals are misinformed and still want to be invested in these types of funds)
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 and/or risk rolerance.

Chapter 37 Step 1: Determine your asset allocation

Over 90 percent of investment returns are determined by how investors allocate their assets versus security selection, market timing and other factors. - Brinson, Singer and Beebower, Determinants of Portfolio Performance II: An Update, Financial Analysts Journal, May-June 1991

There are all kinds of formulas for figuring out your proper asset allocation. The most common “rule of thumb” is to take your age and subtract it from one hundred. The answer is the percent of your portfolio that should be in stock, so as you get older you should have more of your portfolio in bonds.

But this formula is too simplistic to be of any real use because it fails to tke into account the many variables between investors of the same age (such as health and income) that could make the results of this formula very misleading. However, it is still better than to place 90% or more of your assets in stocks.

Chapter 38 Step 2: Open an account with one of these fund families

Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to bet the net results (after fees and expenses) delivered by the great majority of investment professionals. - Warren Buffet, Berkshire Hathaway chairman and legendary American Investor, Berkshire Hathaway Inc., 1996 Shareholder Letter

Both Fidelity Investments and the Vanguard Group are well-known and highly reputable firms. At times, they are engaged in price wars over who can charge the least for the funds that will give you market returns for the portfolios.

Fidelity and Vanguard are used as the primary examples for two reasons. First, they are among the largest and most well-known fund families. Second, and more important, currently they have the lowest annual fees attached to the index funds.

A third fund family that offers the three types of index funds you need to appropriately invest your assets is T. Rowe Price. It is also a no-load fund family that, though not as large as Vanguard or Fidelity, does have a significant amount of assets under management.

Chapter 39 Step 3: Select your investments

Surprisingly, one-third of all index funds carry either front-end or asset-based sales charges. Why an investor would opt to pay a commission on an index fund when a substantially identical fund is available without a commissions remains a mystery. - John C. Bogle, author of Common Sense on Mutual Funds

All we know about the stock and bond markets is that over time, both will go up in value.

No one can predict which stock or which bond will go up in value, or when it will increase. And no one will know when or by how much the entire market will increase in value.

Therefore, investors should own the entire market. By “the entire market”, I mean a broadly diversified portfolio of investments in domestic and international markets.

I recommend that, for each of these portfolios, you take the total amount of assets you will be investing in stock funds, and invest 70% of that amount in a domestic stock fund and 30% of that amount in an international stock fund. There is strong academic evidence that portfolios with some exposure to foreign markets have similar historical returns, with less risk, than portfolios invested only in the domestic stock market.

NOTE: If you have less than a total of $25,000 to invest you may not be able to use these allocations because of minimum investment requirements for any of the above mentioned funds. In these cases, you can adjust your allocations accordingly. Eventually, you may reach minimum investments that would allow you to make the optimum allocations for your profile.

Chapter 40 Step 4: Rebalance your portfolio

Active management is little more than a gigantic con game. - Ron Ross, Ph. D., author of The Unbeatable Market

Nothing is more important than your asset allocation. It is important that your allocation remains where you want it to be.

But markets are inherently volatile, and the values of the individual investments constantly change. This means that every day your asset allocation drifts away from or closer to the original allocation you set.

Stocks and bonds may change value in opposition to one another. As bonds become more valuable, stocks may become less valuable, and vice versa. Over short periods of time, nobody can predict which way stocks and bonds will move or whether they will move together or in opposition. However, over the long run, stocks have returned more than bonds.

Over the course of six months, a lot can happen in the markets, and your investments in both stocks and bonds can drift quite a bit away from your initial asset allocation. An original 60/40 stock-to-bond allocation could be 45-55 stock-to-bond after six months if the value of stocks falls dramatically, or 75/25 if the value of stocks rises dramatically. Hence the need to rebalance.

Rebalancing can also be necessary because some life event has changed your need for income from your portfolio or your sense of how much risk you can assume in your portfolio.

There are two ways to rebalance your portfolio.

