Review: The Elements of Investing

Elements of InvestingWhenever people ask me where they can learn more about Couch Potato investing, I need to answer carefully. Two classic books are Burton Malkiel’s A Random Walk Down Wall Street and Charles Ellis’s Winning the Loser’s Game, but for someone who just wants the basics, without a lot of graphs and unfamiliar terms, neither title would be my first choice. Fortunately, these two authors have teamed up to write a quick-and-dirty primer on smart investing that any newbie can read in a couple of well-spent hours.

The Elements of Investing (Wiley) packs a lot of wisdom into its 130 little pages. It begins by explaining some cardinal rules of investing (the time value of money, the Rule of 72) and imparting some commonsense advice about reducing debt and saving more money. Then it lays out the case that Malkiel and Ellis have been arguing for decades: “Investors will be much better off bowing to the wisdom of the market and investing in low-cost index funds, which simply buy and hold all the stocks in the market as a whole.”

The book includes a wise chapter on avoiding common blunders, like trying to outsmart the market or putting faith in pundits who claim to have a crystal ball: “So, as an investor, what should you do about forecasts—forecasts of the stock market, forecasts of interest rates, forecasts of the economy? Answer: Nothing.”

The Elements of Investing has the usual limitations for Canadians: its practical advice about 401(k) plans, Roth IRAs and American index funds are all but useless for investors in this country. Readers who learn the principles behind building a diversified index portfolio should be able to adapt the information for Canada, but I caution readers that Ellis’s suggested asset allocations are way too aggressive for most investors: he suggests people in their 40s keep no more than 15% in bonds, and recommends 30% to 50% stocks even for people in their 80s.

If you’re new to index investing—or you’re hoping to win over a friend or family member who’s still buying crummy mutual funds—this book is an excellent place to start. When you finish it, pass along your copy to your advisor.

8 Responses to Review: The Elements of Investing

  1. Doctor Stock February 7, 2010 at 1:40 am #

    Thanks… I’ll look this one up in my local library.

  2. Tara C February 11, 2010 at 7:00 pm #

    I don’t think 30-50% in stocks is too aggressive at all. My dad has always had 100% in stocks and has done great. Every time I put money into bond funds I lose money big time. Perhaps the key is if you’re buying bonds to only buy individual bonds and not bond funds? I’m sticking with 100% stocks diversified over many asset classes/global regions.

  3. Canadian Couch Potato February 11, 2010 at 7:13 pm #

    Just to clarify, I feel 50% in stocks is aggressive for someone in their 80s, who is presumably living off the income from their portfolio. If you had this allocation and turned 80 in the year 2000, you’d be having an awfully stressful decade.

  4. Tara C February 11, 2010 at 7:30 pm #

    I guess it depends on where you are in your investing – my dad is 73 and his portfolio is about $800,000. I guess if he were living closer to the edge (with very little in his portfolio to start with), it would have been a big problem to have 100% in stocks during the crash.

  5. Cliff March 9, 2010 at 9:30 am #

    My father in law had 100 percent of 1.4 million in a high income mutual fund. This is a balanced fund with about a 50/50 split between equity and fixed income. Last year he lost close to $500,000. He is 85. I don’t think that’s is very good. I’m glad he didn’t have 100% equities.

  6. Canadian Couch Potato March 9, 2010 at 9:33 am #

    Cliff: Just curious whether the mutual fund was his choice or whether a “highly qualified financial advisor” decided that an 85-year-old with $1.4 million needed to invest half his money in stocks?

  7. Harris May 8, 2012 at 10:56 pm #

    Hi, I don’t know if I will be able to get a reply from you on this or not as the last reply I see is in 2010, but I’m going to ask you anyway,
    Currently im 28 yrs old and had last year setup a leveraged investment of $100,000 in a segregated fund as was Advised by a financial advisor who I’m sure will benefit from it. First question is was it a good decision or not? Also It was step as 75% aggressive portfolio. I haven’t made much or either lost uptill now.
    Second, I have this year setup a spousal RRSP as well of $10,000 and invested with TD Comfort Balanced Portfolio, was that a good choice.

    Now I have around $15,000 which I would like to invest in stocks or bonds but would like to do that myself , what would you advise?
    Thanks

  8. Canadian Couch Potato May 9, 2012 at 1:18 am #

    @Harris: I hate to be the bearer of bad news, but a leveraged investment in a seg fund means that you are probably paying 5% or 6% interest on the loan and 3% to 4% on the fund fees, which makes it awfully difficult to earn a decent return. But I’m sure your “adviser” is doing very well indeed.

    The TD Comfort Portfolios are pretty standard fare from the banks: a 2% MER, but at least they’re well diversified.

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