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Risk Less and Prosper: Your Guide to Safer Investing

ISBN: 978-1-118-01430-1
196 pages
December 2011
Risk Less and Prosper: Your Guide to Safer Investing (1118014308) cover image


A practical guide to getting personal investing right

Somewhere along the way, something has gone very wrong with the way individuals save and invest. Too often, households are drawn in by promotional suggestions masquerading as impartial investment advice. Consumers get saddled with more risk than they realize. Authors Zvi Bodie and Rachelle Taqqu understand the dilemma that today's investors face, and with Risk Less and Prosper they will help you find your financial footing.

Written in an accessible style, this practical guide skillfully explains why personal investing is all about you—your goals, your values and your career path. It shows how to understand investment risk and choose the particular blend of risk and safety that is right for you. And it lays out several simple yet powerful ways for small investors to cast a reliable safety net to achieve their financial goals and truly prosper. Coauthors Bodie and Taqqu challenge the myth that all investments require risk, then highlight some important risks that families often disregard when deciding where to put their money. Later, they connect the dots between investment and investor, showing us all how to grasp our own investment risk profiles and how we may use these insights to make more fitting investment choices.

  • Outlines a straightforward way to invest by aligning your investments with your goals and the risk levels you can bear
  • Provides basic investment abc's for readers who are otherwise literate
  • Lays out a simple, actionable plan for achieving your goals
  • Explains the role of risk-free assets and investment insurance in assuring that you reach your most essential goals

Contrary to popular belief, investing doesn't have to be complicated. You can build wealth without taking great risks. Risk Less and Prosper will show you how to make investment decisions that will make your financial life less stressful and more profitable.

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Table of Contents

Foreword ix

Preface xv

Acknowledgments xxv

PART I All About You 1

Chapter 1 Changing the Game 3

Chapter 2 Picturing Your Destination 17

Chapter 3 Paying Up 31

PART II Risk Matters 47

Chapter 4 The Mismeasure of Risk 49

Chapter 5 The Allure of Hope 65

Chapter 6 Your Personal Risk Profile 85

PART III Building Blocks 99

Chapter 7 Finding the Safe Investment Zone 101

Chapter 8 The Art of Matchmaking 125

Chapter 9 Investing Safely for Education 139

Chapter 10 Choosing Risky Investments 147

Chapter 11 How to Choose an Advisor 167

Epilogue 175

Notes 181

About the Authors 189

Index 191

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Author Information

Zvi Bodie is the Norman and Adele Barron Professor of Management at Boston University. He holds a PhD from the Massachusetts Institute of Technology and has served on the finance faculty at the Harvard Business School and MIT's Sloan School of Management. In recent years, Bodie has been a prominent advocate for the financial protection of small investors and has written widely on this subject. Professor Bodie has worked closely with numerous professional institutions, including the CFA Institute, the Federal Reserve Bank of Boston, the Retirement Income Industry Association, and the Society of Actuaries.

Rachelle Taqqu is a financial consultant with many years of experience in the financial services industry. In recent years, she has worked closely with several nonprofit institutions on their endowments.

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"Bodie and Taqqu have staked out important ground in terms of reconsidering the basic paradigm for long-term saving and investing and presenting a new approach in an engaging and thoughtful manner." (Portfolio.com, February 2012)

"...a good read for those of you who are skeptical of investing in today's stock market. But it is a must-read for those of you who actually think that you know what you are doing." (Huffington Post, January 2012)

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Press Release

December 20, 2011
Risk Less and Prosper

Something has gone very wrong with the way individuals invest and save. All too often, ordinary people are drawn in by promotional suggestions masquerading as impartial investment advice and end up saddled with more risk than they realize. Addressing the urgent need for trustworthy advice to combat the confusion and false impressions fostered by much of today's conventional investment "wisdom," Risk Less and Prosper (Wiley; December 2011; $27.95; 978-1-1180-1430-1; Hardcover and Ebook) offers a better investment path that leads investors to their financial goals without risking calamity.

Coauthors Zvi Bodie and Rachelle Taqqu understand the dilemma that investors face, whether they are frustrated with retirement fund statements that lead nowhere; perplexed about how to fund their children’s education or their own retirement; or unsure about how much risk they are taking in the investments they already own.

The book opens with the story of a small group of men and women who form a support group with a financial advisor to resolve their shared confusion about money. As their stories unfold, they learn how their own personal biographies—their values and goals, their career paths and preferences—are the most important determinant of how they should invest. The second piece of the puzzle is to understand investment risk and to see why the conventional wisdom on this subject is so misleading. These two essential insights make it easier for individuals to choose the particular blend of safety and risk that is right for them.

Risk Less and Prosper offers simple yet powerful ways for individuals to cast a reliable safety net to achieve their financial goals and truly prosper. Bodie and Taqqu offer the following guidelines for moving toward a better investment path:

Set reachable goals: The secret to this is hidden in the details—the more specific the goal, the easier to pursue. Each goal should be separated into basic needs and aspirational wants.  (By definition, basic needs should not be put at risk.) It’s also important to set priorities by identifying which goals are most important. Assign a timeline, attach a price tag, and align goals with your expected funding sources. Refresh as needed, following the target practice exercises spelled out in the book.

Determine how much risk makes sense for you: Finding the right risk set-point is at the crux of a good goal-based plan. Risky assets are not off-limits, but an individual’s risk set-point is based on protecting personal minimum baseline needs—and not on some pre-set allocation formula or on maximizing investment returns.

Find the safe investment zone: An investment isn’t safe unless it’s guaranteed to keep up with inflation. This can be accomplished using inflation-linked bonds such as U.S. Treasury Inflation-Protected Securities (TIPS) and inflation-protected U.S. Government Savings Bonds (I Bonds). Each combines a fixed interest rate with an adjustable component that tracks inflation.

Deploy real-return bonds, along with other appropriate low-risk investments to reach two common goals—education and retirement: When used together, insurance, annuities, and TIPS ladders can ensure a person’s desired standard of living during retirement. Investing for education has its own collection of tax incentives, opportunities, inflation expectations, and time frames that set it apart from retirement investing. Yet the basic safety-first, goal-driven strategy works well for both.

If there is money left over after investing in enough safe assets to cover basic needs, focus on a range of riskier investments to boost returns:  Like a trapeze artist in a circus, if you have a strong safety net, you can take bigger chances up in the air. Consider diversification within an asset class through index funds. While many individual investors avoid indexing because they’re bent on beating the market, indexing is generally a more reliable option for the best returns over time. Also diversify investments across different classes of assets, such as domestic and international equities, and perhaps real estate and alternative investments.

Find an impartial, trustworthy financial advisor: Unless you are highly motivated and diligent about investing, consider working with a financial advisor if you have the means. To avoid ending up with the wrong person who leads you down a garden path filled with thorns, start with referrals from trusted friends and family. But don’t stop there. Screen out advisors who don’t use  “fee-only” compensation arrangements, which minimize conflicts of interest. Choose advisors who act as fiduciaries and are legally required to place the client’s interest ahead of their own at all times.

Contrary to popular belief, investing doesn’t have to be complicated or stressful. Risk Less and Prosper demonstrates how to build a profitable goal-based investment portfolio simply and without taking great risks.  It is a book that will transform the way its readers think about investing.

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