I’ve been looking forward to writing a review of The Four Pillars of Investing: Lessons For Building a Winning Portfolio as I found it to be very influential in my own investment strategy. While some readers may be familiar with this book, I wanted to share what this book is about for those who haven’t read it.
Before The Four Pillars of Investing, William Bernstein wrote The Intelligent Asset Allocator. This previous book, by his own admission, was “comprehensible only to those with a considerable level of mathematical training and skill.” This book conveys the same message as the first, but is easier to read and understand the concepts. Since the book is split into four pillars, lets look at each one.
Pillar One: The Theory of Investing
Pillar One discusses investing theory such as risk (and how to reduce it), as well as how an investment increases in value. One chapter is so obvious once it’s pointed out, that the market as a whole has the same return as the average mutual fund, since they make up the market. So by using simple index funds or ETFs, you can get an average return, no better, no worse… but you also reduce your fees and don’t have to guess what the next great mutual fund will be. The final chapter on theory looks at some possible portfolios consisting of index funds that will match the overall market return.
Pillar Two: The History of Investing
Pillar Two includes a great look into the history of both bubbles and crashes. While you can never be sure of when a major correction will come, or how bad it will be, it’s interesting to read about some of the previous manias and eventual busts. You can see many similarities to what we’ve experienced in this past year.
Pillar Three: The Psychology of Investing
Pillar Three goes into the behavioral psychology related to investing. Seeing these in print can serve as a reminder to avoid the temptation to jump into what everybody else seems to be investing in, since by that time you’ve likely missed the gain. Though most people selling you mutual funds like to use this as a marketing tool, you shouldn’t look at the past 10 years to assume what will happen going forward. Especially after reading this book, don’t start to believe that you are smarter than the market as this can lead to mistakes. There is also more advice to stick with “boring” investments, looking for market beating returns can lead to unnecessary risk. And after all, it’s impossible for everyone to beat the market average, since on a whole, they are the market!
Pillar Four: The Business of Investing
This final pillar convinced me to drop my actively managed mutual funds that same month. Pillar Four looks at how both stockbrokers and mutual fund managers do not have your best interests in mind, due to the simple fact of how they are compensated. Both charge you more for something you can do yourself. More importantly, it’s to their benefit to constantly move you in and out of investments, increasing their commissions while decreasing your return.
Right near the top of my list of recommended personal finance books, The Four Pillars of Investing should be read by anyone that is investing on their own. And for those that are using a commission based financial advisor, this book can open your eyes to the inherent conflict of interest they have and you might also decide to take over your own investments.
I’ll be giving away a copy of The Four Pillars of Investing later this month. I’m saving it to go with a few other surprises! If you want to be the first to find out about the giveaway, sign up for the RSS feed or email subscription.
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Good review! Completely agree – this book should be required for anybody managing their own portfolio. Intelligent Asset Allocator is also good reading if one likes a bit more math, stats, & theory.