Every other Sunday, The Simple Dollar reviews a personal finance book.
I’ve been a pretty big fan of the “Little Books, Big Profits” series published by Wiley and Sons, of which this is the sixth entry. I’ve reviewed each one and quite liked most of them – they do a very good job
Here are nutshells of the first five, with links to my detailed reviews of each.
The Little Book That Beats the Market by Joel Greenblatt is my least favorite of the series. It focuses on Joel’s “magic formula” for finding valuable stocks, but is mostly a good parable about how the stock market works.
The Little Book of Value Investing by Christopher Browne focuses on value investing, the philosophy of stock investing held by Benjamin Graham, Warren Buffett’s mentor.
The Little Book of Common Sense Investing by John Bogle focuses on the concept of indexing – in other words, buying tiny amounts of a huge swath of stocks and riding the ups and downs of the overall stock market. Most investors do this via index funds.
The Little Book That Makes You Rich by Louis Navellier provides an excellent concise summary of growth investing – how to identify stocks that have a huge amount of growth potential in the future.
The Little Book That Builds Wealth by Pat Dorsey focuses on investing based on competitive advantage, looking for ways in which a certain company has some sort of inherent advantage over its competitors, thus making it a better investment.
So what’s this sixth book in the series about? Asset allocation. The subtitle of the book is “What the Rich Do to Stay Wealthy in Up and Down Markets” – they do it through having a diverse set of investments. David Darst, the author, is a managing director of Morgan Stanley and is responsible for asset allocation and investment strategy of the Global Wealth Management Group, and thus has the credentials to discuss asset allocation inside and out.
Let’s dig in to what he has to say.
Chapter One – We All Do It (Even If We Don’t Realize It)
Everyone already does asset allocation – they just might not realize it. We all budget our money each month, right? Our income is an asset, and we allocate some of it to food, some of it to housing, and so on. Darst uses a lengthy analogy of a football team here – you can’t win if your team is composed of nothing but linemen. He also carried it even further, discussing changing environments (you change your plans based on the weather and based on injuries on the opposing team). Similarly, you change your food budget if you have a bunch of family coming to town for a week.
Chapter Two – Everyone Needs an Uncle Frank
“Uncle Frank” is the term Darst uses to refer to a trusted mentor that you can bounce ideas off of and who is willing to talk up your good ones and shoot down your bad ones. Warren Buffett had Ben Graham and, later, Charlie Munger, for example. I have my wife and a few very wise friends that I’m able to do this with – and they’re quite willing to shoot me down when I get off base. In fact, most of us already have an Uncle Frank – they’re the people we want to talk to when the chips are down or when we need advice.
Chapter Three – Building Your House
Your portfolio needs to reflect your personality. For example, if you value a steady income over everything else, you should keep your money in bonds and cash. The real idea behind this is to make sure that your investments match your goals – if your goal is to have stable money, you won’t be in stocks, but if your goal is to get as rich as possible, never mind the risks, you’ll want to own a lot of stocks.
Chapter Four – Parts of the Whole – Combining Dreams into a Plan
So what does that have to do with asset allocation? The real idea of this whole book is that you should never invest without a goal in mind, period. Before you ever start putting a dime away, know why you’re putting it away. Are you socking away money so that you’re fine if your car breaks down? You want it safe, very liquid, and not at risk of losing value – in other words, cash. Are you socking away money for your child’s college education in eight years? You want some stability, but some growth will help your child pay for a better school – a mixed portfolio, with some bonds and some stocks. Saving for retirement, and it’s more than thirty years off? You want growth and lots of it – almost all stocks. The goals lead the investments.
Chapter Five – Two Strategies to Win the Battle for Investment Survival
Here, Darst distinguishes between strategic asset allocation – the long term plan – and tactical asset allocation – short term changes to that plan. Strategic allocation basically relies on socking it away and forgetting about it – you make your long-term decisions well in advance and don’t worry about the day-to-day (or even year-to-year) changes that much. Tactical allocation is all about market timing and trying to make moves to maximize those investments. For example, several years ago I had a very, very strong gut feeling about Google’s IPO – investing in that would have been a tactical choice. Alternately, my Roth IRA plan won’t be touched – I just contribute my $100 a week and forget about it – that’s strategic. Darst argues that both are useful – you should have an overall strategic plan, but some situations may require some tactical maneuvering.
Chapter Six – Do You Know Where You Are Going?
Of course, none of that material is useful if you don’t know who you are and where you’re going. Darst strongly advises people to spend some time thinking seriously about their goals and plans, as well as perhaps doing some serious gut-checks about their personality and mental attributes. Both of these aspects – goals and personality – play into how you should invest, and thus investing the time right now to understand both will pay off huge in the long run.
Chapter Seven – Mix, Don’t Match
Darst starts getting down to brass tacks here, discussing the actual mechanics of asset allocation. In short, he says not to put all your eggs in one basket, no matter what. He encourages people to invest in multiple assets (stocks, bonds, real estate, etc.) that don’t have a history of strong correlation with each other – they go up and down largely independently of each other. Merely having two different stock index funds isn’t enough, because they usually have a pretty strong correlation. Mix in some real estate investing with that if you want to stay aggressive, or throttle back with some bonds.
