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Risk Less and Prosper: Your Guide to Safer Investing, by Zvi Bodie, Rachelle Taqqu
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A practical guide to getting personal investing right
Somewhere along the way, something has gone very wrong with the way individuals save and invest. Too often, households are drawn in by promotional suggestions masquerading as impartial investment advice. Consumers get saddled with more risk than they realize. Authors Zvi Bodie and Rachelle Taqqu understand the dilemma that today's investors face, and with Risk Less and Prosper they will help you find your financial footing.
Written in an accessible style, this practical guide skillfully explains why personal investing is all about you—your goals, your values and your career path. It shows how to understand investment risk and choose the particular blend of risk and safety that is right for you. And it lays out several simple yet powerful ways for small investors to cast a reliable safety net to achieve their financial goals and truly prosper. Coauthors Bodie and Taqqu challenge the myth that all investments require risk, then highlight some important risks that families often disregard when deciding where to put their money. Later, they connect the dots between investment and investor, showing us all how to grasp our own investment risk profiles and how we may use these insights to make more fitting investment choices.
- Outlines a straightforward way to invest by aligning your investments with your goals and the risk levels you can bear
- Provides basic investment abc's for readers who are otherwise literate
- Lays out a simple, actionable plan for achieving your goals
- Explains the role of risk-free assets and investment insurance in assuring that you reach your most essential goals
Contrary to popular belief, investing doesn't have to be complicated. You can build wealth without taking great risks. Risk Less and Prosper will show you how to make investment decisions that will make your financial life less stressful and more profitable.
- Sales Rank: #659062 in eBooks
- Published on: 2011-11-22
- Released on: 2011-11-22
- Format: Kindle eBook
Most helpful customer reviews
84 of 92 people found the following review helpful.
Try well reasoned diversification.
By dr
One reason to be highly skeptical of all of these kinds of books written by distinguished scholars recommending one asset class over another is that a highly distinguished scholar at the time of the tulip craze in Holland could easily have published a book entitled "Tulips for the Long Run," and there was indeed substantial statistical evidence at that time that tulips were an excellent long term investment. An asset class always looks excellent at the top of the market.
In the late 1920s a number of books were written to the effect that stocks were a good long term investment. In 1994 Jeremy Siegel first published the book "Stocks in the Long Run" based on exhaustive analysis of the past statistics.
In turns out that since 1994 stocks have been quite volatile, its been 18 years now, sort of the long run for a lot of people. Probably the popularity of that book helped inflate the stock bubble that finally burst in the year 2000.
For six years after "stocks in the long run" was first published, stocks continued to do very well indeed, but from the year 2000 to today in 2012, for the last 12 years, stocks have been volatile and not the best long term investment.
As it turns out stocks in 1994 were an excellent 6 year investment, but not the best 18 year investment. They were in actual fact a good short term investment, and had an investor switched to long term government bonds in the year 2000, he would have been far better off.
Long term U.S. Treasury bonds were yielding around 8% at the time of that book's release, and zero coupon U.S. Treasury bonds would have been an excellent long term investment in 1994.
Part of this stems from what we mean by the "long run". For many of us the last 12 years of stock market volatility is the long run.
Now everyone wants to be in cash, the yield on short term treasury bills is close to zero.
It is with this background in mind that we read "Risk Less and Prosper".
Sort of a reflection of the current temper of the times stemming from the volatility in stocks and real estate in recent years.
It is an interesting book, worth reading and taking into account with a grain of salt.
Based on the history of these kinds of kinds of investment books and the timing of their release, "risk less and prosper" may be a good short term strategy right now,reflecting current fears and anxiety, perhaps not precisely the best long term strategy.
30 year Treasury bonds are yielding about 3.15% today, and an 8% Treasury bond purchased in 1994, at the time of the release of "Stocks for the Long Run" looks awfully good today in retrospect.
Current yields of various assets are important.
Thirty years ago, 30 year Long Term Treasuries were yielding around 15% per annum, and in fact they were a better long term investment than stocks or cash.
But 30 year T bonds now only yield slightly more than 3% yield to maturity.
Such is the difficulty of looking at the rear view mirror of investment returns, and forming long term future strategies on the basis of past results.
