The Informed Investor: A Hype-Free Guide to Constructing a Sound Financial Portfolio

by Armstrong, Frank, III

• ISBN13: 9780814472507
• ISBN10: 0814472508
• Edition: 2nd
• Format: Paperback
• Copyright: 2003-11-01
• Publisher: Lightning Source Inc

Summary

Better investment decisions lead to more predictable returns, lower risk, and lower taxes. And they yield the best possible opportunity to meet your financial goals. But without the benefit of solid portfolio tactics, investors become irrational, chasing after rainbows that promise high returns with a minimum of risk, and selling off stocks in a panic when the market is down. What amateur investors need is an easy-to-understand explanation of how the market works, so that they can ignore superstition, stop believing in "performance fairies," and escape the atmosphere of uncertainty that often dominates the world of investment. The Informed Investor provides you with practical advice to help you make better investment decisions without becoming confused by the sea of data on television and the Internet. Featuring uncomplicated charts, graphs, and clear instructions for using them, the book gives you every conceivable tool for understanding markets and stocks, analyzing trends, timing your moves, and targeting realistic goals. Book jacket.

Author Biography

Frank Armstrong III (Coconut Grove, FL) is the founder and principal of Investor Solutions, Inc. He is a frequent contributor to CNNfn.com, and has appeared on CNN Headline News and PBS Morning Business Report.

