The Investor’s Manifesto: Preparing For Prosperity, Armageddon, And Everything In Between
Author: William J. Bernstein
Investing…what does it mean to you? Throughout my childhood and even into my late teens, all investing meant to me was “stock market stuff.” It wasn’t until I was 18 and met my first mentor that I learned what investing was. He explained that investing is just doing something now (i.e. reading a book, working out, putting money in a savings account that accrues interest, building a business, etc.) and expecting a greater return on that action or expense in the future. Bernstein explains it as “the deferral of current consumption for future consumption.” When you invest your time into reading a book, the return from that time spent could be many things, but for me, it’s the knowledge and wisdom I acquire that I did not have beforehand. I’ve learned so many things from just simply investing my time in books. Those things include how to properly start a blog, how to make sure my girlfriend always feels loved and appreciated, how to have a better relationship with my parents, how to construct meaningful friendships, and so on. The ROI (return on investment) from working out is becoming healthier, of course. If you spend time working out now, in the future you are healthier, fitter, and you have potentially increased your lifespan. When you put money in a savings account that accrues interest (and actually leave the money in there), your ROI is eventually going to be more money! I know savings accounts don’t pay much interest nowadays, I solely used them as a simple example you’re probably already familiar with. Some things take much longer to produce any ROI than others do. Building a business, for example, can take years before you get a return on the time and money you’ve spent on it. I heard Gary Vaynerchuk say in a video that you should not expect any noticeable monetary ROI for at least two years from anything. That’s one reason why I love reading. As soon as I am finished with a book, I can already start to see the ROI’s in my life. When a book is finished, I am immediately more knowledgeable than I was before. If you already read my Intentional Living review, you’ll know that my greatest strength according to the VIA Strengths Survey is my love of learning.
All that being said, there are clearly many ways to invest in your future but this book focuses solely on investing your money in stocks and bonds, and how to do it efficiently. Stocks are issued by companies to raise capital in order to grow the business or undertake new projects. When you purchase stock in a company, the company then pays you in the form of dividends from the profits it receives. Bonds, however, are kind of like IOU’s. When you purchase a bond, you are lending money to a company, the government, or whoever/whatever issues the bond and then you’re getting repaid for the amount you lent plus interest over time.
The Four Abilities
Bernstein says that to be a successful investor, you must have four basic abilities:
- You must possess an interest in the process. If you do not have any interest in learning how to invest properly then you are far better off leaving your money in the hands of a broker or financial advisor who does have an interest in growing your money rather than leaving it in your own hands.
- You need more than a few mathematics skills. In order to master the basics of investing theory, you must have knowledge of the laws of probability and knowledge of statistics.
- You need to be familiar with financial history, like the South Sea Bubble and the Great Depression. Knowing about financial history will help you understand why things are the way they are. Also, history tends to repeat itself.
- Probably the most important of the four abilities is the ability to have enough emotional discipline to execute your strategy. No matter what.
I think it’s safe to assume no more than a very small percentage of the population is qualified to manage their own money after reading all of that.
The book goes into some detail of previous financial disasters for a while, but for the sake of not getting off track, I’m going to let you read about those yourself if you want to and I’m going to jump to the part where Bernstein starts explaining strategies.
Four Essential Preliminaries
Asset allocation is the most important part of stock and bond investing, but before you can get to the point of learning how to do that, you need to understand this:
- You need to save as much as you can.
- Make sure you have enough liquid, taxable assets in case of emergencies.
- Diversify widely.
- Diversify with passive or index funds.
Saving is the first step on the investing staircase. If you cannot save, you are fucked. There’s no other way to put it. If you cannot defer current consumption, you will die poor. Bernstein suggests that you do not stop saving until you die, and I would consider that pretty good advice. He also explains the importance of having an emergency fund before you start your journey to investing. Six months of living expenses in a taxable account is the minimum set by Bernstein. I have read that same minimum in many other books as well. One of them said that two of those months of expenses should be in your checking account because most emergencies happen at a moments notice and when that happens, you’re going to want to have access to your money immediately. The other four months should be in a savings account that is not easily accessible so that you don’t form a habit of taking money out and using it unless you absolutely need to. I use Betterment’s financial services for that second account because it takes about 5 business days for any withdrawals to hit my checking account. It helps keep me honest and on track.
Once your savings are on in line and you start investing, you then need to make sure you are diversified as widely as possible. I have read some arguments against this strategy, but I stand behind it for this reason: The most you can lose from a single stock is 100% of its purchase value, whereas a different single stock can return 1,000% or more over a decade.
Financial Planning for a Lifetime & Final Thoughts
For every dollar you do not save when you are 25, you will need to save two dollars for the same value by 35, and four dollars by 45. The longer you wait, the more time you give inflation to ruin your future. Bernstein says that once you are at age 25, you need to be saving an absolute minimum of 10% of your income. I personally aim for saving 50% of my income right now only because of how low my current living expenses are. I also have many different investment accounts that I like to keep up with, so I try to put an even amount into each one and let the diversification of each individual account run its course. I think this book has some very solid information about retirement investing but is very geared toward the people who want to manage their own investments. As mentioned at the beginning of this review, a very small percentage of people are even qualified to do that simply because they have no interest in it. With so many robo-advisors and brokers out there today, I don’t blame them. I am them. I do plan on managing my own accounts in the future, but as for right now and with no change coming in the foreseeable future, I do not. I’m going to list the companies and advisors I use at the end of this port so you can check them out and see if they’re a good fit for you. Again, I don’t know if I would necessarily recommend this book to every person reading this. Don’t get me wrong, I think the information is extremely valuable, I just don’t think many people are interested in learning it. However, if you do read it, I truly believe you will get a lot out of it.
Have you read this book? How do you choose to invest? Let me know what’s worked for you!
Hummy’s Financial Accounts
These are the ones I use, I know there are plenty out there that are similar. I just prefer these.
- Betterment: Roth IRA, IRA, Safety Net
- LendingClub: P2P lending account (I have been seeing a solid 5-6% return on my money over the course of two years.)
- RobinHood: Free stock trading