“The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between” – A Book By William Bernstein

For those who have read Bernstein’s earlier books his latest is a timely reminder of basic principles of investing are all too easily forgotten by the 24/7 onslaught of media and web-driven dissemination of financial information or what some term “financial pornography.” Words: 576

In further edited excerpts from the original review* Jonathan Chevreau (www.financialpost.com) goes on to say:

“Hardened Criminals”
William Bernstein, author of a new book entitled “The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between” is a committed indexer and profoundly dubious about high-cost solutions like actively managed mutual funds, wrap accounts or hedge funds. In fact, his attitude to the financial services industry is downright hostile: he suggests more than once that retail investors won’t go too far wrong by considering any stock broker, financial advisor or insurance salesperson a “hardened criminal.” That’s with respect to evaluating whether their interests are more aligned with their own retirements or that of their clients.

Muggers and Worse
Considering how many modern financial books are written by financial industry insiders, Bernstein’s contribution is much needed but will no doubt be viewed with dismay by those who are themselves hard working honest financial industry participants. His chapter Muggers & Worse damns all or “most” of stock brokers, mutual fund sales people, investment newsletters, and hedge funds. Bernstein eliminates from serious investor consideration almost all publicly traded mutual fund companies, leaving his mostly American readers a field of just Vanguard Group and Fidelity Investments, with a half-endorsement of indexers Dimensional Fund Advisors (DFA).

While the book’s title is unwieldy, and will no doubt be contracted to just “The Investor’s Manifesto”, the subtitle does convey the gist of the book. I was expecting a little more presentation of possible future scenarios but found that in fact Bernstein believes low-cost, diversified index-based investing will serve investors no matter whether they enjoy prosperity, economic catastrophe or the more likely middle path between these extremes.

The Enemy in the Mirror
Bernstein reminds us that risk and return are inextricably related but that stocks historically have had higher returns than bonds. That’s the “Nature of the Beast” — his second chapter — but investors also face “The Enemy in the Mirror”: themselves (Chapter 4) and their counterproductive human emotions.

In the realm of portfolio management, Bernstein’s mantra is to keep it simple. On page 89, he suggests a set-it-and-forget it portfolio could consist of just two or three asset classes. Stocks could be split between an index fund or ETF that replicates the Total U.S. Stock Market (70% weight) and 30% Total Foreign Market. Then, assuming the classic asset allocation of 60% stocks to 40% bonds, this would break down to:

Three asset classes and you’re done:
- 42% Total U.S. Stock Market
- 18% Total Foreign Market
- 40% Total Bond Market.

It doesn’t get simpler than that. For those who think this may be overly simplistic or amateurish, Bernstein bruskly advises readers to “get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it.”

Still, he goes on to slice and dice portfolios into smaller components for the benefit of readers who demand more but Bernstein makes it clear this will entail more work and runs the risk of making things worse rather than better.

*http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2010/01/06/the-investor-s-manifesto-from-armageddon-to-prosperity.aspx#ixzz0fMykAFtr

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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