The Gist: An exploration of an investor’s most important decision – how much to put where.
A review of multiple books, most notably William Bernstein’s Four Pillars of Investing
For a prerequisite tribute to index funds, check out my review Who Wants to Be a Millionaire?
In our last correspondence, we explored the dismal and costly track record of both individual and professional investors compared to the lazier but more classically profitable strategy of slowly and continuously buying, holding, and balancing a diverse combination of low-cost index funds that return the historically generous market average.
So why doesn’t everyone just invest in indexes? The answer is an ironic combination of boredom and terror.
Figure 1. It’s basically playing right field in Little League and somehow as a result getting more ice cream on average than your fellow players.
When people normally put money toward investments, investing in a broad-based index just seems dull compared to the excitement of improbably picking a winner. Why buy small parts of 500 companies if your uncle was just telling you about a great article describing the sure-thing prospects of Whizbang Tectonics? William Bernstein playfully created “‘investment entertainment pricing theory’ (INEPT), which describes this phenomenon. For each bit of excitement you derive from an investment, you lose a compensatory amount of return. For example, a theater ticket may be thought of as a security with a high entertainment value and a zero investment return.” Of course, the theater can be pretty humdrum, too. Keep your asset allocation boringly profitable and get your excitement from swimming with sharks, joining a biker gang, and going over Niagara in a barrel to mimic the trajectory of your hand-chosen portfolio.
On the flipside, during a crisis, people lose their nerve as they watch their portfolio lose 20% of its value overnight. Why not sell before it gets worse and you’re wiped out? Historically, millions of investors who thought they could withstand risk sold at precisely the time that they should have been holding – if not buying. Still, if such a prospect freaks you out, the good news is that you can still structure your index investments to reduce risk – but understand that there is a fundamental relationship between risk and return. As Ben Graham intoned, “The investor’s chief problem – and even his worst enemy – is likely to be himself.” Bernstein relates a specific example:
Myopic risk aversion—our tendency to focus on short-term losses—is one of the most corrosive psychological phenomena experienced by the investor. It is best demonstrated by this apocryphal story: An investor places $10,000 in a mutual fund in the mid-1970s and then forgets about it. Shocked by the October 19, 1987, market crash, she panics and calls the fund company to inquire about the state of her account. “I’m sorry madam, but the value of your fund holdings has fallen to $179,623.”
Figure 2. To quote William Wallace: “Hoooooooold….. Hooooooold…. ”
But what if we’re not talking a 20% loss, but 80%? Let’s look at 1929. Before getting to the misery, Bernstein notes that the stock market ‘bubble’ wasn’t entirely unreasonable: “Between 1920 and 1929, real GDP rose almost 50%… by today’s standards, stocks were positively cheap. Until 1928, they sold at approximately ten times earnings and yielded about 5% in dividends. Even at the peak, in the summer of 1929, stocks fetched just 20 times earnings, and dividends fell only to 3%. Again, tame by today’s standards.” Malkiel suggests that the principal problems were people borrowing to buy and the Fed’s ineptitude in first attempting to punish those borrowers, then in mishandling the consequences. Bernstein surveys the subsequent agony: “from the market peak in September 1929 to the bottom in July 1932, the market lost an astonishing 83% of its value. The loss was mitigated, however, by the approximate 20% fall in consumer prices that occurred during the period. The market recovered strongly after 1932, but in 1937, another drop of about 50% occurred.” Collins brutally notes that “should you have been unlucky enough to have invested at the peak, your portfolio wouldn’t have fully recovered until the mid-1950s, 26 years later.”
By now, your instinct for loss aversion is up and you’re ready to split your assets between cash and collectible knick knacks that you can at least enjoy looking at. But Collins points out that you would have had to have been incredibly unlucky to invest everything at the peak. If, instead, you had been investing steadily from your paycheck, your investments from 1926 and 1927 – midway up the stock market rise – would have been positive within 10 years. Indeed, the Bogleheads reveal that “Over the 85-year period from 1929 through 2013, we can clearly see that an investor who picked the worst one-year period to invest in large domestic stocks would have lost 43 percent. However, the same investment over any 10-year period would have lost only 1 percent.”
