Book Review: The Elements of Investing

Whenever 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 giants 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 imparts 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.

[Via http://canadiancouchpotato.com]

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