A Random Walk Down Wall Street ***** : Let's face it, investing books are not exactly page turners and you definitely don't want to read one when you're sleepy. Nevertheless, this is a must-read for anybody interested in maximizing their investments over the long haul (20+ years). Which should be everybody!
The book pretty much fortifies the investing axioms that I have been following for the past several years, but presents a ton of data to back up the claims, which are:
- The ability to consistently beat the market average is rare.
- The only way to get higher returns is to take higher risks.
- Diversification smooths out the volatility inherent in risky investments.
- The semi-strong efficient market hypothesis is the most credible of all the market theories.
- Your life stage defines your risk tolerance (with younger people able to handle more risk).
For persons under 40, the book recommends the following portfolio:
- 5% cash. Or cash equivalent, interest bearing (of course).
- 20% bonds. Three-quarters comprised of zero coupon treasury or no-load bond funds. The rest inflation-protected (TIPS). Put in tax exempt account if possible, otherwise try and use tax-exempt funds.
- 65% stocks. Two-thirds comprised of total stock market (Wilshire 5000), the rest international and emerging markets.
- 10% real estate. No-load REIT fund.
For persons between 40 and 50, it's basically the same as above, but move 10 percent from stocks to bonds.