"Risk Less and Prosper" and "Stocks for the Long Run" are two possible opposing strategies based on studious analysis of the past data.
The difficulty is that the future prospects for the rates of return on assets must surely also be a function of current asset prices at any given time, in contrast to the past statistics of their performance.
Neither "Stocks for the Long Run" nor its opposite strategy "Risk Less and Prosper" could possibly be correct at all times regardless of current asset prices and future unknown prospects for profits and dividends, etc., and the circumstances of the individual investor.
A third investment strategy would be nuanced and well reasoned diversification. No specific asset class can be reasonably called a good long term investment based on past results and an exhaustive study of the past stats, by simply projecting past results into the future.
Since we don't know the future, investors have historically used reasoned diversification between asset classes to reduce the volatility of the entire portfolio.
It is still a good idea.
The author is of course correct that personal circumstances of the individual investor is important.
I agree with Zvi Bodie's view that if an individual needs $X for his minimum goals, he should keep $X in a safe asset. The personal cicumstances of the individual investor is paramount.
One difficulty is in determining what is a safe asset.
TIPS do fluctuate somewhat, and there are some tax issues with TIPS.
So while TIPS are not perfectly safe in real terms after tax, TIPS are relatively safer assets in real terms. We all agree on that one.
Zvi Bodie makes an excellent point there.
With respect to assets far in excess of the minimum needs $X of the individual investor, an investor may wish to consider some diversification, especially over the longer run.
The real rate of return of TIPS fluctuate, TIP securities do fluctuate in price and rate of return, and in recent times the indicated real yield to maturity on some TIPS securities have been negative, as investors rush into the safest assets and have bid their prices above par.
This raises the question of whether it is really advisable for all investors to keep 100% of their assets in TIPS securities in the long run.
Current asset prices and the current yield on assets can be quite important. Timing can be important.
Just as it would have been more useful if "Stocks for the Long Run" had been published at a time when stocks were a good long term investment, it would have been better if a book advising investments in TIPS had been published at a time when stocks were hitting all time peak prices and the real yield to maturity of TIPS were significanlty positive and not negative.
(full disclosure: I have used the author's excellent text as a professor of finance at the graduate level. I have the highest respect for Zvi Bodie and his scholarship.)
48 of 51 people found the following review helpful.
A lot of good ideas
By A. J. Bloom
Bodie and Taqqu make a lot of worthwhile points. Some of the most powerful have to do with highlighting the true risks of stock market investing -- even over the very long term -- and stocks' lack of suitability for funding the essentials in retirement. For the most part, the book is easy to read and full of concrete examples. The key recommendation is to invest for essential long-term goals using inflation-adjusted bonds (TIPS and I-Bonds) and to reserve more risky investments, such as stocks, for funding discretionary future expenses.
The book does an especially good job emphasizing the importance of goal setting and liability-driven investment strategies. It is also refreshing to find a de-emphasis on maximizing return on investments. Furthermore, the discussion of the importance of separating the "musts" from the "wants" in financial goals is truly excellent.
My key quibble is about the claim that TIPS bonds bought on the secondary market lack price transparency and hence TIPS should be bought only at the initial auction. In reality, brokerage sites such as Fidelity.com clearly list both the Bid (customer sell-back) and the Ask (customer buying) price for every secondary TIPS issue. The spread between the two is less than 1% across the board on Fidelity.com - not a large enough percentage nor indicative of price rip-offs to have to restrict oneself to just purchasing issues offered at auction.
Also, the argument for TIPS and I-Bonds could perhaps be tempered by acknowledging that this investing strategy is far from perfect. For instance, peoples' personal inflation rates may differ substantially from the Consumer Price Index used for TIPS and I-Bond adjustments. Furthermore, semi-annual TIPS interest payments need to be re-invested into more TIPS to fully implement the strategy, which entails both reinvestment risk and possibly secondary market purchases (which the authors eschew). Finally, depending on the real rate that one locks in at purchase, TIPS invested outside of Roth IRAs risk trailing the Consumer Price Index after taxes are taken into consideration.
Overall, a well-thought out book that can steer readers to more sensibly think about investment risk.
22 of 23 people found the following review helpful.
