on December 5, 2002
This book makes a compelling case for an approach to investing that won't get your adrenalin running, but will probably make (or save) you more money than any other approach over the long run. Bernstein builds on academic financial theory and historical analysis to argue that you should (a) diversify your portfolio between stocks and bonds, (b) use low cost index (mutual) funds for the stock portion of your portfolio, and (c) rebalance your portfolio periodically to keep your assets in line with your target allocations. And let's be honest - Bernstein is completely correct. If you'd followed his advice, you wouldn't have been caught with a portfolio of tech stocks at the height of the bubble...
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.
on July 29, 2002
There is nothing in this book with which I disagree. My only criticism has to do with readability, an admittedly subjective quality. I read this book after finishing "Four Pillars", and I have to say that the latter is a better written book. If you are into mathematical proof of the principles of index investing, asset allocation and rebalancing, and have a long-term investment horizon, this book is a gem. As a ten year convert to this investing style, I have to say with gratitude that I am glad that I was enlightened when I was. People like Bernstein, Bogle, Malkiel and Swedroe have democratized the investment world to all our benefit.
Neurologist William Bernstein is an unlikely guide to experienced investors with both this comprehensive book and his excellent efficientfrontier website, but he succeeds admirably, perhaps in part because he is a Wall Street outsider with a keen eye for data viewed through a skeptic’s lens.
The Intelligent Asset Allocator - more than a dozen years old now - is very well organized, building logically from broad foundational concepts to practical advice for investors, with an helpful concluding section on further investment resources. Bernstein starts with a clear discussion of risk and return, and then outlines the theoretical (in particular the work of Fama & French) and actual behaviour of multi-asset portfolios. He then covers market efficiency and concludes with practical and precise (he prefers Vanguard whenever possible) recommendations of how best to invest.
Bernstein’s premise is clear from the opening pages, “Asset allocation is the only factor affecting your investments that you can actually influence.” He cites asset classes such as money market, short term bonds, long term bonds, emerging market stocks, and the value and growth options within domestic, foreign, and small company stocks. He notes both the unpredictability of their returns and that past performance is not necessarily a predictor of future performance (at least not over an investor’s time horizon), but nonetheless recommends different asset mixes based on these historic returns and their correlations. How can he not - it’s the central point of his book - though as Bruno Solnik observed “diversification fails us when we need it most” (i.e. in a market crash).
Though Bernstein is careful to highlight the inherent uncertainty in markets and that some of his analysis or recommendations are based on probabilities rather than facts, the book may still leave readers with the unrealistic impression of a paved road to financial success. In fact, it’s closer to sailing to a destination, unsure of the winds and weather, and of our ability to withstand them. As financial weatherman Nassim Taleb has noted, one hundred year storms seem to appear in markets with surprising frequency. To Bernstein, who is very comfortable with a spreadsheet, the forecast is perhaps too analytical and not philosophical enough.
Though much has changed since the book’s publication - it was written before the advent of fundamental indexing, and the number of Exchange Traded Funds (ETFs) available today is as large as the number of individual stocks - its principled approach ensures it stands the test of time well. Mr. Bernstein’s more recent publications are more philosophical and thought provoking, but knowledgeable investors would be hard pressed to find a better, more practical and comprehensive guide than The Intelligent Asset Allocator. An updated edition to include his recent work would be very welcome.
on August 24, 2010
I am happy I bought it. Although a difficult read for the non math-inclined, it has interesting information explained from a statistical point of view. It actually confirms things that I noticed myself along the years, so it did not change my view of investing, just reinforced it. However, it helped me explain some of the things I couldn't understand.
on March 6, 2002
This is an extremely well-written introductory text for the investor thinking about how to allocate assets. There is no filler and no fluff, and everything is to the point.
However, the author's view of allocation seems to me to be too "static," namely, that if you have decided to allocate, say, 50/50 between stocks and bonds, then you don't want to change this ratio simply in response to market conditions. However, everybody knows that at the beginning of an expansion cycle, stocks tend to outperform bonds, and when the Fed is aggressively raising interest rates, then bonds will become safer bets than stocks. In this respect, Martin Pring (The All-Season Investor) and Mark Boucher (The Hedge Fund Edge) offer a more dynamic view of asset allocation to take advantage of the changes in the market cycle.
Besides, my technical analysis background tells me that timing the market, albeit never an exact science, can be done. If you can combine Berstein's approach with market timing techniques and money management discipline, I believe you can achieve better returns with even lower risks. (The irony is that he also wants the investor to buy low and sell high, but how are we going to determine when to buy low and sell high if we don't look at the charts and decipher the price and volume patterns such as "head-and-shoulders," "ascending triangles," etc.? In this respect, he has to admit that timing the market is necessary--at least to a certain degree.)