My column readers know that I regularly review the latest books in the field of personal financial planning. I’m trying to load everything that’s featured in this genre, but I’ll only review books that I think are useful to my readers. Today’s column reviews “How to Don’t Invest” by Barry Littlez (Harriman House) “How to Avoid Wealth-Destroying Ideas, Numbers, How to Avoid Actions and How to Avoid them.”
Ritholtz is co-founder, chairman and chief investment officer of Ritholtz Wealth Management LLC, a financial planning and asset management company that manages over $5 billion.
In the first three sections of the book, Ritholtz examines the bad advice investors receive. By reading these sections, I am reasonably certain that you will recognize many of the reasons why you are not as successful as you have been. He points out that much of the advice he hears from journalists, fund managers and forecasters is inaccurate, as it is based on the “benefits of hindsight.”
In the fourth and final sections, Ritholtz explains what he calls “good advice.” I will emphasize this part of the book. Because he believes that the 10 steps he outlines will help you become a more effective investor.
The first one sounds obvious: avoid mistakes. But this is more difficult than it looks. Ritholtz compares annual returns for 10 and 20 years for each asset class from 2002 to 2021. He points out that if you had invested in the S&P 500 index fund for 10 years, your annual return would have been 16.5%. However, the average investor received a return of 8.7% over that period. Over the course of 10 years, he also includes 12 other well-known indices. These indices were not executed like the S&P 500.
In a 2020 comparison, the S&P index showed a return of 9.5%. The average investor had a return of 3.6%. The REIT Index had a return of 11.2% over 20 years, which was the best. (For 10 years, 12.2% of REIT index returns were returned.)
What do these findings tell us? Ritholtz concludes: “Don’t confuse the actual reasons for changing your portfolio and the daily noise.”
My conclusion: If you are investing in stocks as a significant portion of your portfolio, why don’t you invest 100% of your stock in an S&P index fund and leave it there as a long-term investment?
His second step is to recognize your advantages and make the most of them. For example, as an individual investor, you can’t have any advantages, but you can keep costs low.
Third, create a financial plan and stick to it. If you need help, find someone who is a qualified trustee to work with. The trustee is a financial professional legally and ethically necessary to act solely in the best interests of the client. I think this is one of Ritholtz’s most important recommendations.
And here’s the remaining 7 steps quick take:
– To index the fund (mainly). The best strategy for long-term success is to own a wide range of low-cost equity indexes.
– Bonds to offset income and equity volatility. Primarily the Ministry of Finance, investment grade corporate bonds, municipal bonds, and inflation protection securities or tips from the Ministry of Finance.
– Please recognize taxes. Consider direct indexing to reduce capital gains and reduce concentrated positions.
– If you are considering alternative investments, you are skeptical of everything except the best. Please use it if you can access the top. Otherwise, be careful.
– Solve your money wisely. Buy time, experience, joy.
– Something better. Understand what is in your control and not. Example: manage financial planning, asset allocation and get excellent legal, tax, real estate, and financial advisors. Your Management: Market Volatility, Interest Rates, Elections, Corporate Revenues, and Federal Reserve Decision.
– Understand what it takes to be rich. Ritholtz explains classic strategies to enrich the market, including how difficult each one is and the like, the chances of success. I agree with him that he has a low chance of becoming rich.
Ritholtz’ conclusion: He is very confident that if you implement these ideas (his 10 steps), you will be wealthy and happy about your financial situation and will be much less stressful.
My conclusion: I think following the steps he recommends will make you a more effective investor.
Elliot Raphaelson welcomes your questions and comments at rapelliot@gmail.com.