Rethinking The Whole Process
By Geoff Considine
Published at The Portfolioist (portfolioist(dot)com):
The recently-published book by Zvi Bodie and Rachelle Taqqu, Risk Less and Prosper: Your Guide to Safer Investing, provides a unique perspective on how to meet the challenge of long-term financial planning. The book is well-organized into a number of steps required for identifying and organizing long-term goals and thinking through how to meet these goals. The presentation is built around a narrative in which a group of people meet to try to figure out how to meet their long-term goals and how to deal with the uncertainty associated with both their lives and their investments.
For those who are not familiar with Zvi Bodie, a professor at Boston University, some history is in order. Dr. Bodie has a long history of challenging the conventional wisdom that individuals saving for their future needs (most notably retirement) need to maintain a substantial allocation to risky asset classes such as stocks. His research, buttressed by that of others, suggests that investors tend to take on far too much risk in their investing and do not really understand the nature or magnitude of the risk that they bear.
The standard view of investing for retirement is that investors need to own stocks and other risky asset classes in order to accumulate sufficient wealth to someday be able to retire. A corollary to this notion is that while stocks are risky in the short term, they become less risky the longer you hold them so long-term investors can handle the short-term volatility because it will pay off in the long-term. Another key assumption that is often part of the standard thinking is that we can have confidence that stocks will soundly out-perform other possible investments in the long-term. Jeremy Siegel, a professor at Wharton who has often debated with Bodie, is the author of a book, Stocks for the Long Run, which champions this standard view.
Bodie argues from a very different perspective. He agrees with the idea that, on average, an equity-heavy portfolio can expect to out-perform less risky investments over an extended holding period and that the degree of this expected out-performance increases with the holding period. The problem that Bodie has noted for years is that while the probability of a bad outcome diminishes the longer you hold a portfolio of stocks, the potential severity of the worst outcomes increases with holding period. I did my own analysis of Bodie's argument a couple of years ago, using a Monte Carlo simulation, and I concluded that he was correct that the severity of potential downside events increases with the holding period, even as the probability of these events decreases.
The answer, Bodie concludes, is that investors should focus on saving and investing to provide for their basic future needs with as little investment risk as possible. If there is investable capital beyond what an investor needs to be on track to meet her basic future needs, this money can be invested in risky asset classes. The core of the portfolio needs to be as low risk as possible. There is one asset class that is the best match to investors' future needs, and that is inflation-protected bonds (TIPS). These are government-issued bonds that will maintain their purchasing power to keep up with inflation, as measured by the Consumer Price Index (CPI). Bodie believes that TIPS should make up the vast majority of most individual investors' portfolios. Bodie has presented this part of his thesis in an earlier book for individual investors, Worry Free Investing.
While much of Risk Less and Prosper focuses on making the case for taking little investment risk, the book is broader than this one topic. There is an exploration of how to make a long-term plan with specific goals and how to think through dealing with the contingencies that may arise. In my extended analysis of Bodie's argument that investors should put most or all of their portfolios into TIPS, I concluded the following:
The best solution, given all of the uncertainties, is for investors to build portfolios that provide the maximum sustainable income streams, but also to ensure that worst-case outcomes are tolerable. This notion is receiving more attention, but is still not widely understood. An important part of a balanced investment process is to be aware of all of the risks, and the potential for severe under-performance of equities over extended periods of time is a risk that often gets overlooked. A person near retirement who has little or no flexibility in when they retire and how much income they need in retirement must have less exposure to risky asset classes.
Nothing that I have examined since I wrote my piece in 2009 has changed my perspectives on this. Bodie's position is that individual investors do not have an understanding of the potential worst-case outcomes for their portfolios and thus should lock in a basic standard of living using TIPS. I wholeheartedly agree that people do not have a solid understanding of risk and, particularly, that a portfolio of risky assets does not become essentially riskless if you hold it long enough. This does not, however, mean that I agree with Bodie that a 100% TIPS portfolio should be the baseline portfolio. That said, Bodie and Taqqu have staked out important ground in terms of reconsidering the basic paradigm for long-term saving and investing and presenting a new approach in an engaging and thoughtful manner. I would encourage individual investors to challenge their own assumptions and beliefs by reading this book.
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