10 years! Who has a decade to spare for a measly return? In some ways, riding out a crash is easier than long periods of slow growth. Bernstein reveals that “an examination of historical stock returns shows that the market can perform miserably for periods as long as 15 to 20 years. For example, during the 17 years from 1966 to 1982, stock returns just barely kept up with inflation.” Retirees with too much stock exposure certainly suffered. But this long era of malaise was absolutely stupendous for anyone working throughout, diligently investing a portion of their paycheck. Warren Buffett asks a couple of questions to get at the principle: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?… If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?” Malkiel analyzes: “Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying. This reaction makes no sense.”
Figure 3. Thus explains the youth appeal of Bernie Sanders?
Continuously investing in a bear market takes a lot of grit – how certain can you be that the market eventually will recover? You can’t. That’s why so many people stop buying or sell. Again, there is a fundamental relationship between risk and return. As a historical matter, we can observe that this has been the right strategy in the United States again and again as the long term trajectory of our markets has been a glorious up. But this is subject to hindsight and survivor bias. Every great nation of history had a good run until they didn’t. Turn on a TV and you can start worrying that our screwing up our historic ingredients for success is unfortunately quite plausible. Bernstein worries: “Until World War I shut down the St. Petersburg exchange in 1914, the Russian stock and bond markets were among the world’s most respected and active. They never reopened. During the twentieth century alone, military and political upheaval rendered not just St. Petersburg’s bourse, but also many other once-vigorous securities markets, defunct, or at least moribund: Cairo, Bombay, Buenos Aires, and Shanghai, to name a few.” Malkiel lucidly talks through the incredible speculative run-up of the Japanese stock market, where “stock prices increased 100-fold from 1955 to 1990.” At one point, the grounds of the Tokyo Imperial Palace – sitting on only half of a square mile – were valued greater than all of the real estate in California. Japanese investors at the height of the bubble have still not recovered 30 years later.
All of which brings us to your single most important decision as an investor: how you will allocate your capital among different asset classes. To get a sense of how important this is, the Bogleheads point to a major study of 91 pension funds’ investing over a decade that found that the differences in what percentage they put into each asset class accounted for 93.6% of the difference in performance between them. The final 6.4% was split between the time they bought and sold, the individual securities they selected, and the costs they were charged. To reinforce an earlier point, the same study also found that attempts to actively manage the fund – as opposed to leaving things in relevant indexes – cost pensions 1.1% in performance.
As you make your decisions, keep in mind a few things. First, invest only in things you understand well enough to explain to a 12 year old. Your money is at stake and good returns don’t require complexity – in fact, they may be better correlated with simplicity. Second, make sure your asset allocation reflects your desired risk. In chasing better returns, realize you are inherently going to be in riskier investments that could have, at the very least, more volatility. If your blood pressure can’t handle big swings, go for a safer, simpler allocation. If ultimately this gets too complicated and you want to set it and forget it, you can invest in low cost funds that diversify for you, either based on your target retirement age or your target risk. Third, for proper diversification, the Bogleheads advise “You want some investments that zig while others zag.” To protect yourself at various times, you are going to want asset classes whose performance is not directly correlated with each other. That might mean that certain aspects of your portfolio lag for a long time – and that’s not really a bad thing if you’re confident in their fundamentals. Focus on total portfolio performance. Fourth, be hyper-vigilant about fees and taxes so that you can capture most of the benefit of your returns. The further you drift from a broad market index, the more certain fees you may end up paying for uncertain performance. At the same time, some asset classes or indexes are inherently more or less tax efficient than others. Your tax inefficient holdings are ideally placed in a 401(k) or Roth IRA. I don’t have space to get into all the details, but you absolutely should research your eligibility for them (and precisely what costs and fees are involved).
Figure 4. For the typical 12 year old, you’ll have to properly analogize. Like Fortnite, the winner of investing is the one who manages to hold on while everyone is dropping out. Of course, given the preteen popularity of TikTok, you might have trouble explaining the riskiness of Emerging Market indexes.
The biggest asset allocation question you have to answer is what percentage of your investments to own in bonds versus stocks. In case these terms require demystification: when you buy a bond, you are loaning money to a company or government that they promise to pay back with regular interest. It’s nice to be owed by these guys for a change – and, generally, bonds are considered safer than stocks, especially over a short term, but, predictably, they bring less return. When you buy a stock, you are literally buying a small percentage of a company. Congratulations – you are a business owner!
