Simple Truths You Must Know When You Invest
Failing to plan is a plan to fail when it comes to investment strategies, according to investment strategist Larry Swedroe. He also writes that your own personal investment plan should be tailored to your own unique ability, willingness and need to take risk. In The Successful Investor Today, Swedroe demonstrates the right way to build, write, implement and manage an investment plan over time. His book explains how investors can formulate a successful investment plan by becoming better informed about their investments and options. By addressing the costly mistakes investors make and presenting an up-to-date winning strategy, Swedroe shows investors how they can reach their financial goals and gradually increase their wealth.
A War for Investment Dollars
According to Swedroe, there are two factions in the war for investment dollars. On one side of the battle are the investment specialists of Wall Street and the media, who put forth the idea that smart people, working very diligently, can uncover stocks that are undervalued or mispriced and can successfully time the market so they are fully invested when the bull rages, and sell just before the bear shows its teeth. Swedroe writes that this art of active management leads to sizable profits for Wall Street and its allies, but is costly for investors.
On the other side of this conflict are those in the academic community of financial economists whose objective is to seek the truth, Swedroe writes. These people also have a few allies in their fight, including fee-only advisors who have adopted passive asset class investing, and a few print media columnists. They also embrace the efficient markets hypothesis (EMH), which is how financial economists explain how markets work, how assets are priced, and how risks and rewards of investing are determined. Swedroe writes that this group has an investment approach that is most likely to produce the best returns for the amount of risk taken.
A Passive Investment Strategy
Swedroe believes in the EMH and the passive investment strategy it entails. His goal is to help investors construct portfolios using only passive investment vehicles that are based on their unique ability, willingness and need to take risk. He offers investors 14 simple truths that can lead them to a passive investing strategy that works for them. These simple truths include:
- Truth 1: Active Investing Is a Loser's Game: It Must Be So. According to the EMH, efforts to outperform the market are highly unlikely to produce returns in excess of the market's overall rate of return because everything currently knowable about a company is already incorporated into the stock price, and additional information will be random as to whether it will be better or worse than the market expects. Swedroe writes that the odds are against active managers.
- Truth 2: The Past Performance of an Actively Managed Fund Is a Very Poor Predictor of Its Future Performance. Swedroe points out that the average actively managed fund has underperformed its benchmark by almost 2 percent per annum on a pretax basis, and using Morningstar's rating system to select future winners, between 1995 and 2001, funds rated one star outperformed funds rated five star by 45 percent.
- Truth 3: If Skilled Professionals Don't Succeed, It Is Unlikely That Individual Investors Will. Individual investors are overconfident of their skills when it comes to choosing active managers who will outperform the market in the future. Swedroe explains that the track record of highly respected professional firms shows that, even with their highly skilled talent and tremendous resources, they still have trouble beating the market with actively managed funds. Of the 355 equity funds that existed in 1970, only169 were left standing as of June 2001. Of the survivors, only nine of them managed to outperform the S&P 500 Index.
- Truth 4: The Interests of Wall Street and the Financial Media Are Not Aligned With Those of Investors. Most investors know very little about how the markets work and the best ways to make them work for them. Swedroe writes that investors, lacking the protection of knowledge, are susceptible to all the investment hype and sales pressure that the investment establishment can put out. He explains that the only people who are enriched by the hype are part of the investment establishment itself.
Why We Like This Book
By showing investors how to create a well-thought-out plan and giving them the tools, discipline and patience they need to stay the course and build their wealth, The Successful Investor Today presents an effective and efficient way to bypass the many investment mistakes that investors continue to make. An investment guru who transmits his numbers into practical tips and tactics, Swedroe offers a plan that is both smart and easy to read.