The Elements of Investing is obviously about investing. This is the updated version in 2013. The first edition was published in 2010. The authors aim to provide individual investors the basic principles for a lifetime of success in saving and investing.
Burton G. Malkiel is an American economist and writer. He is the Chemical Bank Emeritus Chairman’s Professor of Economics at Princetown University. He has served several roles related to his expertise in government, universities and major corporations.
Charles D. Ellis is a consultant to large public and private institutional investors. He is the founder of Greenwich Associates, an international business strategy consulting firm. He has served as a board member, chair of committees, director and trustee of several different organizations. Mr Ellis is also a prolific author, with 17 books under his belt.
The Elements of Investing has an introduction, 6 chapters, and a summary chapter. There is a preface for this second edition by George U. “Gus” Sauter, ex-Chief Investment Officer (CIO) of Vanguard and foreword of the first edition by David F. Swensen, CIO of Yale University.
Chapter 1 is Save. This chapter is about the preliminary step before we can start to invest.
Chapter 2 is Index. The authors introduce the concept of indexing here and explains why they think it is the best investment strategy.
Chapter 3 is Diversify. The importance of diversification is discussed in this chapter.
Chapter 4 is Avoid Blunders. The authors explains the mistakes that people normally do in investing and how to prevent them.
Chapter 5 is Keep It Simple. This chapter is mostly about asset allocation.
Chapter 6 is Timeless Lessons for Troubled Times. This is the new chapter in this edition.
There is an appendix on saving taxes legally but the lessons are not applicable in Malaysia.
The Elements of Investing teaches us the lessons to achieve a comfortable and secure retirement.
The first step is to save. The book provides practical ways to increase our savings. Furthermore, the authors advise us to never incur credit card debt as it is destructive to our finances if it is not managed properly. However, the main purpose of saving is to empower us to keep our promises, not about making sacrifices.
Before spending our money, the authors advise us to think about the opportunity cost. Think of every cent we spend as the amount it could grow into when we retire. Thus, it is better to spend on what is necessary and forgo the unimportant stuffs. Minimize tax legally is also a way to save and invest.
Quoting the authors: “If you need further discipline, remember that some say the only thing worse than dying is to outlive the money you have set aside for retirement.”
The best strategy of investing in the authors’ opinion is indexing. There is no need to beat the market. Do not chase for hot performance as this represents a costly and self-defeating exercise. On the other hand, the time to buy is when the stocks are on sale. In short, the authors are against market timing. Volatility can enhance returns for the disciplined long-term investor who is saving regularly. However, the volatility might also cause investors to refrain from buying equities regularly. Thus, to have success in investing, do not let volatility affects our plan.
They recommend rebalancing our portfolios once per year. During rebalancing, we could probably ignore small changes (+/-10%).
In conclusion, the four elements of investing are summarized as diversification, rebalancing, dollar-cost averaging and indexing. The secrets to success in investing is the same as in so many human endeavours: patience, persistence, and minimizing mistakes. Thus, when we are able to practice these elements consistently, we should be able to profit in our investment journey.
- Money makes money. And the money that money makes, makes money.
- Luck in picking the right time to invest is all well and good, but time is much more important than timing.
- The lower the stock prices go, the better the bargains if you are truly a long-term investor.
- The only way to get rich – unless you inherit or marry a fortune or hit the lottery – is to get rich slowly.
- The secret to success and enjoyment in so many parts of life is to know your capabilities and stay within them.
Interested in The Elements of Investing?
You may get the book from Kinokuniya Malaysia through the link below*.
*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.