The Investor's Manifesto Preparing for Prosperity, Armageddon, and Everything in Between

by Bernstein, William J.; Clements, Jonathan

• ISBN13: 9781118073766
• ISBN10: 1118073762
• Edition: 1st
• Format: Paperback
• Copyright: 2012-08-28
• Publisher: Wiley

Summary

As the Twenty-first century dawns, our country, to author Bill Bernstein's great surprise and agitation, somehow expects schoolteachers and factory workers to manage their own investment and retirement portfolios. This is akin, in his view, to having airline customers fly their own airliners or expecting parents to remove a child's inflamed appendix. This is not hyperbole: in the course of his professional life, Bernstein actually has flown aircraft, practiced a complex medical specialty, and managed money. He has found the last vocation to be fully as difficult as the first two. Simply put, our current retirement system is a travesty; forcing the average American to save, invest, retire, and then spend down their own portfolios is a hopeless conservative libertarian conceit. Only now, with the market's recent collapse, have the full costs of this cruel joke on John Q. American become apparent. Unfortunately, for the present most citizens now find such plans their investment mainstay, and they need to know how to rationally respond to this predicament. This book will describe just how to plan a lifetime of investing, drilling down on the "nature inside the beast" that we know as stocks and bonds, and the relationship between risk and return. Naturally, there will be a strong focus of the meaning of the current market maelstrom, and the path out. Such material is often deadly for investors with little professional experience, but Bernstein believes Mr. Market may no longer be the cold portfolio assassin he was in 2008. He artfully focuses on the concept of Pascal's Wager--identifying and avoiding worst-case scenarios. After reading Timeless Investing, investors truly will understand the nuts and bolts of executing a lifetime investment plan: how to survive dealing with the investment industry, the practical meaning of market efficiency (not trying to time markets, pick stocks, or select individual fund managers), how much to save, how to maintain discipline in the face of panics and manias, and what vehicles to use to achieve financial security and freedom.

Author Biography

William J. Bernstein, PhD, MD, is a bestselling author known as a grassroots hero to independent investors. Formerly a practicing neurologist, Bernstein approaches the problems of saving and investing as someone who had to figure it out for himself—from first principles up. He is the author of The Intelligent Asset Allocator and The Four Pillars of Investing—highly regarded, plain-spoken guides on how to build a diversified portfolio without the help of a financial advisor—the editor of the asset allocation journal Efficient Frontier, and the founder of the popular website efficientfrontier.com. He has also written two volumes of economic history, The Birth of Plenty and A Splendid Exchange, and is a coprincipal in Efficient Frontier Advisors.

Table of Contents

Foreword ix

Preface xiii

Chapter 1 A Brief History of Financial Time 1

In the Beginning 2

Near-Death in Venice 8

The Incredible Shrinking Risk Premium 11

Summary 12

Chapter 2 The Nature of the Beast 13

Of Ravens and Returns 13

History versus Math 18

Mr. Gordon’s Curious Equation 25

Math Detail: The Discounted Dividend Model 29

Home Sweet Home? 35

Adventures in Equity 38

Math Detail: Risk 43

Throwing Dice with God 47

Gene Fama Looks for Angles and Finds None 49

Sandbagged by a Superstar 52

Jack Bogle Outfoxes the Suits 56

It Is Better to Be Lucky Than Smart 63

Bond Funds: A Flatter Playing Field 64

Summary 65

Chapter 3 The Nature of the Portfolio 69

Four Essential Preliminaries 71

The Asset Allocation Two-Step 74

Math Detail: Mean-Variance Analysis 83

With Luck, Zigs, and Zags 84

Chasing Rainbows 88

Summary 93

Chapter 4 The Enemy in the Mirror 95

Inner Demons 97

Behaving Badly 100

Bargain-Basement Psychotherapy 116

Summary 125

Chapter 5 Muggers and Worse 127

The World's Largest Bad Neighborhood 128

The Fund Funhouse 135

Summary 142

Chapter 6 Building Your Portfolio 143

Financial Planning for a Lifetime: The Basics 143

Saving for Retirement: Nuts and Bolts 145

How to Save: Dollar Cost Averaging and Value Averaging 152

Four Investors, Four Plans 154

The Rebalancing Question 166

Math Detail: Rebalancing, Momentum, and Mean Reversion 169

Teach Your Children Well 172

Summary 174

Chapter 7 The Name of the Game 179

Investment Theory and History: The Short Course 180

The Portfolio Theory of Everything 181

We Have Met the Enemy, and He Is Us 181

Heads I Win, Tails You Lose 182

Fire When Ready 182

The Books You Need . . . Aged Like Fine Wine 185

Notes 188

Acknowledgments 193

About the Author 195

Index 196