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It's well known that the technology world is changing at a rapid pace due in part to innovations in computers, the Internet, telecommunications, and biotechnology. It is less well known that the financial world is in a far different place than it was just a few years ago as witnessed by the bursting dot.com and NASDAQ bubbles in March 2000. But even when financial markets change-especially when the change is irrational-investors need to return and hold fast to the basic ...
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It's well known that the technology world is changing at a rapid pace due in part to innovations in computers, the Internet, telecommunications, and biotechnology. It is less well known that the financial world is in a far different place than it was just a few years ago as witnessed by the bursting dot.com and NASDAQ bubbles in March 2000. But even when financial markets change-especially when the change is irrational-investors need to return and hold fast to the basic principles of prudent investing.
Rational Investing in Irrational Times is a timely new handbook for every investor today. Using a question and answer format, rising star Larry Swedroe identifies the many mistakes even the smartest investors make whether markets are strong or troublesome. He attributes almost all current mistakes and losses to investors' human vulnerability (a tendency to stray from proven investment principles), a lack of investing experience, faulty investment strategies, or errors of portfolio development. Unlike most investment books, the author further shows how investment performance can be greatly improved by building a globally diversified portfolio of passive index funds and/or Exchange Traded Funds consisting of multiple asset classes. Apart from offering a winning strategy, Rational Investing in Irrational Times presents an efficient and proven way to avoid the most common (and costly) mistakes investors make.
At the roulette tables, the groom places the five dollars on the number seventeen. Sure enough, he wins $175 on the roll. He lets the winnings ride, wins again, this time collecting $6,126. He keeps winning, and letting the winnings ride, until he's won $7.5 million. He lets the $7.5 million ride - and the ball hits 18 instead of 17. The groom, completely broke, goes back to the hotel room. "How'd it go?" asks the bride. "Not bad," he replies. "I lost five dollars."
Investing in Any Market
The title of Rational Investing in Irrational Times is a bit misleading: This is not a book about how to invest rationally in today's unpredictable markets; it is a book about how to invest rationally in any market. In fact, a more accurate title would have been Why Smart People Make Dumb Investment Decisions.
Author Larry Swedroe, a principle in the investment advisory firm of Buckingham Asset Management, offers a list of 52 costly mistakes - presented in the form of a question - that people make when investing their money. The story of the man in the green bathrobe, for example, illustrates mistake number 13, "Do You Believe You Are Playing with the House's Money?"
The mistake in this case involves what some call "mental accounting," That is, the mistakeof valuing some dollars less than others, and thus wasting them. In the groom's mind, the $7.5 million he wagered was the house's money, not his. Since he was not risking $7.5 million of his own money, he could afford to lose it. The truth, of course, is that the groom did not lose $5; he lost $7.5 million.
Swedroe illustrates this case with the real example of a friend who had the good fortune of buying Cisco stock when it cost $5 per share. Eventually, the stock reached $80 per share. Although the friend refused to buy more Cisco stock - thus acknowledging that the stock might be overvalued - he would not sell it either. Instead, the friend held onto the shares because he believed he had nothing to lose: After all, he had bought the shares at five. Of course, the friend did have much to lose - and lose much he did as Cisco's shares plunged within three months from $80 to $13.
Categories of Mistakes
Swedroe organizes his mistakes into four categories:
Mental accounting - believing that you are playing with the house's money - is a human behavior mistake. So is letting ego dominate the decision-making process (mistake 5); allowing yourself to be influenced by a herd mentality (mistake 6); and projecting recent trends indefinitely into the future (mistake 2).
In the "Ignorance Is Bliss" category are such mistakes as relying on misleading information (mistake 16) and failing to consider the costs of an investment strategy (mistake 18).
Do you fail to tax manage your portfolio throughout the year? Do you rely on market gurus? Do you work with commissioned advisors? These are some of the mistakes (numbers 35, 39, and 41 respectively) that people make when planning an investment strategy.
Finally, mistakes made when developing a portfolio include having too many eggs in one basket (mistake 44) and underestimating the number of stocks needed to build a diversified portfolio (mistake 45).
Why Soundview Likes This Book
Whether you're just starting to explore the stock market, have questions about your past investment choices or want to take advantage of changing circumstances, this highly valuable, well-organized guide will put you on alert to the many mistakes you might be on the verge of making. Keep this one on your shelf. Copyright (c) 2002 Soundview Executive Book Summaries
Posted May 28, 2002
In this, his latest (and in my opinion, greatest) book, Larry Swedroe provides investors with a solid road map for avoiding the common investment mistakes that make it difficult, if not impossible, for them to reach their financial goals. On the Morningstar Vanguard Diehards Forum, we see posts on an almost daily basis from investors trying to recover from the very mistakes that Swedroe's book addresses. Larry's fluid writing style makes for easy reading by both novice and experienced investors alike. This book contains a wealth of solid information. It's a real gem, and should definitely be part of every investor's library. Mel Lindauer, Forum Leader, Morningstar Vanguard Diehards ForumWas this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.