A few weeks back, J.D. listed his favorite finance books (and encouraged readers to suggest their own). It's a fine list, full of money-saving, debt-defying, financial-liberating manuals. But there was just one investing book, and since J.D. asked me to join his merry band of bloggers to add more investing posts to GRS, I thought I'd provide my own reading list. But rather than list books, I'm going to focus on authors, since most have several books, and any one of them will expand your knowledge on how to grow the money you've saved.
While this is a lengthy list, you'll find most recommend the same things: index funds. These are mutual funds or exchange-traded funds that own all the investments in a certain index (such as the Standard & Poor's 500) rather than trying to pick which investments will do better than others. That may surprise some of you, given that I work for The Motley Fool, a company perhaps best known writing about individual stocks. However, we've long been fans of index funds. In our Rule Your Retirement service, we cover six model portfolios, three made completely of index funds. I'm on the 401(k) committee here at the Fool; we have the Vanguard 500 among our choices, and I suspect a lot of employee money goes into the fund.
Why index funds? This brings us to my first favorite author: Princeton professor Burton Malkiel, author of the classic A Random Walk Down Wall Street, which was first published in 1973; the 10th edition will be available this November. In a recent interview on Fool.com, Malkiel was asked whether his advocacy of index funds has held up over the past 37 years. His response:
I believe that even more strongly than I did when I first wrote the book in 1973, when there were no index funds. What I have done with every subsequent edition is ask the question, was the advice right? Is it in fact the case that investors have done better with index funds? And every time I do it, including the data that I put together earlier this year, I find that two-thirds of active managers are beaten by a passive index and the one-third who beat the index in one year, are not the one-third who beat them in the next year.
In other words, there is very little persistence in terms of excess performance. Sure, in any period there will be people who have beaten the market, but it is not the same people from period to period. So I would say to you that I feel even more strongly today in that thesis than I did when I first wrote it almost 40 years ago.
Now, unlike many proponents of index investing, I don't see stock-picking as evil. I own several individual stocks myself, and I know some of the authors you'll meet in this post do as well. However, I agree with Dr. Malkiel when he told us:
[A]t least the core of every portfolio ought to be indexed. Now, fully understand that telling an investor that you can't beat the market is like telling a 6-year-old that Santa Claus doesn't exist. And anyone with a speculative temperament is going to say, “Look, I want to go and pick some of my own stocks.” And I think that is fine, and you can do it with much less risk if the core of your portfolio is indexed.
With all that said, and your belief in Santa Claus shaken, here are my recommendations for people you should read if you want to learn about asset allocation and portfolio construction.
Like Malkiel, Bogle advocated indexing before indexing was cool. He founded the Vanguard Group of mutual funds in 1974 (after getting fired from another job — talk about making the most of adversity!), and created the first index fund available to individual investors in 1975 (institutional index funds had been tried a few years earlier). We at The Motley Fool like Bogle so much, we named a room after him. After he gave a speech to our company a year or so ago, he received a standing ovation. To learn about investing from one of the smartest and most ethical people around, read Common Sense on Mutual Funds or The Little Book of Common Sense Investing. To learn a bit about Bogle's life, his life lessons, and why he thinks today's financial-services industry fails investors, read Enough.
Tyson pens many of the financial books in the For Dummies series. All of them are good. If you're new to financial stuff in general, start with Personal Finance for Dummies. Also, I love the Guru Watch area of his website, which digs deep into the track records of financial pundits.
Bernstein's The Four Pillars of Investing made J.D.'s list, and I'll second the recommendation. If you're looking for an investing expert who also holds a Ph.D. in chemistry and an M.D. and practiced neurology, Bernstein's your man. The Investor's Manifesto might be more accessible for those newer to investing. He's also written excellent books on economic history. Plus, I have to say as a former English teacher and editor, Bernstein is an exquisite writer.
Ferri defends index investing like the Marine fighter pilot he once was. His All About Asset Allocation is an excellent primer on the pros and cons of various types of investments and how to put them all together. If you want to learn more about exchange-traded funds, check out The ETF Book. Also, Ferri's firm, Portfolio Solutions, charges just about the lowest management fees (0.25% a year) you'll find, though there is a $500-per-quarter minimum charge.
Perhaps the only person who can match Rick Ferri's zealotry about indexing is Larry Swedroe. He's written or co-written a series of “The Only Guide…” books, the most recent being The Only Guide You'll Ever Need for the Right Financial Plan. All the “Only Guide” books are worth reading (as are Swedroe's other books), but the one that deserves special highlighting is The Only Guide to a Winning Bond Strategy You'll Ever Need because there are so few good books out there about bonds. Swedroe also has an excellent blog on MoneyWatch.com.
If you're looking for simplicity in investing and a little more personality in the writing, Bill Schultheis is the author for you. The New Coffeehouse Investor is about as readable, entertaining, and inspiring as an investment book gets. [Last year, Schultheis shared a guest post at Get Rich Slowly: “How to build wealth, ignore Wall Street, and get on with your life“.]
In the world of institutional investing, David Swensen is a rock star. He has managed Yale's endowment for 25 years, with spectacular results. He's written just one book for individual investors, Unconventional Success. The interesting thing about this book is, Swenson set out hoping to highlight the best mutual funds and fund families for the average schmo. However, the more research he did, the more he realized that almost all fund families suffer from an insurmountable conflict of interest: Their drive for profits encourages them to keep expenses high, which in the end hurts investor returns. Swensen concludes that he can only recommend two companies: Vanguard and TIAA-CREF.
For a more technical book written for financial professionals, check out Roger Gibson's Asset Allocation: Balancing Financial Risk. To get a taste of the subject matter, read “The Rewards of Multiple-Asset-Class Investing” [PDF] from the Journal of Financial Planning. While I have this book at the end of this list, Gibson's work has probably had the biggest influence on me as a financial writer. Plus, he's a really nice guy.
That's it from me. Have a favorite I missed? Let us hear about it. Just don't tell me that there's no Santa Claus. I can take only so much.