Saturday, July 04, 2009

Book Recommendation: Investing?

I have always been of the opinion that saving money for the future is important. Really important. And just recently my wife and I have finally managed to build our savings up to the point where just letting it sit in a savings account feels a bit silly when I know there must be some way to get more than the piddling yields a savings account (or even a CD) can provide. Unfortunately my knowledge of investing was limited to something along the lines of "I hear people invest in stocks." I have recently begun to attempt to remedy this.

Allow me to recommend in turn a book that I just read on the recommendation of JD over at Get Rich Slowly: William Bernstein's The Four Pillars of Investing. It covers the basics of investing and portfolio theory in a manner that manages to be engaging and interesting despite the subject matter. (Okay, the first chapter or two is quite dry, but it picks up quickly after that.) While I am by no means now an expert, I feel like the book has given me a very basic grasp of investment strategy, which is a huge improvement over where I started. I can't recommend this highly enough if you too are reaching the point in your life where you have enough of a difference between income and expenses to know that you should be thinking about investing, and have no clue where to start.

Things it really brought home to me:
  1. Invest young. It will compound into a much larger pile than you think by the time you're ready to retire.
  2. I should really be dumping money into the stock market over the next few years. We're seeing a really epic bear market right now, and buying while prices are low is the way to ensure better returns - as long as you are sure you won't need to touch the money for at least five years, hopefully a decade or more.
  3. Index funds kick the a**es of actively managed mutual funds. All funds not managed by Warren Buffet revert to the mean (market) return over time, and actively managed funds have high overhead, lowering net return. Since you can't beat the market, you want to be the market, by investing in index funds which, by definition, will give market returns (minus minimal overhead, since they are passively managed).
  4. Don't hold too much of your money in stocks. They're too volatile to be more than 80% of your portfolio (at the really aggressive end). If the market tanks at the same time you need some of the money, you want to be able to get it from the bond portion, which should be relatively stable (lower returns, but they will rarely leave you in the poorhouse when the economy goes bad).
The one thing I wish it spent more time on is tax sheltering and what the tax implications of IRAs, Roth IRAs, 401(k), etc are. I'm still clueless on that front, and vague on how one goes about structuring a portfolio such that the retirement (tax sheltered portion) is kept separate from the "general savings" portions. I'm also a bit shy on the tactics of investing - how to implement a portfolio once I've decided what breakdown I want it to have in the long run, since I can't do it all at once with my very limited (at this point) funds. But the fact that I now know enough to ask, and hopefully understand the answers, is a big step. The book was well worth the $20 I spent on it.

On a related note, Econtalk a couple years ago had a podcast with John Bogle (founder of Vanguard) about his invention of the index fund. Fascinating, and a good basic intro to index funds in general.

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