Summary

Now in paperback--the groundbreaking investment guide by bestselling author James O'Shaughnessy that shows you the simple way to create the fully funded retirement you deserve. Even if you think you're in great financial shape and can afford two cars and several vacations a year, the numbers in your savings and retirement plan don't always add up to a wealthy--or financially secure--future. InHow to Retire Rich, investment wizard James O'Shaughnessy uses his revolutionary analysis of the Standard & Poor's CompuStat Database and stock market history to identify exactly which strategies have consistently beaten almost all active stock pickers over the past four decades--and to show regular folks like you how to apply these proven formulas to your 401(k) and your savings plan, and, over time, grow as little as $2,000 into more than $4 million. By adopting O'Shaughnessy's logical, proven approach and by avoiding hunches, hot tips, and trendy advice from high-profile gurus, you, too, can master the basics of investing, dramatically increase your net worth, and fund the retirement of your dreams.

Author Biography

The bestselling author of What Works on Wall Street, James O'Shaughnessy has been featured in the Wall Street Journal, the New York Times, the Financial Times, Barron's, Forbes, and Money and is a frequent guest on CNN and CNBC. He is the founder and chairman of O'Shaughnessy Funds, a family of no-load mutual funds.

Acknowledgments	p. xv
What Is Rich?	p. 1
Saving for Retirement	p. 3
The Woes of Social Security
Will Baby Boomers Make Social Security Go Bust?
In with 401(k) Plans, Out with Traditional Pension Plans
Personal Savings: Your Ticket to Rich
Save, Save, and Save Some More	p. 7
Start Saving Now	p. 9
How Four Couples Define Rich	p. 10
Bill and Nancy Robinson
George and Theresa Ramirez
Tom and Sarah O'Neil
Steve and Betsy Johnson
It's Not Too Late	p. 18
The Strategy Revolution	p. 20
You Need a Map to Get Where You Want to Go	p. 21
The Accidental Investor
It's Not a Game--It's a Science	p. 23
Short-Term Thinking Destroys Performance	p. 24
Staying in the Market Is 90 Percent of the Battle	p. 25
Even the Pros Succumb to Human Nature	p. 26
I Have Met the Enemy, and He Is Us	p. 29
What's the Batting Average?	p. 29
The Strategy Revolution	p. 32
What Works on Wall Street
Only the Fullness of Time Can Show You What to Expect
The SandP 500: A Simple Large-Capitalization Strategy
Be a Bargain Hunter ...
... Not a Spendthrift!
It's Not Different This Time	p. 37
The Story of Smith and Jones	p. 39
The Best Strategies Are Simple	p. 40
Be Humble in Face of the Market	p. 41
Just Do It!	p. 42
The Strategies	p. 44
Change the Way You Think	p. 45
Factor Definitions	p. 46
Market Capitalization
Price-to-Earnings (PE) Ratio
Price-to-Sales Ratio
Relative Strength
Dividend Yield
Cash Flow
Winning Strategies: The Ground Rules	p. 50
The Importance of 25- to 50-Stock Portfolios
Reasonable Runaways
Watch Out for Volatility
Commit for the Long Term
How Does Reasonable Runaways Work?
Why Does It Work So Well?
Discipline Is the Key to Success
The Lazy Man's Reasonable Runaways
Leaders with Luster
A Less Volatile Strategy
A Great Strategy for the Bear in You
How Does Leaders with Luster Work?
Getting the Best of Both Worlds
Three 10-Stock Strategies
Dogs of the Dow
That's Some Track Record!
The Awesome Power of Compounding
Utility Strategy
Safety First
Income and Capital Gains, Too
Core Value
Great Performance over the Last 12 Years
Putting It All Together	p. 72
History Is the Best Teacher	p. 72
Mutual Funds: What to Look For--and Look Out For	p. 74
Why Mutual Funds Can Be a Good Investment	p. 75
Easy Does It
Diversification: A Safety Net for the Prudent Investor
Why Mutual Funds Can Be a Bad Investment	p. 77
The SandP 500 Beats Most Mutual Funds
Fund Managers Face the Same Demons We All Face
Style Drift
Incubator Funds: What You See Is Not What You're Going to Get
Window Dressing
Mutual Fund Fees: Read the Fine Print
Beware the Taxman
Rock Stars, Sports Heroes, and ... Mutual Fund Managers?
Case Study: The Fidelity Magellan Fund
What to Look For in a Mutual Fund	p. 85
Discipline, Discipline, Discipline
Enhancing Those Indexes
Strategy Indexes: Uniting Active and Passive Management
