If you are looking for a get-rich-quick method to investing, you won’t find one in William J. Bernstein’s fifth book, but rather quite the opposite. Bernstein’s “The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between,” will tell you how not to die poor.
Bernstein, a neurologist-turned-financial-theorist most widely known for his contributions to Modern Portfolio Theory, has a long-term outlook on investing. His book is geared towards the everyday investor saving for retirement.
It is an easy read – less than 200 pages – and illustrates through investment history, theory and practice how risk relates to return. While Bernstein thoroughly fleshes out how the two go hand-in-hand, the general idea stressed is that when times are good, there is a lower rate of return than when times are grim. This book then goes into detail on the best way to maximize return while minimizing risk.
If you were looking for some stock-picking tips or some insight into how to make money with technical analysis, you will need to look elsewhere. But if you continue reading, Bernstein just might convince you that those “sexy” investment strategies will only leave you sinking in losses. How you allocate your assets will determine your returns.
There’s a high probability that you’ve already broken one of Bernstein’s tenets and done something like buy stock in Apple Inc. It’s a popular stock, which is why you shouldn’t buy it, Bernstein argues. In fact, you should not invest in growth stocks, but rather look for value stocks that you won’t be bragging about to friends. Why? Because “boring” companies need to perform better to attract investors by delivering higher returns.
That is not the only advice that leaves you wondering. With China’s incredible growth, an investor might want to get in on the action. But if you do, you could find yourself losing money instead.
“China’s economy has been growing at a blistering 9 percent real rate per year for more than two decades,” Bernstein writes. “Yet between 1993 and 2008 investors actually lost 3.3 percent per year in Chinese stocks, even with dividends reinvested.”
Bernstein also suggests dumping the stock you own in the company where you work. If the company goes under, you’ll get hit twice. Case in point: Enron.
Another no-no: you shouldn’t own an all-stock portfolio unless you can stomach losing nearly half of it when the economy goes south like it did in 2008. And if you think it won’t happen again, Bernstein says you’re mistaken.
Since no one can predict the future, how should you invest? Bernstein preaches diversification. He advises investors not to try to out-predict professionals on Wall Street or large hedge funds because you will inevitably lose.
Plus, most people invest on emotions, and human emotions are “maladaptive” to rational investing, Bernstein points out. Hiring someone to do your investing for you is not such a smart idea either. Financial advisors are expensive, paid for with your money, and they don’t need more than a high school degree to land the job.
Bernstein writes that before you invest in anything, save enough money to sustain your lifestyle for six months. From there, he recommends investing in a diverse portfolio comprised of stocks and bonds through passively managed index funds. It may sound like investing-made- simple, but Bernstein’s argument for this approach is thorough and convincing.