Global Asset Allocation

If you’re interested in asset allocation strategies Meb Faber’s book Global Asset Allocation is worth a read. Generally speaking it’s short and easy to understand. The first few chapters deal with the basics of investment planning (inflation, historic rates of return of bonds, bills and stocks, etc.). Nothing new, but it lays the foundation for the content that proceeds. Whenever I read Faber’s work he always provides a few illuminating morsels of information that seem so simple you wonder why they haven’t been discussed more broadly. Here’s a few interesting points:

  • There are only two states that any given portfolio or asset can be at: all time highs or drawdowns
  • The traditional 60/40 stock/bond allocation has spent only 22% of it’s time at all time highs and the remaining 78% in a period of drawdown
  • The largest financial asset class in the world is foreign ex-US bonds
  • US stocks represent about half of all global equities

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Markowitz’s Portfolio Selection

Harry Markowitz is often referred to as the father of Modern Portfolio Theory–a collection of mathematical models that quantify the behavior of assets and portfolios of assets. Harry’s work specifically addresses the latter and examines how assets may be combined to reduce volatility and (potentially) increase returns. I briefly alluded to Harry’s work in an earlier article on portfolio construction, but wanted to cover the major points in greater detail.

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Pound Foolish

Helaine Olen’s book Pound Foolish should be required reading for everyone interested in personal finance and money management. The personal finance industry that most of us are familiar with markets itself as an understanding and helpful guide in improving the financial well being of clients and customers. Olen takes issue with this and deconstructs many of the popular channels through which we receive advice. In the process of doing so she shows the industry is often conflicted, unrealistic, deceptive and in some cases just plain wrong. Her work is not a political rant in any sense, but rather a deeply researched and well thought out examination of the financial services industry. After reflecting on my own experiences (see this and this) I found myself in agreement with a majority of what Olen was preaching. A large portion of the industry is indeed incredibly shady.

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When Genius Failed

Roger Lowenstein has perhaps captured the most complete and definitive story of hedge fund Long-Term Capital Management. The firm started out as a small group of well pedigreed and incredibly intelligent bond traders at Salomon Brothers and morphed into a private hedge fund that nearly brought the financial system to its knees in the summer of 1998. While the rise of this firm was spectacular the decline was even more so.

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Against The Gods

Peter Bernstein’s masterpiece Against The Gods is without a doubt one of the great works in business literature. It’s an insightful and illuminating investigation into the meaning of risk and the ideas and techniques humans have developed over centuries to quantify and manage the unknown. Through a comprehensive collection of history and philosophy Bernstein investigates the controversy between two groups that take different approaches to decision making

  1. Those who believe the best decisions are based on numbers
  2. Those who base their decisions on more subjective beliefs about the uncertain future

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Your Money & Your Brain

Wall Street Journal columnist Jason Zweig has written on just about every topic imaginable when it comes to the world of personal finance. His book Your Money & Your Brain covers a gamut of emotions and biases that we’re likely to experience when dealing with money. The major theme, as Zweig puts it

“…our investing brains often drive us to do things that make no logical sense. That does not make us irrational. It makes us human. Our brains were originally designed to get more of whatever would improve our odds of survival and avoid whatever would worsen the odds. Emotional circuits deep in our brains make us instinctively crave whatever feels likely to be rewarding–and shun whatever seems liable to be risky.” [1a]

In other words our minds are still quite primitive. The mental processes and emotions that evolved to help our ancient ancestors survive have resulted in some unintended consequences when it comes to dealing with modern day financial decisions. Using a combination of psychological evidence and easy to understand examples Zweig takes readers through the progression of emotions that they are likely to experience when managing their finances and investments

  • Greed
  • Prediction
  • Confidence
  • Risk
  • Fear
  • Surprise
  • Regret
  • Happiness

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The One-Page Financial Plan

I’ve read a number of books on personal finance, but The One-Page Financial Plan by Carl Richards is without a doubt among the easiest to understand and a great starting point for those new to the subject. Richards is a certified financial planner and Director of Investor Education for the BAM Alliance. He’s also the author of the Behavior Gap website and known for his simple black and white sketches that capture more complex financial concepts*. The technical content of this book is nothing new to those who are familiar with budgeting and investment portfolio construction. What separates Richards’ work from others is the connection he draws between our values and our finances. He does this in a relatively simple and straightforward manner which was something I have not seen before but really connected with.

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