Lexington Corporate Leaders: Sticking to Their Knitting
Quantitative Funds: The Black Box Approach
What It All Boils Down To	p. 89
How to Find the Best Conventional Mutual Funds	p. 89
International Funds	p. 91
Strategies Are the Future	p. 91
How to Get the Most Out of Your 401(k)	p. 92
The New Pension Plan	p. 93
What Makes 401(k) Plans Great	p. 93
Contributions Are Pretax Dollars
Income Is Tax Deferred
Matching Contributions from Your Employer
You Can Take Them with You
The Basics	p. 95
Finding Out About Your Company's 401(k) Plan	p. 95
Who's Who in the Bureaucracy
The Paperwork
How Much Should You Contribute?
Where to Invest Your 401(k)	p. 98
Equities--Still the Best Place for Your Savings
What About My Company's Stock?
Bonds and Cash
How Much Can You Expect to Make?	p. 101
Don't Treat Your 401(k) Like a Bank
When Bonds Make Sense
Stocks for the Long Haul
Time to Get Going	p. 105
Portfolios for the Rest of Your Life	p. 107
Bill and Nancy Robinson: The Big Payoff of Starting Early	p. 108
Tax Advantage Makes Saving Easier
Their Future Looks Bright
How to Invest for a Rich Retirement
Aggressive Investing Pays Huge Returns
A More Conservative Path
The Power of Youth
George and Theresa Ramirez: You Can't Be Too Prepared	p. 115
Saving for the College Years
Ensuring Their Future
When They're 65
The Power of Strategy Indexes in a 401(k)
How to Lower Risk and Still Retire Rich
A Middle-of-the-Road Strategy That's Hardly Middle of the Road
Tom and Sarah O'Neil: Allowing Persistence to Overcome Risk and Fear	p. 121
Sarah's Fears Are All Too Common
A Plan for Sarah
The O'Neils' Future Transformed
Steve and Betsy Johnson: Making Up for Lost Time	p. 126
Putting a Plan in Place
Steve's Plan: Watch Out for Risk
Betsy's Plan: Keep Saving
Steve's Postretirement Portfolio
The Johnsons' Nest Egg When Betsy Retires
What to Do with an Inheritance
Steve and Betsy's Future
The Right Plan for You	p. 132
The Broken Record: Stay in the Market	p. 134
Pitfalls, Roadblocks, and Excess Baggage	p. 135
Perils and Pitfalls of Investing	p. 135
The Crash of 1987
Black Monday
Panic Spans the Globe
More Fuel for the Fire
Short-Circuiting Panic
Hysteria in the Headlines
How to Keep Yourself from Panicking
Other Market Panics Are Just the Same
What You Should Panic About	p. 142
Overcoming Emotions and Panic	p. 143
The More Things Change, the More They Stay the Same
How to Survive a Long Bear Market
What If One of My Stocks Tanks?
What If I Get Elated?
Elation Has Its Pitfalls Too
Stay the Course
What If Some of My Stocks Soar?
Remember Your Goals	p. 150
Things Will Cost More When You Retire	p. 151
Above All, Stay in the Market
Where to Find the Information you Need	p. 153
Annual Reports: To the Recycle Bin	p. 153
Reasonable Runaways and Leaders with Luster	p. 154
The Easy Way: Pick Up the Phone (and Open Your Checkbook)
Surfing the Web: The Cheap (and Relatively Easy) Way
Big Database, Itty-bitty Price
Finding Reasonable Runaways Stocks
Finding Leaders with Luster Stocks
A Big, Free Database for Reasonable Runaways
More to Come on the Internet
In the Dogs of the Dow House	p. 160
Cyberspace Canines
Keeping Up with New Sites
Finding Core Value and Utility Strategy Stocks	p. 162
Old-Fashioned Value Line
Using the Value Line Investment Survey for Windows
Computers, Off-line	p. 164
I'm Scottish--Is There Hope for Me?	p. 164
Consider a Course at Your Local College	p. 165
What If I'm Computer-Phobic?	p. 165
The Brokerage Revolution: You Win	p. 167
On-line Trading Explodes	p. 167
Fees Plummet	p. 168
Opening an Account	p. 169
Is It Safe?
What to Expect from an On-line Broker
How Should I Choose?	p. 171
Price
Service
Reputation
Size and Confidence
Trading Your Account	p. 172
A 10-Stock Portfolio
Portfolios with 25-50 Stocks
Off-line Trading	p. 178
Traditional Discount Brokers
Traditional Full-Service Brokers
No Excuses	p. 180
The Simple Way	p. 181
The Conventional Way	p. 182
Those Darn Facts
A New, Strategic Path	p. 183
The Killer Brownie
Keep the Faith	p. 184
Bet with the House
Stress and the Proud Way	p. 185
Peace of Mind and the Humble Way	p. 186
Don't Ignore--Accept	p. 187
Every Day, Retirement Is Nearer	p. 189
Take Action and Retire Rich	p. 189
Performance Appendix	p. 191
Index	p. 263
Table of Contents provided by Syndetics. All Rights Reserved.