Bonds tend to face three problems: first, inflation endangers the value of your return. Second, many bonds are callable, so that if interest rates decrease, the lendee will simply borrow somewhere else and pay off the expensive bond. Third, the lendee may default. An index of bonds broadens your exposure and thereby limits your risk – but you might consider buying U.S. Treasuries directly because you can do so online without a broker or ongoing expenses. Bernstein cites Jeremy Siegel’s Stocks for the Long Run: “stocks outperformed bonds in only 61% of the years after 1802, but that they bested bonds in 80% of ten-year periods and in 99% of 30-year periods” Further, Malkiel shares that, most recently, “bonds have produced average returns of 7.1 percent versus stock returns of 11.4 percent over the 50-year period ending in 2016,” but importantly, they zig when stocks zag: “bonds proved to be excellent diversifiers with low or negative correlation with common stocks from 1980 through 2018” Ultimately, Bernstein says “we own stocks to hedge long-term risk and bonds to hedge short-term risk.”
Figure 5. As you buy bonds, it’s fun to think of yourself as a corporate loan shark. “Nice car you got there, Tesla. Shame if something happened to it after you defaulted.”
The classic rule of thumb is that the percentage of bonds in your portfolio should be your age – that way, your portfolio becomes less risky as you approach retirement. Several authors believe that this is too conservative for investors with full-time jobs and that their bond percentage should max out at 20% or 25% until they approach retirement. Bogle, bullish on stocks, had an approximately 80% stock/20% bond mix into his 90s, advised young investors to flirt with 100% stocks, and thought retirees would do fine with a 50-50 ratio. Bernstein, on the other hand, suggests that younger investors might want a larger percentage of bonds until they’ve lived through at least one crash and understand how they’ll react. While Bernstein believes a disciplined buy and hold of more stocks would be better over time, a bigger percentage of bonds that made investors feel safe in a crisis would be better than selling off stocks in a panic. Indeed, he notes, a stock crash would generally be a good time to sell bonds and buy stocks. And Bernstein is also skeptical of the size of the recent return premium stocks have had over bonds, so that at least 20% in bonds is always valuable. Similarly, the legendary Ben Graham suggested that you should never have more than 75% in either allocation, and the data over the last 100 years suggest that those are good upper/lower limits for risk/reward ratios. Ultimately, the perfect portfolio is only clear in retrospect – you need to decide this for yourself.
Once you’ve settled on what percentage of bonds, you’ll have to determine what kind. For simplicity, the indexers tend to prefer a total bond market index for tax-protected accounts and a total municipal bond market index for taxed accounts (the latter is free of taxes, but has predictably lower returns). There’s a richer debate about the duration of your bonds. Longer-term bonds pay more because there’s less certainty about the distant future’s inflation and default rates. Bernstein warns “Long-duration bonds are generally a sucker’s bet – they are quite volatile, extremely vulnerable to the ravages of inflation, and have low long-term returns.” He suggests the average duration of your bond should be less than 5 years – after all, your bonds are the short-term hedge. The Bogleheads, on the other hand, recommend choosing a timeframe that matches your need: if you are going to need the cash in 2 years, go for short term. If you’re investing forever, buy the total index. Relatedly, Malkiel likes zero-coupon bonds – an instrument that you buy at a discount, pays zero interest, but gives you the full amount at a time you specify (i.e. for paying for college). Junk bonds promise high yields because the lendees are of questionable ability to pay – all the indexers avoid them because they prefer safety in bonds and risk in stocks. There’s also some appeal for a particular type of U.S. bond that explicitly promises to pay a return above inflation – that takes care of a significant concern – but this type of bond is considered so safe that it tends to have little return and, worse, it’s taxable.
Figure 6. Your new nickname for your brother-in-law can be “Junk Bond”
Once you’ve settled on your allocation within bonds, you’ll move to stocks. Here, you’ll want to determine whether you want a simple portfolio that covers the total market in proportion to individual companies’ size – or whether you want to flavor your portfolio with exposure to different elements of the global marketplace, usually at greater cost and risk for certainly more diversification and complication, possibly more return.