Chapter Eight – Our Minds, Our Selves
This portion of the book covers the familiar ground of investor psychology. We often give into panic because our investments are dropping and we also sometimes get too aggressive and jump on the bandwagon of whatever the “hot” investment of the moment is. This is fairly typical material covered in most investment books, but it’s essential stuff to know.
Chapter Nine – The Jockey Matters as Much as the Horse
Many people don’t want to get into the nuances of picking specific investments for themselves and thus often hire financial planners or investment advisors to manage it for them. Darst lays down a lot of solid tactics for finding a good financial advisor, but most of the advice centers around finding a professional money manager, something which goes far beyond the realm of most of the readers. Most people just want a boost for managing their own finances, not a team of crack advisors gulping down six figures to manage your money.
Chapter Ten – Riding Out Storms
Perhaps the biggest advantage of a properly diversified portfolio is that it doesn’t take a nosedive when the stock market does. As I pointed out in my article on asset allocations, a diversified portfolio can weather just about any storm without incurring big losses, though it may not hit the euphoric peaks of a stock-heavy portfolio. This is particularly important if you’re intending to live out your days on the back of your investments.
Chapter Eleven – Build Your House on These Rocks
Darst makes a fascinating point here, one that I hadn’t really considered before. Early in your adult life, you don’t have much financial capital – you’re in college (or fresh out of college) and you’re likely in a significant amount of debt. However, what you do have is a lot of human capital – youthful energy, few social requirements, lots of time to devote to building a career, and a different set of ideas than the older generations. Over time, though, you gradually trade that human capital for financial capital, until you’re at the end of your career, no longer young, and ready to retire – but you (hopefully) have a solid bankroll. The goal is always to make that trade between human and financial capital as lucrative as you can. Thoughtful chapter, indeed.
Chapter Twelve – Count to Zen
Sometimes you’re going to make mistakes, in both investing and life. The difference between the winners and the losers is how they digest that loss. Do you accept it calmly or do you get irrationally upset? Do you spend time considering what caused the loss, or do you push ahead, guns blazing? Sometimes, you might discover that your loss is a result of just following the crowd and doing what everyone else does. Don’t. It’s okay to be a contrarian sometimes – and sometimes it can be quite beneficial.
Chapter Thirteen – Seven Quick Ways to Ruin
Darst mentions a lot of little mistakes here, but I think the biggest one that people commit is an underestimation of risk, both in their investments and in their day to day life. Individuals get so caught up in believing that they’ll succeed that they push things too far, get too greedy, and take too big of a leap of faith – and then they crash. I watched a friend of mine start up a small business, throwing every dime he had into it, and then watched it fail. Why? He just followed a dream without doing the appropriate investigation to see if it would work.
Chapter Fourteen – The Road Less Traveled that You Should Take Right Now
Darst closes the book by encouraging people to be careful about their information sources. Find many different sources of information and don’t just blindly follow one source of advice. Also, if you do find a source that you might trust, read as much as you can from that source and use little cues to figure out whether they’re trustworthy or not. Excellent advice, all around, and it also states a big reason why I tend to trust bloggers – you can read a ton of their writing all in one place and make up your own mind about them.
Some Thoughts on The Little Book That Saves Your Assets
Here are a few things I think I think about this interesting book.
It’s frustrating when good advice swerves down a completely unrelatable road. For the most part, I give this book a big thumbs up – but that ninth chapter only relates to people with more money than 99.9% of all Americans. Next to the rest of the advice – which is solid information about how to balance a portfolio and protect against losses in a down market – it really sticks out like a sore thumb.
Trading human capital for financial capital (chapter eleven) is tied heavily to the “true hourly wage” concept. A person’s true hourly wage, which I first learned about from the excellent Your Money or Your Life, is the money you actually earn for each hour you devote to work-related activities. In other words, it’s your annual income minus taxes, transportation to and from work, clothing for work, meals eaten for work, and any other work expenses divided by the number of hours worked plus hours spent commuting, training outside of work, spending time with coworkers, and so on. How much financial capital are you really getting in exchange for your human capital?
Darst makes an astute point about the Rich Dad, Poor Dad crowd in chapter thirteen. Although he doesn’t directly address it, he very clearly says that one of the biggest mistakes people make is getting overly optimistic and thus taking on way too much risk – the exact criticism I found in Rich Dad, Poor Dad. It’s filled with glowing fantasies that are so filled with positives that common sense is thrown out the window – and that’s a giant mistake.
Is The Little Book That Saves Your Assets Worth Reading?
The Little Book That Saves Your Assets is a book that runs more on concept than on hard and concrete examples. It very deftly explains the ideas behind asset allocation without digging much at all into the specifics.
In other words, The Little Book That Saves Your Assets is a great book if you want to learn what asset allocation is, but not a great book if you’re going to dig into the nuts and bolts of asset allocation yourself. It might serve very well as a “first” book, but you’ll want something with more meat on the bones (like The Bogleheads’ Guide to Investing) if you want to practice things yourself.
Aside from that, Darst does raise several very interesting and thought-provoking points in this book that apply to life in general, especially in the latter half of the book. Even though I’d read the more complex Bogleheads’ Guide to Investing before, I still thoroughly enjoyed this book. It made me think – but not always necessarily about the strict issue of asset allocation. To me, that means it was well worth my time.