Supplemental Materials

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Excerpts

How to Survive a Long Bear Market

As we've seen time and again, a successful campaign to retire rich is not for the faint of heart or weak of will.  The normal gyrations of the market will constantly test your devotion to these strategies.  But what will test your will the most is a long-term bear market.  With luck, we may not have to face a bear market like the one that tried investors' souls in the early 1970s.  But if we do, you'll need to reread every section of this book to hang on and keep the faith.  Between 1969 and 1973, Reasonable Runaways, one of the strategies mentioned earlier, lost 5.5 percent a year while the S&P 500 had a slight gain of 2 percent a year.  Imagine having to endure that during the first five years of your investment program.  The urge to give up on the strategy would be truly overwhelming.  The key to your success is to know what can happen and prepare yourself for it--before you begin your investment program.

Knowledge is power.  I guarantee that people who jump into the market without an underlying investment plan will run to the "safety" of cash or bonds long before those who understand history.  But as any bear market grinds on, every instinct will tell you to sell.  Your stocks will be down.  All your friends who never owned stocks in the first place (who will never retire rich, by the way) will be amazed at how foolish and reckless you are to be invested in the market.  Relatives will try to talk you into more prudent, guaranteed investments.  Worse yet, you may be drawn to the idea of market timing and say, "I'll stick with this strategy, but I'll time my purchases so that I can avoid these awful bear markets."

If there were a simple market-timing method with a batting average as successful as that of these strategies, it would be a dream come true, and I would be the first person to recommend it to you.  But there isn't one.  Many investors believe that they can time their purchases and miss those wrenching bear markets, but no one I know of has effectively demonstrated the ability to do so.  Market-timing newsletters scream about all the times you'd be better off on the sidelines, but their actual track records are dismal.  Most of them fail to beat even T-bills, and you wind up paying a fortune in commissions as you move in and out of the market.  Since no effective market-timing tool has yet been invented, you simply have to gut out those down markets.

Most important, you shouldn't care about the short term.  In the grand scheme of saving and investing for a rich retirement, five years is a short period of time.  When a bear market gets you down, revisit the Performance Appendix at the back of this book.  You'll see that after suffering through five losing years in the early 1970s, Reasonable Runaways went on to compound at almost 24 percent a year over the next five years, swamping the S&P 500's return of 4.32 percent a year.  By focusing on long spans of time and the natural ebb and flow of the market, you'll have a calm and reasonable perspective that all those around you lack.

What If One of My Stocks Tanks?

Even if you don't have to suffer through a long-term bear market, you're going to have to face the fact that over the course of your investment program, you're always going to have a few stocks in your portfolio that are real losers.  It's not uncommon for several stocks in Reasonable Runaways to be down by 50 percent or more, and the urge to do something about them will be overwhelming.  "Surely I can stick with the basic strategy but avoid these horrible performers," you'll think to yourself.  Believe me, I've had exactly the same feeling.  But I know from experience that it's foolish to start tinkering around with these strategies.  The minute you start to think you can prune your portfolio of just a few bad stocks, you've reopened the door to managing your portfolio in a conventional manner.  Most investors think they're capable of singling out the stocks that need to be removed from their portfolios.  But, as you know, most investors don't beat the S&P 500 either.

