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Review: All About Asset Allocation by Richard Ferri

All About Asset Allocation, Second EditionAll About Asset Allocation, Second Edition by Richard Ferri
My rating: 5 of 5 stars

The best book I’ve read on asset allocation. It’s a practical guide to constructing a portfolio based on modern portfolio theory (MPT). Full of recent data (2010), studies, charts and graphs, it’s relatively easy to read, but better for intermediate investors, not beginners.

Research shows that about 90% of portfolio performance depends on asset allocation. I liked the point that the goal of investing isn't to get rich; it's to not get poor. Ferri’s advice: don’t try to outguess the markets, but control what you can: costs, taxes, and risk. Buy, hold, and rebalance using low-cost mutual funds and ETFs. I’m a fan of Vanguard founder John Bogle and passive investing, so I agreed with most of this book, although I invest more aggressively than Ferri recommends.

I picked up this book after hearing Richard Ferri interviewed on The Index Investing Show.

Lessons
Allocate across multiple asset classes to reduce risk.
Invest broadly within each class to eliminate the specific risk of any single security.
Keep costs as low as feasible, including taxes.
Rebalance periodically (annually).

Early savers (20s and 30s)
6 months living expenses in checking or money market
Short-term bond or CD for large purchases such as home
60-80% stocks and REITs
20-40% bonds

Why not to have 100% in stocks
Most people can’t stomach the volatility.
You need money to move into stocks in down markets.

Early Savers Moderate Basic Portfolio
40% US stocks (total US stock market index fund/ETF)
20% international stocks (total international index fund/ETF)
10% real estate (REIT index fund/ETF)
30% bonds (total bond market index fund/ETF)

Early Savers Moderate Multi-Class Portfolio
US stocks
25% core (total US stock market index fund/ETF)
10% small value
5% microcap
10% real estate

International stocks
5% Pacific
5% Europe - large
5% international small cap
5% emerging markets

Bonds
20% investment grade bonds (total bond market index fund/ETF)
5% high-yield bonds
5% inflation-protected bonds/TIPS

Asset location and taxes
Tax-deferred or tax-free accounts
corporate bonds and bond funds
CDs, agency bonds, mortgages
high-turnover mutual funds
REITs
commodities

Taxable accounts
low-turnover mutual funds, index funds
broad market ETFs
muni bonds

Real estate
A well-diversified portfolio with real estate alongside stocks and bonds has higher returns.
The long-term risk and return on US real estate has been on par with US stocks since 1930.
Use home ownership and commercial real estate investments as long-term investments.
Hold a max of 10% in REITs.

Miscellaneous asset allocation notes
The more asset classes the better, up to about 12. This reduces risk and increases returns.
Include assets with no or low correlation.
Globally, small and value stocks have higher returns due to higher risk. Add a small cap value fund to a total US market fund.
Foreign bonds aren’t worth owning due to high fees.

Skip commodities. They have no real returns; they don’t earn more than inflation in the long term.
Skip hedge funds. They have high costs, lack of diversification, and poor performance consistency.
Investing in collectibles can be worthwhile if done right.
The real after-tax, after inflation return on T-bills is 0.
Use “your age in bonds” as a guideline for the percentage of bonds to hold. Adjust according to circumstances.

View all my reviews

Comments

Rick Ferri said…
Thanks for the great review!

Rick Ferri

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