Ok, so The Informed Investor by Frank Armstrong III has been sitting on my nightstand, often being overlooked for my Car & Driver magazine for a couple months now. Not because it is a bad book, but mostly because all the money I plan on investing for now in stocks and bonds is already invested, and because the book covers a lot of stuff that I’ve already read about in books like The Four Pillars of Investing and A Random Walk Down Walk Street. Accordingly, this book is aimed at the general non-financial public who is wondering on how to invest their retirement money.
Although I think the book tries to cover a bit too many areas to be a primer, it ends up being a book I’d keep around as a reference for the same reason. Here are the major areas that I think it covers well:
- The greater the risk, the greater the return (over long periods of time). There is no free lunch! Examples: Bank Account – very low risk, very low return. Investment-grade bonds – low risk, low return. Large-cap stocks – high risk, high return. Small-cap stocks – even higher risk, even higher return. The books goes into this in detail, telling you exactly what you should reasonably expect each of these asset types to return based on history, as well as the risk involved.
- Modern Portfolio Theory (MPT) & the Efficient Frontier. I think this book has done the best job of any book I’ve read so far in describing MPT and the Efficient Frontier. In short, MPT says that if you want a certain return, owning the proper asset allocation mix can give it to you for the least risk. Or, for a given amount of risk, you can maximize the return (This maximum return is the most efficient frontier.). He then goes into how to build and implement such a portfolio for yourself.
- Index funds and Index ETFs are good things. Active management very very seldomly justifies the extra expense. When it does, it’s probably luck.
- Much of Wall Street is based on commissions. Anyone named a broker, financial planner (other than fee-only financial planner, which Armstrong is), investment advisor, financial advisor, is most likely based on commission. They are going to push whatever pays them the most. The book goes into this harmful conflict of interest and what to watch out for.
Overall, this book is not terribly complicated, but there is a lot of information. I would try to digest it for a little bit day over the course of a couple weeks. In the end it will allow you to build a portfolio which, becaused you are now “informed”, you can be comfortable with even through the ups and downs. You don’t have to be one of those guys staring at the stock tickers with upset stomachs, even if you do let someone else run your account. If you have the thirst to learn more and empower yourself, I recommend it.
By Jonathan Ping | Book Reviews | 5/8/05, 11:14am