On My Bookshelf: The Lies About Money

Some months ago, my Dad loaned me The Lies About Money, the latest book by licensed financial planner and radio show host Ric Edelman, and I’ve been working my way through it.  It’s a dense book, but clearly written, in a style that I think should be approachable by even the beginning investor.  The book’s basic argument is that if you’re investing in traditional retail mutual funds, you’re very likely getting taken to the cleaners.  Quoting from the book jacket: "[R]etail mutual funds don't follow ...fundamental [time-tested, proven investment methods], using instead deceptive business practices that interfere with your investment goals." 

Along the way, he makes a pretty good argument that if you do any of the following, you’re investment approach is misguided (note I’m paraphrasing here):

• Buying individual stocks
• Buying actively managed (that is, non-index) mutual funds
• Buying investments based on their price or performance
• Buying or selling because of what the market is doing
• Working with a financial advisor that guides you toward doing any of the above

He argues in favor of the following approach instead:

1. Determining your time horizon and risk tolerance, then
2. Based on those factors, select a portfolio not of individual investments, but of investment types, then
3. Select suitable broadly diversified investments from each of the identified asset classes, then
4. Hold that portfolio indefinitely, rebalancing periodically to maintain the proper ratios, and adjusting your holding in response to changes to your time horizon and risk tolerance, not in response to investment performance

The book also includes the Edelman Guide to Portfolio Selection (GPS) (a version of which is also available online here), which identifies an appropriate mix of asset classes based on your answers to a series of questions about your investment goals and personal situation.  For example, because I am highly risk tolerant and have a long time horizon, GPS steered me toward the 96% equity Mason portfolio (identified as Portfolio 40 in the book).  This portfolio is somewhat atypical; most of the 43 portfolios provided include non-equity classes in various proportions, including bonds, real estate, natural resources, and the like.

The book’s broad financial guidance seems pretty consistent with other books on portfolio theory I’ve read in recent years, and I found his case against retail mutual funds to be persuasive.  In any case, whether you buy the book or not, the GPS is worth a look, and hey, it’s free.