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Review: The Only Guide To Winning Investment Strategy You'll Ever Need by Larry E. Swedroe

The Only Guide To Winning Investment Strategy You'll Ever Need: Index Funds and Beyond--The Way Smart Money Creates Wealth TodayThe Only Guide To Winning Investment Strategy You'll Ever Need: Index Funds and Beyond--The Way Smart Money Creates Wealth Today by Larry E. Swedroe
My rating: 3 of 5 stars

Swedroe makes a compelling case for using diversified, global, passive asset class investing, based on Modern Portfolio Theory. He explains to the average investor how markets work, why they work that way, and how to make them work for you. He shows how to construct a portfolio based on academic theory and statistical evidence compiled from many studies covering several decades. I don’t agree that this is the only investment guide you’ll ever need, but it’s a good part of your knowledgebase. You should also read some of the investing books on my Finance shelf on Goodreads.

Swedroe says that the question of market efficiency is irrelevant. The real question is: can active management overcome its expenses and add value over passive investing? The evidence says no. Neither fundamental nor technical analysis has proven to outperform the market.

Swedroe strongly advocates overweighting asset classes with higher risk premiums, such as small caps and value stocks. My investment philosophy is largely based on John Bogle’s, founder of Vanguard. In his The Little Book Of Common Sense Investing (my review) he says he’s skeptical that small and value stocks outperform the broad market over the long-term. He says that even if they do outperform, they carry so much additional risk that investors would be better served by a portfolio based on market cap weighting. See also the Bogleheads entry Value Tilting - Stock and Bogle’s 2002 talk “The Telltale Chart”.

I read this book because it was recommended by The Index Investing Show, an investing podcast I used to listen to regularly. Below are my notes from the book.

Efficient Markets Theory and Modern Portfolio Theory

Q: If markets are efficient, why do valuations fluctuate so much? A: The market has expectations. When it receives new info, it revalues securities. The volatility is evidence that the unexpected frequently fails to occur. Market efficiency isn’t about valuation; it’s about how quickly prices incorporate available info.
  • Small cap and emerging markets are as efficient as large cap markets. Active managers of small caps and emerging markets do no better than active managers of large caps.
  • The higher the risk, the higher the reward. Value outperforms growth, even though value has lower volatility. The smaller the market cap, the greater the return.
  • Compound growth rate matters more than average annual return.
  • Volatility decreases returns.

Bond Investing

  • Active bond investing is as foolish as active stock investing; interest rates are as unpredictable as stock prices.
  • Don’t invest in bonds with maturities beyond 5 years. After 5 years, higher risk isn’t compensated by higher returns.
  • Invest in only government-issue and investment grade (AA+) corporate bonds. Riskier bonds don’t provide enough compensation to be worthwhile.

Five-Factor Model Risk Premiums

  • large cap: 5%
  • small cap: 10%
  • value: 10%
  • small cap value: 15%
  • short-term fixed: 0%
  • long-term fixed: 1.5%

Building a Portfolio using Modern Portfolio Theory

  • Limit international stocks to 30% of portfolio and emerging markets to 6% to reduce event risk of foreign political or economic instability.
  • Any cash not needed for 10+ years should be in equities.
  • Tax-exempt securities are usually better than taxable ones above the 28% tax bracket.
  • Small cap funds should have an average market cap of $100-150 million.
  • An advisor can be worth more than their fee by providing access to institutional-style funds, and by providing advice.

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