If you have an opportunity to add new money to your portfolio, you can buy more of the assets that you need to rebalance the portfolio. If you must work only with the assets you currently have, you need to sell some of the assets that are overrepresented in the portfolio and buy more of the assets that are underrepresented.

Whatever the reason for your rebalancing, it should only take you 45 minutes or so, twice a year, to complete the exercise, since you will only be dealing with three or four mutual funds or ETFs - U.S. stocks, international stocks, and U.S. bonds.

A number of firms, including Fidelity and Vanguard, have established model portfolios for retirement investments that automaticaly rebalance at regular intervals. Vanguard calls these funds the “Vanguard Target Retirement” funds. These funds have different asset allocations, depending on whether your “target” retirement date is 2015, 2025, 2035, or 2045. The funds are made up completely of Vanguard index funds.

So if you don’t want to carry out your own rebalancing, you can simply invest your retirement savings in one of the Vanguard target funds.

Chapter 41 Don’t back down

Wall Street’s favorite scam is pretending that luck is skill. - Ron Ross, Ph. D., author of The Unbeatable Market

Being a Smart investor is appropriate for both conservative and aggressive investors. What determines how conservative or aggressive you are is your asset allocation, not whether you are, or you are not, trying to beat the markets. There are ways to invest in more aggressive markets (by increasing the percentage of stocks in your portfolio, for example) that can be extremely aggressive, but still produce the market returns for that market and, when owned in the correct proportion within your portfolio, do not add undue risk.

Chapter 42 Where are the 401(k) plans for smart investors?

… they [corporations] are simply unaware of the historical evidence, or perhaps they believe in the triumph of hope over experience and wisdom. In any case, it is the employees that lose. Employees should band together to demand that employers provide them with passive choices. – Larry Swedroe, There Is Trouble in 401(k) Land, Index Funds Advisors article, July 16, 2002

Chapter 43 The smartest investor who ever read an investment book

Some people change their minds because they want to, others because they have to. - Howard Gardner, author of Chaging Minds

Chapter 44 Too good to be true?

So who still believes markets don’t work? Apparently it is only the North Koreans, the Cubans and the active managers. - From a transcript of Rex Sinquefield’s opening statement in debate with Donald Yacktman at the Schwab Institutional conference in San Francisco, October 12, 1995

Additional resources

While there are a number of books that have been written about the virtues of being a Smart investor, few have achieved commercial success. There are a couple of exceptions.

One is a superb book by Burton Malkiel, entitled A Random Walk Down Wall Street. Malkiel, a professor of economics at Princeton University, was one of the first to show that the history of the price of a stock cannot be used to predict how it will move in the future, and therefore that stock price movement is, in the language of economists, “random”. In other words, he totally debunked the ability of anyone to consistently predict the future prices of stocks.

A number of excellent books explore the subjects discussed in this book in far more detail. The problem with some of them is that they provide so much information, the overall message tends to get lost and cause investors to throw their hands up in collective despair. And unfortunately they would turn to hyperactive brokers or advisors for assistance.

For those that want to delve deeper, here are some of the best resources.

1. A Random Walk Down Wall Street, Burton Malkiel
2. Index Funds: The 12 Step Program for Active Investors, Mark T. Hebner
3. Bogle on Mutual Funds, John Bogle
4. The Four Pillars of Investing, William Bernstein
5. The Only Guide to a Winning Investment Strategy You’ll Ever Need, larry Swedroe
6. Unconventional Success: A Fundamental Approach to Personal Investment, David F. Swensen
   1. David F. Swensen, the Chief Investment Officer of Yale University, who also teaches economics at Yale College and finance classes at Yale’s School of Management, has lived investing from the trenches. He is the author of Unconventional Success. He has made his professional name by running Yale’s endowment fund, which has had superior growth through years when the market was up and when the market was down. He has been involved in expanding the scope of the kind of investing done by university and other endowments, from venture capital investing to investing for social return within the local community, to even short-selling the market when he thought it was appropriate. Yet in his book, Swensen says that for the vast majority of investors, Smart Investing is the way to go.