A major question is how much you should invest in the United States versus overseas. Bogle was essentially an investing nationalist: when you invest internationally, you are being exposed to multiple additional risks beyond company performance, including different accounting standards, political trouble, and currency differences. If you simply invest in the S&P 500, those American-based companies already get half their revenue from abroad which could be enough international exposure for you. Finally, investing globally can involve more fees than investing at home. On the other hand, Malkiel reminds us that the United States represents less than half of the global investing economy and Bernstein suggests that the number of differences between the United States and elsewhere mean that international stocks zig while domestic stocks zag – exactly what you may be looking for in a diversified portfolio. And, returning to our Japanese or Russian examples, Bernstein insists the takeaway is not that international markets are scarier, but that markets anywhere, including here in the United States, are subject to unexpected risk, so avoid excess concentration.
If you do decide to invest internationally, you can simply buy an index that covers the world, as the Bogleheads simply advise, or you can break it down into indexes of particular regions or economic development. There’s always a danger the more specifically you index the closer you are approaching historically-fraught stock-picking. But there are reasons to consider breaking it down: first, owning the equivalent of the S&P 500 for Europe is relatively low cost and tax-efficient and so may be more appropriate for a taxable account. You still get the zig: Malkiel notes that from 1970 to 2017, an index of international developed economies’ stocks has done equivalent to the S&P but have only had a 0.5 correlation. Second, if you own the whole international market, you may be over-exposed to regional bubbles, such as with Japan in the late 1980s dominating the international index. Third, you may want to manage your exposure to faster-growing emerging markets. Malkiel is intrigued by their growth and notes their better performance than developed economies from 2000-2010. Bernstein thinks that there are substantial gains to be made in the very long transition from a riskier, emerging economy to a developed economy – but that those don’t always translate into immediate stock market returns – “China has had one of the world’s highest economic growth rates—at times exceeding 10% per year—yet between 1993 and 2008, its stock market lost 3.31% per year. The same is true, to a lesser extent, for markets in the Asian ‘tigers’ (Korea, Singapore, Malaysia, Indonesia, Taiwan, and Thailand), which since 1988 have all had lower returns than those in the low-growth United States.” Again, ultimately, you’ll need to decide for yourself. Within the books reviewed here, the range of recommendations for how much international stock to own is 0 – 30% of your total portfolio.
Figure 7. Sadly, you’ll have to forgo the most promising foreign investments in emails from Nigerian princes.
Of course, the core of your stocks should be within the United States, where you can easily invest in an index that covers most of the stock market. For simplicity’s sake, once you’ve settled the bond and international questions, you could stop right there. Bogle’s personal portfolio had the beauty of simplicity: 80% S&P 500, 20% total bond market index. And, indeed, all of the indexers covered here tend to recommend putting at least a plurality of your stocks into the S&P 500 or the total US market. As mentioned before, there’s always a danger the more specifically you index the closer you are approaching historically-fraught stock-picking. But if you want to get creative, there are advocates for indexes of two sectors in particular (real estate and precious metals), the smaller companies in the market (small-cap), and companies that are trading at a relatively smaller multiple of their earnings or net worth (value) – but note that practically everything is going to have higher costs than a broad market index.
Most indexers believe that real estate is a good investment because it has had similar returns to the generous stock market over time while not being exactly correlated. The principal vehicle that people use to invest in real estate is a real estate investment trust (REIT) – and they have some peculiarities, chief among them that they have to distribute 90% of their profits in dividends, which are not ideal in a taxable account. That distribution feature also means that they heavily rely on debt for expansion, which creates its own risk. Publicly traded REITs also, for better or worse, own only a single digit percentage of the total U.S. investable real estate market, so they are not as broad an investment as desirable. There are other opportunities to invest in real estate outside indexes, but whatever you do, do not consider your personal home an investment. The authors reviewed here are otherwise skeptical of sector indexes because they feel too close to stock-picking and they fear being that rational investor in 1900 who, looking for an evergreen industry, invests in a blacksmith index. But at least Bernstein likes a very small exposure to precious metal stocks as one industry that persistently zags. While uncorrelated, the precious metals sector may primarily be an inflation hedge, and there may be better alternatives over a long time.
Figure 8. If you’re seeking to design a post-apocalyptic portfolio, conventional securities aren’t going to be that useful – Mad Max isn’t likely to value the printout of your Charles Schwab holdings in gold mining companies. Instead, carefully allocate to bullets, alcohol, and cigarettes – the latter two being all the more valuable if you’re not a personal consumer!
