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The investor's manifesto -- Specifics to planning for retirement

Year's ago my wife (who at the time was my girlfriend) was given a book by her father (who is now my father in law) called The Investor's Manifesto by William Bernstein.  When I first saw it I thought this looked like a cheap, garbage filled book, that you could buy at a Hudson News while waiting in LaGuardia.  Little did I know, that this book would essentially drive my financial plan for my family and I for the foreseeable future.

Full disclosure.  Like most financial books, advice, literature, it is best absorb when you read the entire text on your own.  What I will provide today is a brief synopsis of the book paired with some of my opinions.

The first thing to understand is that it is very difficult to pick individual stocks that will yield you a return.  More often than not we will most likely end up losing more money than making.  There are well educated and intelligent people on Wall Street who do this for a living, and even they can't get it right most of the time.  Because of this, it is best to invest in a passively managed index fund.  An index fund is essentially a mutual fund that covers a large section of the market, such as the S&P 500.  In layman's terms, if you invest in an index fund that covers the S&P 500, you are investing in the largest 500 companies in the stock market.  

The second thing is to develop an understanding of investing over a long period of time.  By long period of time you would ideally like to invest over the course of a lifetime.  Essentially, you want to be investing from the start of your career to the end of it, so ideally if you start working at 22, then you could continue investing until you retire at ago 60 for example.  The numbers aren't so important, but the emphasis on the commitment to the strategy over a long duration of time is important.

Mr. Bernstein teaches us that the market will have fluctuations.  There will be times where it seems like there is no end to the climb, and other times where the market will collapse like in 2008.  However, the market in general generates a 7% return on average.  This in essence highlights the importance of investing over a long time.  You have to be in the market long enough to be the beneficiary for when the market does well.  In addition, you have to be in the market long enough to withstand it when it the market goes through a downturn.

This leads us into the next point (point number 3).  Which is that there is a benefit to an upturn and a downturn.  The benefits of when the market is doing well is that we will be enjoying the returns on our investments.  The benefits of when the market is doing poorly is that the price to purchase more of an index fund becomes cheaper.  For example: when the market lags it is akin to paper towels going on sale, take the opportunity to stock up on it when the price is low.

The fourth point is asset allocation.  Mr. Bernstein advises us to determine our allocation by using the following formula.

100 - Your age = The percentage invested in stocks.

For example:

Let's say we are 35 years old.
100 - 35 = 65
Therefore 65% of our investment portfolio should be in stocks.

The remainder of our investment should be in bonds.  So using the example above, we should have 65% in stocks and 35% in bonds.

As we age, we adjust our investment allocation to reflect this.  So when we turn 36 years old, we now invest 64% in stocks and 36% bonds.  Since bonds are less volatile, we will be receiving a lower return but we are assured a more consistent return on our money.

So how does this look for us in a practical sense.  Let's keep the numbers and let's say you have exactly $100 to set aside each month for your investments.  Then at the age of 35, you should be investing $65 into a stock fund, and $35 in a bond fond.

Mr. Bernstein is a huge fan of Vanguard funds.  The book essentially drives the entire investment plan off of Vanguard funds, and in my opinion, Vanguard funds are a good and reliable choice.  For specifics on which funds to choose you can do your own research or read his book.  In my opinion, I recommend VTSAX (google that ticker code) as an index fund.  As for bonds I recommend VBMFX.

I recommend reading Investor's Manifesto, it's a great book and Mr. Bernstein does a great job of explaining his strategies on investing and goes into great depth as to how to approach it and why.  I'll continue building off this post in future ones, so please subscribe or add yourself onto the mailing list.  In one of my upcoming posts I'll speak more about asset allocation and diversifying your portfolio.
Thanks for reading!!


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