The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk [Hardcover]

But Bernstein's book has one glaring failing. In the last year, the tools have become available for individual investors to pursue exactly the strategy Bernstein advocates with great ease at exceptionally low cost. But Bernstein hardly discusses these tools, and fails to acknowledge their advantages.

These tools are Exchange Traded Funds (ETFs). If you look at Barclays I-shares (there's a web site devoted to them), for example, you'll find a complete set of exchange traded index funds covering US and foreign markets, individual sectors, and divisions of the market by market cap and style (such as small cap/large cap, growth/value).

ETFs offer compelling advantages to individual investors. They are:
(1) ETFs have lower expense ratios than mutual funds. The Barclays I-shares S&P 500 ETF charges 0.09% a year in fees, compared to about double that for the Vanguard 500 Index Fund.
(2) ETFs are easier to manage from a tax perspective. Don't think this is trivial - it will probably have an immense impact on your after-tax performance. Because ETFs trade like stocks, online brokers ...will show you which lots you have unrealized capital losses on. So at the end of each year you can sell your S&P 500 ETF, realize a capital loss, and put the money into a combination of the S&P 500 Growth ETF and the S&P 500 Value ETF - which amounts to the same thing but allows you to claim up to a $3000 deduction off your tax return. Mutual funds make it much harder if not impossible to track gains and losses and specify individual tax lots for sale.
(3) You can use limit orders on ETFs, which you cannot for mutual funds. Don't think this is an advertisement for day trading - it's not. Following Bernstein's model, you want to trim your asset allocation if one asset rises steeply in price ahead of the rest of your portfolio. Setting Good 'till Cancel limit orders is a great way to keep your portfolio in balance, and to benefit from sharp intra-day movements.
(4) Some of the best online brokers offer portfolio analysis tools that allow you to track your portfolio allocation easily if you keep all your assets in a single account. Since ETFs look like stocks (including the bond index ETFs), it's easy to keep all your assets in a single account. For example, [there is one ETF], which has a bank as well as a brokerage under one roof, allows you to move funds instantaneously between a high interest bearing money market bank account (currently paying about 2.4%) and a brokerage account. This allows you to keep your cash, stock and bond allocations under a single roof, to monitor your total asset allocation, and to move assets from one class to another with ease. In contrast, if you hold multiple mutual fund and savings accounts, it's harder to track your asset allocation and to move funds between asset classes.

The downside of ETFs, compared to mutual funds, is the cost of trading. Online brokerages now charge a [fee for each] trade (ETFs trade just like stocks), so if you rebalance frequently and your assets are not large, you'll want to monitor your trading costs carefully. It may even make sense to use mutual funds instead (you don't pay for buying and selling no-load mutual funds). But for most individuals, I believe that ETFs will prove more profitable than mutual funds, mainly due to the greater ease of tax management and lower expense ratios.

So a discussion of ETFs and a model portfolio using them is the final - missing - chapter of this book. Go read the book anyway - it's a great book. But until Bernstein updates his book, this review - and the free online material at ABetterWayToInvest.com - will have to stand in for that final, missing chapter.