The theoretical appeal of small companies in the bottom 10% or so of the market is that, by their very size, they may have an easier route to greater returns. They also, of course, are closer to going out of business. Bernstein points out that “the small stock advantage is extremely tenuous—it’s less than a percent-and-a-half per year, and there have been periods of more than 30 years when large stocks have bested small stocks.” An index of small cap companies spreads your risk – but anytime a company is too successful, they get bigger, prompting the index to sell the shares in a taxable event. And, naturally, keeping track of these smaller companies means more fees than a broad based index. Malkiel also cautions that small cap companies may now have become too popular (and therefore overpriced) even while there’s relatively little analyst attention to this small part of the market. Malkiel further points to data that “single factor funds have either produced returns that are roughly equivalent to broad-based index funds or their returns have been inferior” – but that may again go to the question of correlation.
The theoretical appeal of value companies trading at about the lower third of multiple of book value is that you can buy them cheap and they are less subject to speculative bubbles. In any given decade, investors will get enthusiastic about a particular industry or country or whatever and they’ll feverishly bid up prices to be a gigantic multiple of the earnings and value of a company in anticipation that “some greater fool” will pay them more for it. There may, of course, be a good reason why a company is trading at a lower multiple. Yet Bernstein reports: “There have been a large number of studies of the growth-versus-value question in many nations over long periods of time. They all show the same thing: unglamorous, unsafe value stocks with poor earnings have higher returns than glamorous growth stocks with good earnings.” Nevertheless, like a small cap index, if a company does start to trade at a higher multiple, it will get sold – and create another taxable event. Targeted value indexes have more expensive fees than the broad market index – and they can underperform that broad market index for over a decade. I’ll repeat Malkiel’s warning about single factor funds – but I’ll also note that he’s more intrigued by multiple factor funds, like combining the two we just discussed for a small cap value index (and more fees and taxes!). For what it’s worth, Richard Ferri reports that “According to researchers Gene Fama and Ken French, 95 percent of the return on a widely diversified U.S. stock portfolio can be explained by that portfolio’s market risk (beta), percentage in small stocks (size risk), and percentage in high book-to-market stocks (value risk). Over the long term, U.S. small-cap stocks have achieved a return premium over large-cap stocks, and value stocks have achieved a return premium over growth stocks.”
Figure 9. Value stocks help you miss getting hosed in the financial bubble bath
Once you’ve determined your ideal allocation, you have one final decision to make: whether, when, and how to balance your account. The different aspects of your portfolio will be growing at different rates and so the perfect allocation you originally conjured will eventually be out of whack, such that your 60% stocks is now 80% due to a bull market. Bogle believed that the unbalanced portfolio was “likely to provide higher long-term returns” because you let your winners ride and just adding more money without selling anything means you will be less likely to dangerously tinker. Bernstein cites lots of academic evidence to argue the opposite, that rebalancing will generally lead to higher returns, though “usually no greater than 1 percent per year.” Bernstein’s argument is premised on reversion to the mean – you want to sell winners because they are probably overperforming relative to their base rate and, relatedly, the losers are cheap underperformers. In this vein, Bernstein insists: “Do not allow the inevitable small pockets of disaster in your portfolio to upset you. In order to obtain the full market return of any asset class, you must be willing to keep it after its price has dramatically fallen. If you cannot hold onto the asset class mutts in your portfolio, you will fail. The portfolio’s the thing; ignore the performance of its components as much as you can.” Of course, if all your investments are in a taxable account, then selling winners will lead to capital events whose taxes will overwhelm the real but limited gains. Nevertheless, Bernstein argues that you would still want to rebalance occasionally in a taxable account to reflect your risk tolerance, either because you are getting older and want more security or, as in the example above, stocks have run up in a big bull market and you want to preserve some of your gains.
