Review of Rethinking Investing
Rethinking Investing contains all you need to know about investing wisely and setting yourself on the right path to a secure financial future. You will also learn how to avoid the common errors that can ruin any financial plan. I would like to see if I am applying his recommendation in the book.
The Important Points
The author discusses 9 investment-related issues that can dramatically increase investment success at the beginning of this book. For Malaysians, I think the relevant ones are:
1. Recognise the power of compounding;
2. Start saving as much as possible as early as possible;
3. Use broad-based index funds and exchange-traded funds as the principal investment choice;
4. Avoid pitfalls identified by behavioural economists that regularly cause serious harm to investors’ results and diminish significantly the average individual investor’s return;
5. Minimising costs, fees, and taxes;
6. The concept of total financial portfolio;
7. Adopting a sensible spending rule to smooth year-to-year payouts from your investments, which may reduce or eliminate the traditional “stabilising” role of bonds.
Index Investing
The author recommends index investing as the primary investment choice and I agree with him. Nonetheless, index investing was not popular at the beginning. One reason is semantic. Index investing used to be called passive investing, in contrast to active investing by managers who were choosing individual stocks and other assets. We all want to be recognised as active. No one wants to be known as passive. But after the benefits of index investing is proven, it becomes mainstream.
Human Behaviour and Investing
There is a chapter about behavioural economics which is very informative. We should try to avoid human frailties discussed in this chapter.
The right way of investing is to focus on minimising errors and improve the decision-making process.
The 3 strengths for successful investing are:
1. Personal discipline to maintain a long-term focus when surrounded by many tempting and compelling temptations;
2. Ability to understand the great advantage of benign neglect – doing less – because most actions by most investors and most investor helpers do more harm than good;
3. Ability and discipline to think and act consistently according to your long-term plan, particularly in periods of general excitement or uncertainty.
Personal Investment Plan
When we talk about investment, we cannot get away from investment plan. The most important positive step all investors should take is figuring out what your objectives as an investor are—offensive and defensive—and then designing your long-term plan in ways that maximise your pro and minimise your con.
The plan should consist of 3 parts, namely portfolio allocation, savings plan and spending rule. Portfolio allocation is the proportion of different assets in your portfolio while savings plan is your plan to save money. The author recommends to save as much as early as possible. Spending rule will be discussed below.
Total Financial Portfolio
The author introduces the concept of total financial portfolio, which encompasses all your assets, including your stable assets such as your home, EPF, and potential inheritance. These stable assets are considered as bond equivalents. Generally, he eschews bonds, except for certain situations e.g., money is needed in the near or intermediate future (2 – 6 years).
Spending Rule
An effective spending rule converts the price-volatile returns of the market into far smoother, more predictable stream of payouts and enables your long-term investment strategy to focus on achieving higher long-term returns. Below is the step to devise a spending rule:
1. Average the year-end values of your assets over the prior several years (preferably more than 5 years) to dampen the impact of market fluctuations.
2. Calculate what would be a prudent withdrawal of the averaged assets—likely 4–5%—to determine what dollar amount you can prudently withdraw from your current portfolio each year to cover some of your expenses.
Conclusion
Rethinking Investing is indeed a very short book. The author is straight to the point and provides sound advice. I am practising quite some of his points and will try to apply the spending rule in the future.
Read the summary if you are really short of time but I think it would not take up much of your time even if you read the whole book.
One-sentence summary for Rethinking Investing
To succeed in investing, we have to properly plan for saving, investing, and spending.
Quotes
- Successful investing is simple—but not easy.
Rating
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