Table of Contents

PREFACE	xix
ACKNOWLEDGMENTS	xxi
1. INTRODUCTION	1	(6)
Dumping the Performance Fairy	2	(2)
Drowning in Data	4	(3)
2. GATHERING INTELLIGENCE	7	(10)
Rates of Return	8	(1)
Definitions	9	(2)
A book at the Long-Term Data	11	(1)
The Range of Reasonableness	11	(4)
Savings vs. Investment	15	(2)
3. ASSESSING THE RISK	17	(24)
A World Without Risk	18	(1)
Risk Offers the Chance for Higher Returns	19	(1)
The Investor's Dilemma	19	(1)
Reexamining Risk	20	(1)
Investing Is Not Gambling	21	(3)
Decision Making in an Atmosphere of Uncertainty	24	(1)
The Professional's View	24	(3)
Sources of Risk	27	(2)
Risk Is Part of the Investment Process	29	(1)
Factors That Multiply Risk	29	(1)
An Investor's View of Risk	30	(1)
Visualizing Risk	30	(3)
Market Risk Is Short-Term Risk	33	(1)
Risk Falls Over Time	33	(2)
How Often Can You Expect Losses?	35	(1)
How Bad/Good Can It Get?	36	(1)
How Often Will You Beat Inflation?	37	(1)
The Risk-Reward Line	37	(2)
Risky Business	39	(2)
4. TAMING THE BEAST	41	(12)
Business Risk	42	(2)
Market Risk	44	(1)
Interest Rate Risk	45	(3)
Currency Risk	48	(2)
Political Risk	50	(1)
A Bite out of the Old Free Lunch	51	(2)
5. A NIBBLE FROM THE FREE LUNCH	53	(8)
The Beginning of Modern Portfolio Theory	54	(1)
What Is Modern Portfolio Theory?	54	(4)
The Efficient Frontier	58	(3)
6. TRAVELS ON THE EFFICIENT FRONTIER	61	(8)
Improving an All-Bond Portfolio	62	(2)
International Investing and Modern Portfolio Theory	64	(1)
Modern Portfolio Theory as a Risk Management Tool	65	(4)
7. THE ASSET ALLOCATION DECISION	69	(6)
A Groundbreaking Study	71	(2)
Wall Street Calls Foul	73	(1)
Asset Allocation: The Lessons for Investors	74	(1)
8. THE EFFICIENT MARKET DEBATE	75	(10)
The Information Age	76	(1)
Market Fundamentals	76	(1)
In a Perfect World	77	(1)
Prices in an Efficient Market	77	(1)
Pricing Models	77	(1)
Degrees of Efficiency	78	(2)
Types of Research	80	(1)
Conflicts of Interest	81	(1)
An Alternative Point of View	82	(3)
9. CAN MANAGERS ADD VALUE?	85	(14)
A Quick Test	86	(1)
What About the Winners?	87	(1)
If It Was Good Yesterday, Will It Be Great Tomorrow?	88	(1)
Where Are They Now?	89	(1)
Bigger Was Better	90	(5)
Some Recent Dissenting Voices	95	(1)
Toward Better Benchmarks	96	(1)
Taking Big Bets Against the Benchmark	97	(1)
Can Managers Add Value? Don't Bet on It!	98	(1)
More on Style Investing	98	(1)
10. DOING IT WITH STYLE	99	(8)
A Modest Proposal	100	(1)
Dividing the Market by Size and BTM Ratio	101	(1)
Each New Study Creates New Problems	102	(1)
Economic Justification for the Three-Factor Model	103	(1)
A Bag Full of Sick Puppies	104	(1)
Fun With Numbers	105	(2)
11. MORE FUN WITH NUMBERS	107	(12)
First Things First	108	(1)
Put Time on Your Side	108	(2)
Lesson One: Start Early	110	(1)
Lesson Two: Plan for a Reasonable Rate of Return	110	(1)
Lesson Three: Control Costs	111	(1)
Lesson Four: Control Taxes	111	(2)
Building a Tax Model	113	(2)
Beating the Tax Man	115	(1)
Dollar Cost Averaging	116	(1)
Forcing Yourself to Save	117	(2)
12. MAY DAY AND BETTER MOUSETRAPS	119	(8)
How Deregulation Opened Up Wall Street	119	(1)
Viva La Revolution!	120	(1)
The Dutch Make a Purchase	120	(1)
Enter the Pigs	121	(1)
May Day	121	(3)
The Price of Change	124	(1)
Monopoly and Regulated Industries	124	(3)
13. IT'S A JUNGLE OUT THERE!	127	(10)
Horror Stories	128	(2)
The Role of Commissions	130	(4)
The Flawed System of Large Brokerages	134	(2)
Alternatives	136	(1)
14. SETTING YOUR GOALS	137	(8)
Setting Monetary Goals	138	(1)
How Software Can Aid the Planning Process	138	(3)
Time Horizon	141	(1)
Dealing With Risk, the Four-Letter Word	142	(3)
15. BUILDING YOUR PORTFOLIO	145	(12)
In the Real World	145	(1)
A Quick Review of Some Basic Principles	146	(1)
Methodology	147	(7)
Conclusions	154	(3)
16. PORTFOLIO TACTICS	157	(10)
Old-School Investing	157	(1)
Turning Your Goals Into a Strategy	158	(1)
Let's Get Risky	159	(1)
Balancing Risk With Return	160	(2)
Expecting Periodic Declines	162	(1)
No More Second-Guessing	162	(1)
