Preface xiii
Acknowledgments xv
About the Author xvii
Legal Disclosure xix
Introduction The Market Wants to Be Your Friend xxi
Mistake #1 Market Timing 1
The Idiots 5
Why Is It So Hard to Beat the Market? 6
Efficient Markets 7
The Evidence (Research and Stuff) 8
The Media Get It Wrong, Over and Over Again 8
Economists Get It Wrong, Over and Over Again 9
Investment Managers Get It Wrong, Over and Over Again 14
Newsletters Get It Wrong, Over and Over Again 17
Your Buddy 18
Strategies That Don't Sound Like Market Timing but Are Market Timing-Oh, and They Don't Work Either 19
Asset-Class Rotation 19
Tactical Asset Allocation 20
Style Rotation 20
Sector Rotation 20
What Smart Investors Have to Say on Market Timing 20
Knowing All This, Why Would Anyone Market Time? 21
Corrections 22
Bear Markets: An Overview 26
Bear Markets Happen for Different Reasons, but the Outcome Is Always the Same 27
Bear Markets Are Not Predictable 28
When Bear Markets "Turn," They Make People on the Sidelines Look Silly 30
The Market Is Volatile-Get Used to It 30
You Can't Wait for Consumers to Feel Good 31
Learning to Accept the Bear Markets 33
Miscalculating the Risk of Market Timing 34
But What If I Am Perfect? 34
Lump-Sum Investing versus Dollar-Cost Averaging 36
Learning to Fly 40
Avoiding Mistake #1-Market Timing 41
Mistake #2 Active Trading 43
The History of Active Trading 44
Active Investment Managers Lose to Indexing 45
Newsletters Lose to Indexing 45
Active Mutual Funds Lose to Indexing 45
Survivor Bias (a.k.a. Mutual Fund Performance Is Even Worse Than the Data Suggests) 47
What About the Winners, Huh? What About the Winners?! 48
Hedge Funds Lose to Indexing 51
Endowments-Misperception of Performance 56
Venture Capital (Sounds Sexy but Usually a Dog) 57
The Taxman Cometh (a.k.a. Dear Goodness, It Gets Worse) 59
Portfolio Activity Hurts Performance 59
But Doesn't Active Management
Work in a Down Market? 60
Why Indexes Win 61
But Indexing Results in Average Returns 62
S&P 500, Here I Come! 62
Avoiding Mistake #2-Active Trading 64
Mistake #3 Misunderstanding Performance and Financial Information 65
Misunderstanding #1-Judging Performance in a Vacuum 65
Misunderstanding #2-Believing the Financial Media Exists to Help You Make Smart Decisions (a.k.a. the Media Is Killing You) 67
Misunderstanding #3-Believing That the Market Cares About Today 71
Misunderstanding #4-Believing an All-Time High Means the Market is Due for a Pullback 74
Misunderstanding #5-Believing Correlation Equals Causation 77
October Is The Worst Month to Invest 77
Sell in May and Go Away 78
Misunderstanding #6-Believing Financial News Is Actionable 79
Misunderstanding #7-Believing Republicans Are Better for the Market Than Democrats 80
Misunderstanding #8-Overestimating the Impact of a Manager 82
Misunderstanding #9-Believing Market Drops Are the Time to Get Defensive 83
Avoiding Mistake #3-Misunderstanding Performance and Financial Information 84
Mistake #4 Letting Yourself Get in the Way 85
Fear, Greed, and Herding 85
The Overconfidence Effect 89
Confirmation Bias 93
Anchoring 95
Loss Aversion 97
Mental Accounting 98
Recency Bias 100
Negativity Bias 103
The Gambler 105
Avoiding Mistake #4-Letting Yourself Get in the Way 106
Mistake #5 Working with the Wrong Advisor 107
Most Advisors Will Do Far More Harm Than Good 108
Advisor Selection Issue #1-Custody 108
Advisor Selection Issue #2-Conflict 113
Test #1-Independent Advisor or Broker? 114
Investment Advisor Defined 114
Broker Defined 114
So What's the Difference? 115
Test #2-Pure Independent versus Independent and Broker 116
Test #3-Proprietary Funds versus No
Proprietary Funds 117
A Final Thought on Conflicts 118
Advisor Selection Issue #3-Competence 119
Competence Check #1-Do the Advisor's Credentials Meet Your Needs? 120
Competence Check #2-Is the Advisor Right for You? 120
Competence Check #3-Is the Advisor Following a Process That You Agree With? 120
A Final Thought on Advisors-Principles 121
Avoiding Mistake #5-Choosing the Wrong Advisor 122
Mistake #6 No Mistaking 125
Rule #1: Have a Clearly Defined Plan 125
Rule #2: Avoid Asset Classes That Diminish Results 127
Cash-The Illusion of Safety 127
The Illusion of Gold as a Way to Grow Wealth 129
Rule #3: Use Stocks and Bonds as the Core Building Blocks of Your Intelligently Constructed Portfolio 131
Rule #4: Take a Global Approach 138
Rule #5: Use Primarily Index-Based Positions 140
Rule #6: Don't Blow Out Your Existing Holdings 140
Rule #7: Be Sure You Can Live with Your Allocation 142
Rule #8: Rebalance 143
Rule #9: Revisit the Plan 144
The Ultimate Rule: Don't Mess It Up! 145
Portfolio Example 146
The "I Want to Beat the Market" Portfolio 146
The "I Need 7 Percent to Hit My Long-Term Retirement Goal" Portfolio 146
The "Get Me What I Need for the Rest of My Life with the Least Volatility Possible" Portfolio 147
The "I Have More Money Than I Will Ever Need and I Want It to Grow with Minimal Volatility" Portfolio 148
The "I Have More Money Than I Will Ever Need, Volatility Doesn't Bother Me, and I Want It to Grow Along with the Market" Portfolio 148
A Path to Success: Intelligent Portfolio Construction 150
You're the One 151
Conclusion Let's Roll!! 153
References 155
Index 163