If you decide to rebalance, you need to decide when and how. For when, Bernstein suggests that the best answer may be every few years and, additionally, if there’s a big swing (20%?) in market prices. The Bogleheads, appropriately sensitive to taxes, recommend selling losers before year’s end and winners in the new year to take advantage of something called “tax loss harvesting.” For other tax reasons, they cite a Morningstar study that suggests rebalancing should not be done more frequently than every 18 months. I’ll also remind you that there are low cost funds that rebalance for you, either based on your target retirement age or your target risk. For how, you can obviously sell the over-performers and buy the under-performers. But in an ideal world, you’re putting money in the market every month or quarter and you can use that to try to bring things back into your preferred percentages, such that if stocks are out of whack, your monthly contribution may only go toward bonds. The key here is putting in about the same every time as opposed to waiting for when prices are low: time in the market beats timing the market. Malkiel cites a University of Michigan study that found that “95 percent of the significant market gains over a thirty-year period came on 90 of the roughly 7,500 trading days. If you happened to miss those 90 days, just over 1 percent of the total, the generous long-run stock-market returns of the period would have been wiped out.” And Malkiel piles on by citing Laszlo Birinyi: “a buy-and-hold investor would have seen one dollar invested in the Dow Jones Industrial Average in 1900 grow to $290 by the start of 2013. Had that investor missed the best five days each year, however, that dollar investment would have been worth less than a penny in 2013.”
If you’ve gotten this far, that’s about it. Invest regularly, and only in things you truly understand. Make sure your asset allocation reflects your desired risk – and remember chasing more returns means risking bigger losses. Diversify within assets with indexes and across assets through allocation and rebalancing. Be hyper-vigilant about fees and taxes so you can capture most of the benefits of your returns. And, as Malkiel advises, be patient and disciplined: “You can only get poor quickly. To get rich, you will have to do it slowly, and you have to start now.”
Figure 10. Click here to buy William Bernstein’s Four Pillars of Investing, 9/10. As a reminder, the four pillars that you must understand are the theory of investing, the history of markets, your own psychology, and the adverse interests of the investing business – which includes financial journalism! Bernstein recommends that you avoid the media, filled with English-major journalists currying favor with those they cover, and instead read books like the ones reviewed here. Bernstein best articulates the real risk that comes with investing and why it’s important to diversify. For better or worse, he is an asset-class junkie who suggests an ideal portfolio that is more complicated than others covered here (and he gives more specific advice about investors in different situations). But despite his worries, he still sees a longer trend up for stocks:
A superb metaphor for the long-term/short-term dichotomy in stock returns comes from Ralph Wanger, the witty and incisive principal of the Acorn Funds. He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.
Figure 11. Click here to buy Burton Malkiel’s classic A Random Walk Down Wall Street, 8/10. Though first published decades ago, Malkiel has continuously and freshly updated it to reflect the latest data and events. Malkiel explicitly addresses one major recent concern about index funds: that they’ve gotten too big and that there will soon not be enough actors in the market to price things correctly. Malkiel essentially responds that the temptation of inefficiency will be too great for some not to take advantage of it. Appreciated his quoting J Kenfield Morley: “In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well”
Figure 12. Click here to buy the Bogleheads’ Guide to Investing, 9/10. A very practical and simple overview that goes deep into what it means to follow the path laid down by John Bogle. Amusing citation of Gene Brown: “Foolproof systems don’t take into account the ingenuity of fools”
Figure 13. Click here to buy American investing hero John Bogle’s Little Book of Common Sense Investing, which lives up to its title and is a stirring call to arms, based on law of averages, for investors to humble themselves by picking the cheap indexes that outperform all the hard work of expensive active managers. 8/10. Has a great quote from Buffett: “The greatest Enemies of the Equity investor are Expenses and Emotions”
Figure 14. Click here to buy JL Collins’ The Simple Path to Wealth, 7/10. The premise of this book was investing advice that the author wanted to pass along to his daughter and it’s an easy read, but probably should be read in conjunction with the Four Pillars to ensure you have a proper sense of risk. Collins does a great job illustrating how the Great Depression was bad, but not as bad as you might think – but overall is perhaps more optimistic than warranted about stocks. Perhaps a better case is made by Jeremy Siegel in Stocks for the Long Run who argues that peak investors before the Great Depression actually recovered faster than Collins suggests (15 years v. 26) and, what’s more, “since World War II, the recovery period for stocks has been even better. Even including the recent financial crisis, which saw the worst bear market since the 1930s, the longest it has ever taken an investor to recover an original investment in the stock market (including reinvested dividends) was the five-year, eight-month period from August 2000 through April 2006.”
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