By Jeff Doblin
The market is saturated with books about investing, but what should place The Investment Answer by Dan Goldie and Gordon Murray at the top of any investor’s reading queue is the ease in which the authors convey their thoughts about keys to successful investing. The book highlights five major investment decisions faced by individuals: 1) whether to do everything on your own, 2) asset allocation, 3) diversification, 4) active versus passive and 5) rebalancing.
The Do-It-Yourself Decision
The authors compare choosing the do-it-yourself approach with making a medical decision without consulting a doctor. If more people viewed working with a financial advisor in a similar vein as seeing a doctor, we would either have far more people using financial advisors or far less people visiting doctors. Note that when this book was written, robo advisors were not as prevalent as they are today.
When choosing a financial advisor, an investor should assess the investment philosophy of the firm and the advisor and consider whether he or she feels a personal connection as well as a sense of trust with that advisor.
The Asset Allocation Decision
According to the authors, asset allocation is the most important investment decision that an investor can make. Risk is the primary driver of investment returns, and it manifests itself via the mix of equities, fixed income and cash that an investor has in his or her portfolio. The authors emphasize that there are no low-risk/high-return investments.
Equities should provide an investor with higher expected returns in the long run, but of course, not without additional risk. While bonds should be viewed as a tool to reduce volatility, the percentage of cash in a portfolio should be positively correlated to how quickly one might need access to these funds.
The Diversification Decision
With this decision, the authors discuss moving from having a basic understanding of diversification to adopting effective diversification. It is important to consider how different asset classes relate to one another in a portfolio.
Some of the asset classes that the authors believe should merit inclusion in a portfolio are domestic equities, international equities, domestic fixed income and international fixed income. An effectively diversified portfolio should be viewed as a whole instead of fixating on different components.
The Active versus Passive Decision: Understanding Evidence-Based Investing
Active investors try to time the market as well as pick the right stocks. The authors compare picking stocks to making a bet. Conversely, evidence-based investing is based on decades of academic research and seeks to capture the returns of the market. Instead of competing against thousands of market participants, an investor following an evidence-based approach takes a long-term perspective and remains disciplined, increasing the odds of achieving his or her long-term financial goals.
The Rebalancing Decision
Through rebalancing, it is possible to ensure that a portfolio maintains the proper risk tolerance. This is accomplished by selling securities that have outperformed (overweighted) and investing the proceeds in securities that have underperformed (underweighted). Because the rebalancing process is automated, it is free of emotions.
I found Dan Goldie and Gordon Murray’s road map for investors to be incredibly helpful. As long as investors are willing to take a long-term perspective and remain disciplined, they can increase their odds of achieving their financial goals while taking the right amount of risk. The question readers should be asking: Do they have the patience and discipline to follow along?