I came across this book in my local library, so just out of curiosity I checked it out. This is largely an investment tool book that provides some basic concepts, stats, caveats, tips, and principles for investing, as well as a little meditation routine to stay calm (for life). Below comes a summary/excerpt of this book chapter by chapter, appended with a few short comments of mine.
- An overview of the whole book
7 facts in investments: 1. On average, “corrections” (market falls by more than 10%, as opposed to “bear markets” of 20%) occurred about once a year since 1900. 2. Less than 20 of all corrections turn into bear markets 3. Nobody can predict consistently whether market will rise or fall 4. Stock market rises over time despite many short term setbacks 5. Bear markets happened every 3-5 years (but didn’t last) 6. Bear markets changes to bull markets, pessimism turns to optimism 7. The greatest danger is being out of the market (you need to stay in the market long enough to let compounding do its magic)
- Pay attention to fees
- Also note the power of compounding
- Example: assuming 7% return per year, then $1 becomes $29.5 in 50 years. Same condition, but with a 2% fee (i.e., 5% return), then $1 becomes $11.5 in 50 years. Almost 3x difference!
- If stock goes up, you need to pay taxes; if you lost money in stocks, no compensation at all – hidden fee in investment.
- According to one study, only 8 out of 203 actively managed funds outperforms S&P 500 index – you have to pay management fees to 195 of them even if your investment not beating the market – another hidden fee.
- 71% people enrolled in a 401(k) think there are no fees
- 92% admit they don’t know what the fees are
- All “big names” have fees
- Broker commissions, fund management fee, hidden fee, initial purchase fee, …
- 90% of 310,000 financial advisors are just brokers
- For rest 10%, or 31,000 registered investment advisors, 26,000 of them registered as both brokers and fiduciaries.
- I.e., only 5,000 of them across US are fiduciaries.
4 principles in investing: 1. Don’t lose money. Use smart asset allocation to protect us from nasty surprises. 2. Identify opportunities in asymmetric risk/reward structures. Big risk -> big reward and small risk -> small reward is usually true, but not always. 3. Tax efficiency. 4. Diversify across asset classes, markets, countries, currencies, time, etc.
Diverse asset: - Stocks (market down about 1 in 4 years) - Bonds (safer, lower yields) - Alternative investments - Real estates investment trust (REIT) - Private equity funds - Master limited partnership (MLP, mostly in energy sector, has tax benefits) - Gold - Hedge funds
How to create an asset portfolio? - Set goals, create asset allocation plans, evaluate risk, repeat if risk is too high
Tips to manage portfolio: - Distribute across asset classes - Index funds as core in asset allocation - Have a cushion - Set aside 7 years of income in income producing investments (bonds / MLPs) - Explore additional strategies - Re-balance
- Know what you do, do what you know.
- 80% psychology, 20% mechanism
6 money mistakes and how to deal with them 1. Confirmation bias – always seek for alternative opinions 2. Recency bias – don’t sell out/all in, re-balance 3. Over confidence – get real, get honest 4. Greed, gambling, quest for home runs – it’s a marathon, not a sprint 5. Home bias (stick to whatever you know the best) – expand your horizons 6. Negativity and loss aversion – preparation is key
- Real wealth is emotional, psychological, and spiritual (quality of
- Go beyond hunger, drive, desire, and consistently take actions
- “I decided that I would no longer live in a suffering state.”
- Beautiful state: love, joy, gratitude, awe, playfulness, ease, creativity
- Suffering state: stressed out, worried, frustrated, angry, depressed, irritable, overwhelmed, resentful, fearful
- Suffering triggers: loss, less, never.
- Ultimately which state you are at is your own choice.
- Either you master your own mind, or it masters you.
- Life is just to short to suffer.
- 90 second rule: whenever you start to suffer, stop the thought in 90 seconds.
This book is content rich although it is quite a short one (the author has another book on investment which is 600+ pages). It contains a lot of valuable experience, that an average individual is hard to obtain with his/her limited investing experience. While some of the advise are commonly seen in investment textbooks (such as to diversify), some other tips, stats, and viewpoints are new and/or presented in a more accessible means. This helps an average reader to grasp the main points without drudging through deep investment theories. The overall tone in the book also follows that from the author’s usual motivational speeches, and to some extent helps me hold a more optimistic view towards facing risks associated with investment activities and obtaining financial freedom.