Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.
Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.
This is the Fifth and final book in the author’s five part series on finances. In the previous four they showed how to use long-term trends to “time the market” in the long term (10 – 15 years +), how to set up an income producing portfolio in these low-yield times, how baby-boomers can still retire even after the dotcom crashes through using the right steps, and finally, how millennial and Gen Xers should be saving, investing and living their lives responsibly throughout their lives (their 20s, 30s, 40s….). This final book goes through a series of steps that anyone should take when designing their savings and investing strategy, so that it meets their short and long-term goals and they can move towards the life they desire.
Most of these steps are not unfamiliar to folks in the FIRE community. As laid out in the book, the six steps are:
- Evaluating your needs before deciding on your investments (what are you trying to accomplish, what are your current assets & liabilities, what are your short term and long term goals, etc.). You shouldn’t just invest in something, you should figure out what you want to accomplish first.
- Your whole portfolio matters. Often folks develop their investments over a period of time (bonds from grandparents, start an IRA at graduation, 401K at 3% match from work, buy some stocks from a friend who is a broker, etc.). An individual needs to consider all of their investments in one “pool” and make decisions based on that (some items are preferable in a tax-advantaged account, some not, etc.)
- Take on risk intelligently. Your stock may have gone up 15% last year, but based on the high risk you took on, it really should have gone up 30%, to compensate (maybe the much safer investment which made 14.5%). Its here they start getting into the use of Monte Carlo simulation to help with investment decisions.
- Diversify. Don’t put “all your eggs in one basket” or you faith in 1 or 2 stocks. There is a wide variety of investment options (stocks, bonds, ETFs, mutual funds, precious metals, real estate, etc.). They go up & down at different rates, and carry different rates of risk. By diversifying, you can reduce risk while keeping investment returns strong. It also makes it easier to sleep at night. Stein and DeMuth are big fans of modern portfolio theory, and demonstrate how a series of investments can earn good returns with reduced risk.
- Use the Monte Carlo Simulator to test drive your portfolio. The book covers the use of the Monte Carlo simulators at www.quantext.com or www.financialengines.com to test out the portfolio. Many of us are familiar with Monte Carlo simulators (see my sidebar for links). The simulators help you see your chances of reaching certain goals with the portfolio you selected. This really is the meat of the book, as it shows in detail how to analyze your portfolio strategy in order to optimize it.
- Do a Portfolio Reality Check. Look at the portfolio in terms of your current life situation (do you have debts you should pay off first, etc.), does the portfolio make sense, will you be able to sleep easily with the results. Take this opportunity to revisit goals and then act.
Other Topics Covered
- Farewell to Bonds? Here the authors cover the use of low volatility stocks with low correlation (i.e. stocks that don’t move much, and don’t move with the market as much) in the place of bonds. They show it across time periods when stocks didn’t do well (2000-2002) and did well (2003-2006). In both, when compared against a 60% bond and 40% stock portfolio, they did well.
- Hedge funds? Use of specific hedge funds to “hedge” against losses and obtain higher returns
- Investing for Income: Most of these topics were covered in their previous book, but the general idea is to use dividend stocks, bonds, and REITs to generate respectable income (instead of having to cash in growth stocks).
Overall, I think it’s a good book, and could be useful for those interested in doing the research to “bump up” their returns.
I would rate in 25 stars out of 5, primarily because most of the topics were covered in the previous 4 books.
Mr. 39 months