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Soundview Executive Book SummariesThe Way Smart Money Invests Today
Money management expert Larry Swedroe argues that investors who try to time their investment decisions so they are buying when the market is undervalued and selling when the market is overvalued are playing a loser's game. In the 2005 edition of The Only Guide to a Winning Investment Strategy You'll Ever Need, he explains that he is a firm believer in the principles of modern portfolio theory (MPT) and the efficient market hypothesis (EMH). Swedroe writes that he has worked for years to help investors understand how to apply the principles of MPT and EMH to their own unique circumstances and personalities so they have the greatest chance of reaching their financial and life objectives.
When he sought out a book that would help him explain the principles of MPT to investors, he found none that addressed these three fundamental questions:
- How do investors generally believe markets work?
- How do markets really work?
- How can you apply the knowledge of how markets really work to develop a winning game plan tailored to your unique situation?
Since no book was available that answered these questions, he published the first edition of The Only Guide to a Winning Investment Strategy You'll Ever Need in 1998. In it, Swedroe laid out the case against active management and for passive management, explaining why diversification is the winning strategy.
Over the past eight years, he has learned even more as a financial adviser about passive investment vehicles that provide lower cost and more tax-efficient ways to invest, as well as the major changes in the tax law. While he has included all of these issues and new ideas in the 2005 edition of his book, he explains that one message has not changed: Passive investing - and not the active investing that involves individual stock picking and market timing - is the surest way to enable an investor to achieve his or her financial goals.
Informed investors are better investors, Swedroe explains, so he has broken down his principles using familiar analogies to make the difficult concepts they contain more clear and easy to understand.
The first part of The Only Guide to a Winning Investment Strategy You'll Ever Need describes the problems involved with active investment strategies and why those strategies are called "the loser's game." The second part presents the foundation of MPT and how markets really work. By providing readers with a theoretical understanding of the interaction between risk and return, Swedroe offers them the skills they need to make the markets work for them. These skills include those recommended by "the brightest academic minds in the field of economics." Swedroe points out that the passive investment strategy is based on research that was awarded the Nobel Prize in 1990.
Tolerance for Risk
Once Swedroe has logically explained why passive investment strategies are superior to active investing strategies, he describes several model portfolios ranging from the conservative to those that present more risk and expected return. Next, he provides an investment approach that helps investors choose a portfolio that best meets their objectives and tolerance for risk. He adds that "there are no right portfolios, just one portfolio that is right for each individual - based on his/her own unique ability, willingness and need to take risk." The models he offers are starting points at which investors can begin to consider and decide how much to allocate to each asset class.
Swedroe concludes his book by explaining how portfolios should be maintained and a winning strategy can be implemented. He writes that rebalancing a portfolio and restoring it to its original asset allocations and risk profile are integral to the winning investment strategy. He also discusses the merits of using a financial adviser and a checklist to help investors do it.
Why We Like This Book
Larry Swedroe offers investors a rational approach to investing that is diligently described in clear examples and conversational language. His grasp of the modern portfolio theory and his focus on debunking popular investment myths make his book an important guide to steady portfolio growth and realistic investment opportunities. Copyright © 2005 Soundview Executive Book Summaries