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A Wealth of Common Sense


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Table of Contents

Introduction: Why Simplicity Is the New Sophistication xi Chapter 1 The Individual Investor versus the Institutional Investor 1 Institutional versus Individual Investors 5 We're All Human 9 Extra Zeroes 12 Long-Term Thinking 13 Key Takeaways from Chapter 1 16 Notes 16 Chapter 2 Negative Knowledge and the Traits Required to Be a Successful Investor 19 The Biggest Problem of All 25 Traits of a Successful Investor 27 Standing on the Shoulders of Giants 33 Key Takeaways from Chapter 2 38 Notes 38 Chapter 3 Defining Market and Portfolio Risk 41 Volatility: Risk or Opportunity? 48 Understanding Rule Number 1 of Investing 49 The Risk Tolerance Questionnaire 50 Risk versus Uncertainty 52 Risk Aversion 54 The Cycle of Fear and Greed 58 Key Takeaways from Chapter 3 60 Notes 60 Chapter 4 Market Myths and Market History 63 Myth 1: You Have to Time the Market to Earn Respectable Returns 66 Myth 2: You Have to Wait until Things Get Better Before You Invest 67 Myth 3: If Only You Can Time the Next Recession, You Can Time the Stock Market 68 Myth 4: There's a Precise Pattern in Historical Market Cycles 70 Myth 5: Stocks and Bonds Always Move in Different Directions 71 Myth 6: You Need to Use Fancy Black Swan Hedges in a Time of Crisis 73 Myth 7: Stocks Are Riskier Than Bonds 74 Myth 7a: Bonds Are Riskier Than Stocks 75 Myth 8: The 2000s Were a Lost Decade for the Stock Market 76 Myth 9: New All-Time Highs in the Stock Market Mean It's Going to Crash 77 Myth 10: A Yield on an Investment Makes It Safer 78 Myth 11: Commodities Are a Good Long-Term Investment 80 Myth 12: Housing Is a Good Long-Term Investment 81 Myth 13: Investing in the Stock Market Is Like Gambling at a Casino 82 Key Takeaways from Chapter 4 84 Notes 85 Chapter 5 Defining Your Investment Philosophy 87 Degrees of Active and Passive Management 90 The Benefits of Doing Nothing 94 Exercising Your Willpower 96 Simplicity Leads to Purity 98 Defining Yourself as an Investor 99 Key Takeaways from Chapter 5 100 Notes 101 Chapter 6 Behavior on Wall Street 103 Threading the Needle 107 So Never Invest in Active Funds? 112 The Most Important Thing 114 Key Takeaways from Chapter 6 115 Notes 116 Chapter 7 Asset Allocation 119 Asset Allocation Decisions 121 Why Diversification Matters 123 Mean Reversion and Rebalancing 131 Risk Factors, Value Investing, and the Power of Patience 135 The Value Premium 136 The Rise of Smart Beta 138 How to See It Through 143 Key Takeaways from Chapter 7 146 Notes 147 Chapter 8 A Comprehensive Investment Plan 149 Why Do You Need a Plan? 150 The Investment Policy Statement (IPS) 152 Lifecycle Investing 154 Beating the Market 158 Saving Money 159 Taxes and Asset Location 160 Key Takeaways from Chapter 8 161 Notes 161 Chapter 9 Financial Professionals 163 Vetting Your Sources of Financial Advice 166 Outsourcing to a Financial Professional 168 What a Financial Advisor Can Do for You 171 How to Be a Good Client 174 Benchmarking and Ongoing Maintenance 176 Alternatives 177 Key Takeaways from Chapter 9 178 Notes 178 Conclusion 179 Book List 186 Notes 187 About the Author 189 Index 191

About the Author

BEN CARLSON, CFA, has spent his career managing institutional portfolios for endowments, foundations, and pension plans. He is also the creator and author of the blog A Wealth of Common Sense ( and is a Yahoo! Finance Contributor.

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