Adjusting the Portfolio for Individual Preferences	163	(1)
The Proof Is in the Performance	164	(1)
Happiness Through Asset Allocation	165	(1)
Reality Rears Its Nasty Head	165	(1)
A Strategy for Everyone	166	(1)
17. EDUCATION	167	(8)
Education in the Good Old Days	167	(2)
Annuities for College Funding? Not!	169	(1)
Help From the Government?	169	(2)
Other Options for Education	171	(4)
18. A COMPREHENSIVE APPROACH TO INVESTING DURING RETIREMENT	175	(14)
A Different Game Plan	176	(1)
Sustainable Withdrawal Rates	177	(4)
Constructing the Investment Policy	181	(3)
Transition Planning	184	(1)
Midcourse Corrections and Inflation Adjustments	185	(1)
Alternative Withdrawal Plans	185	(1)
Additional Considerations	186	(1)
Note	187	(2)
19. THE JOYS OF FUND SELECTION	189	(12)
The Mutual Fund Industry	190	(1)
Fund Basics	190	(1)
Cost: The Natural Enemy of the Investor	190	(4)
Targeting Your Market Segment	194	(1)
Style Drift: The Natural Enemy of Asset Allocation	195	(1)
Traditional Labels and Fund Objectives That Obscure Rather Than Enlighten	196	(2)
Active vs. Passive	198	(1)
An Action Checklist	198	(1)
Limited Budget	199	(1)
Just Do It!	199	(2)
20. THE GOOD, THE BAD, AND THE UGLY	201	(14)
Advice From Mom	202	(1)
A Short History Lesson	202	(1)
NASD: The Name Says It All	203	(1)
Cost Creep	203	(1)
The Mutual Funds Marketplaces	204	(2)
A Strategy to Have Your Cake and Eat It Too	206	(1)
The Role of Independent Directors	206	(1)
Deals Cut in the Dark	207	(1)
Soft Dollars	208	(1)
Paying for Order Flow	209	(1)
Directed Trades and Fee Sharing	210	(1)
Preference Bidding	211	(1)
Economic and Moral Implications	211	(1)
Regulatory Reform	212	(1)
Vote With Your Feet	212	(1)
Sunlight: The Best Disinfectant	213	(1)
Playing the Hand We Are Dealt	213	(2)
21. FUND ALTERNATIVES	215	(10)
Closed-End Funds	215	(2)
Unit Investment Trusts	217	(1)
Real Estate Investment Trusts	218	(1)
Wrap Fee Accounts	219	(2)
Variable Annuities	221	(1)
Exchange Traded Funds	221	(1)
Index Fund Features	222	(1)
ETF Features	222	(1)
The Bottom Line	222	(1)
Conclusion	223	(2)
22. TENDING YOUR GARDEN	225	(8)
Finding the Right Home for Your Assets	225	(1)
Keeping It Simple	226	(1)
Get a Grip	227	(1)
Take a Break	227	(2)
Build Your Own Benchmark	229	(1)
Avoid Endless Tinkering	229	(1)
The Big Picture	230	(1)
Less Is More	231	(2)
23. INVESTOR, HEAL THYSELF!	233	(12)
What's Going On Here?	234	(1)
Investors Do the Strangest Things	235	(2)
What Have Investors Learned?	237	(1)
Know Thyself	237	(1)
Know Thy Market	238	(1)
The Tuna Fish Factor	238	(1)
Zen and the Market Experience	239	(1)
Relative Pain	240	(1)
The Cocktail Party Factor	240	(1)
The Analytic Investor	240	(1)
More Advice From Mom	241	(1)
Your Investments Are Your Future	242	(1)
Run a Fire Drill	242	(3)
24. THE CULTIVATION, CARE, AND FEEDING OF INVESTMENT ADVISORS	245	(16)
Investors as Frogs	246	(1)
A Riddle Wrapped Up in an Enigma	247	(1)
The Fee-Only Alternative to Business as Usual on Wall Street	247	(1)
Recent Industry Trends	248	(2)
The Revolution Bears Fruit	250	(1)
Finding an Advisor	250	(1)
A Commonsense Checklist	251	(8)
The Bottom Line	259	(2)
25. PULLING IT ALL TOGETHER: A SUMMARY	261	(10)
Good News, Bad News	262	(1)
There Is Good News	262	(1)
Action on Several Fronts	263	(1)
Return on Investment	263	(1)
Risk	264	(1)
Correlation	264	(1)
Time Horizon	265	(1)
Efficient Markets	265	(2)
Harness the Power of Asset Class Investing	267	(1)
Deregulation: The Beginning of Revolution	267	(1)
Wall Street's Rear-Guard Action	268	(1)
A New Breed of Financial Advisor	269	(1)
Just Do It!	270	(1)
Marx Had It Wrong	270	(1)
APPENDIX 1: The Joneses' Retirement Income Portfolio: Year-by-Year Results Compared to the Large Company Index and One-Months CDs	271	(2)
APPENDIX 2: The Joneses' Income and Portfolio Values: Income From CDs: 1975-2002	273	(4)
APPENDIX 3: Adjusting the Portfolio for Individual Preferences: Annual Returns and Summary Data: 1975-2002	277	(2)
APPENDIX 4: Sample Investment Policy Statement	279	(12)
RECOMMENDED BOOK LIST	291	(2)
INDEX	293