The book was the inspiration for Retirement Investing Today to devise his starting plan for a low cost investment strategy and which appears to have served him well so far as he closes ever nearer to financial independence.
The original version was published in 2006 - this 3rd edition came out in late 2013 so is relatively up to date. Some things have changed - the arrival of Vanguard to the UK markets, the nature of financial advice following the introduction of RDR - some things remain much the same - investor behaviour, the uncertainty of markets etc.
The underlying thesis of the book remains - to construct a robust portfolio which can withstand whatever storms the markets suffer over both short and long term.
As I have been moving my investing strategy more towards index funds over the past year or so, I was interested to read how Hale made the argument for passive investing and the evidence drawn upon in support.
The case against managed funds
Fact - the market will always beat the average investor, professional or amateur. The market consists of all investors, the return of the average investor must be the return of the market before all costs. After costs, therefore the return for the average investor must be below the market.
Hale quotes a 20 yr study by Dalbar in 2011 which shows the average investor made a return of just 4% p.a over the period compared to the average market return of just under 10% p.a.
He suggests industry costs are excessive for managed funds, and that a good record of past performance of any individual fund offers little reassurance that its future performance will be good, bad or indifferent.
Looking for future winners over the next 20 yrs from over 2,000 UK funds is compared to looking for a needle in a haystack. Research by Bogle in 2007 covering a 35 yr period revealed that less than 1% of the 355 US equity mutual funds delivered consistent out-performance.
Hale suggests the issue of whether active management can beat the market depends upon 3 questions :
- Can active managers beat the market after costs?
- If so, do some do it consistently over time based on skill rather than luck?
- Finally, does the average investor have a reasonable chance of identifying them in advance?
For all the above reasons (and many more), the book suggests avoiding the complications generated by media advertising, stock tip columns, fund rankings and other streams of endless ‘noise’, side step stock-picking, buy/sell signals, economists and active management, all of which are mostly irrelevant and confusing for most average investors.
The strategy is then simple, calm and relaxed - it is focussed on index funds and long-term asset mix.
"This is concerned with building and holding a sensible portfolio that provides the greatest chance of success…it’s about pursuing options that increase the chances of success, avoiding the chase for returns or trying to beat the market".
Te book goes on to cover many of the basic pointers for a successful outcome - it covers the process of deciding on asset allocation and asset mix in some detail, also practical aspects such as compounding and the need to minimise costs, the ongoing maintenance of a portfolio and importantly a section on contending with human behaviour and emotions and how we can often be our own worst enemy.
The second part of the book looks at many aspects of controlling risk as well as the practical aspect of building a portfolio.
Whilst it is important to understand and evaluate risk in its many forms, it is probably easier than managing a diy portfolio over many years as the markets gyrate and any initial enthusiasm is challenged. This is why I would place more emphasis on the early chapters, particularly understanding human behaviour and ways to minimise making poor investing decisions
Simpler Decisions for a better result
This is the sub title of the book and a message repeated throughout is to keep things simple. Don’t try to select the handful of funds that may succeed from the thousands on offer. Don’t invest in things you do not understand. Review your portfolio just once per year. Don’t get sidetracked by media hype. Don’t put all your eggs in one basket and don’t worry about the things outside of your control.
“Smarter Investors realise that investing is not about trying to be an economist, or knowing how to read a company balance sheet, or having the ability to pick and choose when to be in and out of the markets, or what stocks to buy and sell. What they do know is that their mix of assets has a good chance of delivering them a successful outcome and will not lose them too much if things don’t go as planned.”Conclusion
For the newcomer to investing, this book is a great resource - if I were to be critical, possibly a little too long for my liking and a little repetitive in parts but that would be nit picking. Also, the cost at £19.99 is possibly a little prohibitive for some so if, like me, you can get hold of a copy at the local library, so much the better.
That said, I enjoyed the book very much and even as a seasoned investor for many years, I have taken away many points to learn from and hopefully improve my own investing process.
The essence of the book are simple and probably common sense - invest in things you understand, use simple low cost funds, globally diversified passive index will probably do a better job compared to managed funds and be aware of the many human traits and poor practices which often can sabotage the chances of a good outcome for the small investor.
Its not rocket science but I guess from time to time all investors need to be reminded of some of the basics.
A really great effort from Tim Hale and, I would say, one of the best investing books on the market for UK small investors.
Leave a comment below if you have read this book. Let other know what you think of it.