A stock that looks like a real clunker now could easily turn around and surprise you.  Goodyear Tire is one example.  It was one of the Dogs of the Dow stocks in 1991, and it looked like a real deadbeat as rumors about the company not paying its dividend and firing its chairman popped up frequently in the news.  Goodyear did eliminate its dividend--and the stock went up 187 percent that year!  Investors who thought they were smart enough to override the strategy probably had already sold the stock and missed the gain.

I used to keep a list of all the stocks that I thought looked like bad investments even though they met my strategies' criteria.  I also kept a list of stocks I thought would be great investments but didn't show up in any of my strategies.  Well, guess what?  The clunkers always outperformed the stocks I thought would do well.  Whenever you're compelled to sell a stock that's doing poorly, remember that all the winning strategies we've looked at in this book have contained all sorts of stocks that ended up in the cellar.  The 45 years of returns we've looked at include the losing stocks as well as the winners.  These strategies are powerful--clunkers and all.  Don't try to second-guess them.

What If I Get Elated?

Panic and fear have their flip side--greed and elation.  Had you started Reasonable Runaways at the end of 1990, you might have become an intolerable boaster by the end of 1993, since you would have gained more than 144 percent in those few years, while the S&P 500 gained just 55 percent.  You would feel like a genius, since your portfolio was doing three times as well as the market at a time when the average mutual fund didn't even keep up with the S&P 500.

Elation Has Its Pitfalls Too

Oddly enough, this kind of elation can be even more dangerous than the panic you feel when your portfolio is losing ground.  If you've bragged enough, your friends might seek your opinion and ask you for advice about how they should be investing their money.  Everyone will think you're absolutely brilliant, and you'll be inclined to agree.

Beware! When the emperors of ancient Rome paraded through the city streets teeming with thousands of admiring citizens, they had slaves at their side whispering in their ears: Sic transit gloria mundi--"All worldly glory is fleeting."  Since you probably can't afford a full-time whisperer (at least not until you retire rich because of your successful savings and investment program), remember the truth of those words.

Whom the gods destroy, they first make great.  The financial industry is littered with famous money managers who did extraordinarily well for a short time but then crashed and burned.  Don't let success go to your head and make you think you're smarter than the strategies that made you successful.

Theresa Ramirez recently faced a problem just like this.  One of her partners had done particularly well in the stock market last year buying high-flying technology stocks.  And even though her portfolio was doing well, Theresa still felt a little cheated--her partner was so elated by his success!  Maybe she should trust his advice and buy some of the stocks he was recommending.

But as we've seen over and over, this is the worst thing Theresa could do.  When things are going particularly well, just like Theresa we tend to think they could be even better.  Theresa compared her portfolio's gain of 25 percent last year with her partner's gain of 40 percent and felt she wasn't doing as well as she should.  But the odds are that her partner will soon join the vast majority of investors who get burned when trying to outsmart the market.  Her partner currently thinks he's a genius.  The market will probably soon teach him otherwise.  There's always someone with a portfolio that's up 40 percent, who almost always thinks it's due to his or her brilliant stock picking.  More often than not it's just dumb luck.  The minute you think that you can outsmart the market, remember the sobering fact that 80 percent of the brilliant, well-connected, and superinformed money managers on Wall Street can't beat the S&P 500 over the long term--primarily because they believe that they can outsmart the market
in the short term.

Stay the Course

When you become elated about your portfolio's performance, remind yourself of two things.  First, you're once again focusing too much on the short-term performance of your investments.  The whole point of strategic investing is to put your long-term investment strategy on automatic pilot and let the time-tested techniques do their stuff.  Just like panic, elation is an emotional trap that keeps you from thinking clearly.  When the market starts moving against you, you'll probably panic even more than other investors do and want to abandon your strategy even faster.

Second, and on a more positive note, remember that when these strategies outperform the S&P 500, it's the rule, not the exception.  The reason you put your money in Reasonable Runaways or Leaders with Luster in the first place is that they do much better than the S&P 500.  This is quite normal, not something you deserve to jump up and down about.  You're using simple models that have nothing to do with your brilliance and everything to do with empirical research and great batting averages over long periods of time.  Stay humble, keep your emotions in check, and you'll be able to stay the course.

Excerpted from How to Retire Rich: Time-Tested Strategies to Beat the Market and Retire in Style by James P. O'Shaughnessy
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.