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Pointers from Book: The Smartest Investment Book You will ever read - Daniel R Solin

If you are someone who does not follow stock market, but are interested in making money from investment, this book will be your friendly guide. I have made some notes form these book, which would help if implemented.


Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of fools, but fools do not imitate successes of the wise.

Determine the correct asset allocation, i.e. the division of a portfolio between stocks and bonds. Buy a globally diversified portfolio of 3 low cost index funds directly from vanguard or fidelity. Rebalance periodically to keep the asset allocation intact.

The investors chief problem and even his worst enemy is likely to be himself. Most individual investors would be better off in an index mutual fund.

The first key to wisdom is defined, of course, as assiduous and frequent questioning. Low risk portfolio has the highest percentage of bonds and the high risk portfolio has the highest percentage of stocks. Smart investing portfolio: it consist of 3 types of index funds-

  1. An index fund of US stock market.

  2. An index fund of International stock market.

  3. An index fund of US bond market.

Over long term, smart investors will consistently outperform those who attempt to beat the market.

Benchmark Index fund: S&P 500, the index of USA largest 500 companies by market capitalization.

Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. The investors who engage in the most trading are the ones who most significantly underperform the market. In short, trading is hazardous to ur wealth. Investors who frequently shift from one stock to other stock actually detract from performance by incurring transaction costs.

Make proper asset allocation ur new investment goal. Once u accept the premise that asset allocation is far more Imp than stock picking or market timing, ur financial life becomes stress free walk and ur money will start to grow.

Some key terms to understand as we move ahead:

Asset Classes are the 3 major groupings under which financial assets fall: stocks, bonds and cash.

Asset allocation is the way that asset classes are divided up in an investment portfolio. Depending on investors time horizon, risk tolerance, he will allocate the money in portfolio in different proportions among stocks, bonds and cash.

Risk management refers to the techniques that can be used to reduce the risk in an investment portfolio. Risk is the measure of the probability of potential outcomes and the change in portfolio value that would occur if those outcomes came to pass.

Financial knowledge is critical skill needed for good investment. No one can predict the market timings. Morning star rating is of no value for the smart investors, who invest in the index funds.

Prospectus is a document that should be given to a potential investor before he or she makes an investment. Every mutual fund has a prospectus, as does an IPO stock. The prospectus defines the risks of the potential investment, as well as the investment philosophy and the capitalization of the stock or mutual fund the investor is being solicited to invest in. Investing is a strange biz. It’s the only one we know of where the more expensive the products get, the more customers want to buy them.

Standard deviation measures the volatility of a security or of a portfolio of securities. Specifically, it measures the fluctuation of stock prices without regard to direction. Standard deviation is measured using a statistical calculation. It is important for every investor to know and understand the significance of the standard deviation for his or her investment portfolio.

Conservative investors should have Standard deviation no higher than 8%.

Moderately aggressive investors should have Standard deviation no higher than 15%. No one should have std deviation of more than 30%.

Investment policy is the foundation upon which portfolios should be constructed and managed.

Smart investors understand that an appropriate allocation of bonds in their portfolios is critical to risk management. Bonds are more steady, less volatile and must be part of ur portfolio. Smart investors should never lose sight of the downside risks. Investing in the funds that match the broadest stock market indexes and who can commit without reservation to holding those funds for the long term can safely hold large percentage of stocks in their portfolio.

Have a portfolio with ideal asset allocation of 60% stocks and 40% bonds for balance investment.

Smart investors does not invest in any funds with A, B and C classes of shares. But if u still invest, only invest for long terms with A class shares. Never ever invest in class B and C shares. For long term investors who have more than $50k to invest, A shares are least costly. While there is an up front fee, over time lower annual marketing fee more than offsets the up front cost, and on investments is more than $50K, the upfront load is reduced.

Smart investors never buy house funds, or any mutual funds which claims to beat the benchmark index fund.

Beware of margin: it may be disastrous to your financial health. Margin increases risk. People want to maximize their return so they borrow to buy. It can work, as long as market does not go down. Never buy in margin.

Every stock in the market is either value, growth or combination of value and growth.

Growth stocks are stocks in companies that have rapidly growing sales, revenues and profits and which plow most of those returns back into growing the company rather than paying dividends to shareholder.

Value stocks are stocks in companies who perceived value as assigned by the market is below the value assigned by the particular analyst. Warren buffet have made career of being value investors, finding undervalued investments and taking large stakes in them.

It’s always great to hold a stock with half growth and half value.

Investing all ur assets in anyone sector of the market is not recommended. Have a balanced portfolio.

Smart investors pay no attention to the predictions made in the financial media and never use them as a basis for their investment decisions.

Only large investors with more than $1million invested assets, pension plans and trusts should or can afford to pay for investment advice. Dimensional fund advisors can help with real value if ur money by investing passively with variant index funds. Use web: to find list of advisors. DFA and it’s network of economic and finance consultants, usually who are uni professors or noble laureates, offer passive portfolios that are slightly different than ETFs and typical index funds offered by commercial mutual fund companies. DFA offers fund that concentrate on more precisely defined sectors of the market than other fund families.

One limitation with vanguard or fidelity is that they don’t offer index funds in international small cap and international value markets.

Think of ice cream:

  1. With Vanguard index fund: which holds all the stocks in the S&P 500 index for the large cap sector in US stock market. Is vanilla form.

  2. Chocolate ice cream: a fund that invests in the S&P 500 index for the mid cap sector in US stock market.

  3. Strawberry ice cream: a fund that invests in the S&P 500 index for the small cap sector in US stock market

  4. Other flavors which invests in other index’s.

  5. DFA has index funds that invests in stocks of all sort of exotic flavors or market segments.

With investments less than $1million, advisors fees and transaction costs is not worth it the profits. Smart investors must take self help investment strategy into index funds and win over long time by avoiding traps from fund managers and brokers fees, transactions costs.

No matter what, buying stocks by buying the market through an index is a good idea.

4 steps process:

  1. Decide on ur asset allocation.

  2. Open an account with fidelity or vanguard or any brokerages account like robinhood.

  3. Invest the stock and bond portions of ur portfolio in the funds as follows:

  4. Rebalance ur portfolio twice a year to keep ur portfolio either aligned with ur original asset allocation or to a new asset allocation that meets ur changed investment objectives or risk tolerance.

Over 90% of investment returns are determined by how investors allocate their assets vs security selection, market timing and other factors. A number is factors go into determining ur optimal asset allocation including ur age, ur health, whether or not u need income from ur portfolio, life changing events like death, divorce etc..

Formula for asset allocation: 100- ur age

Eg 100-30 means 70% stocks and 30% bonds.

S&P 500 index does not include small stocks. Since small stocks should be part of an investors exposure to the equity market, S&P 500 fund by itself is inadequate. So index fund having S&P 500 index and small stock index fund is good target fund to find and invest. Here’s are these kind of options,,

ETFs are traded on exchange and charge very low fee which makes them reasonable alternative to index funds.

Always rebalance ur portfolio twice a year., which means if ur asset allocation is 70/30 stocks to bond ratio, then if it goes over 70 or less than 70 % in stocks, then need to readjust ur portfolio either by buying or selling accordingly. If u don’t want to carry out ur own rebalancing, u can simply invest ur retirement savings in one of the vanguard target retirement funds.

Thanks for reading till end, will post more notes from different books explored by me.

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