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A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan

A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan

Ben Carlson

ISBN: 978-1-119-02485-9

May 2015

224 pages



A simple guide to a smarter strategy for the individual investor

A Wealth of Common Sense sheds a refreshing light on investing, and shows you how a simplicity-based framework can lead to better investment decisions. The financial market is a complex system, but that doesn't mean it requires a complex strategy; in fact, this false premise is the driving force behind many investors' market "mistakes." Information is important, but understanding and perspective are the keys to better decision-making. This book describes the proper way to view the markets and your portfolio, and show you the simple strategies that make investing more profitable, less confusing, and less time-consuming. Without the burden of short-term performance benchmarks, individual investors have the advantage of focusing on the long view, and the freedom to construct the kind of portfolio that will serve their investment goals best. This book proves how complex strategies essentially waste these advantages, and provides an alternative game plan for those ready to simplify.

Complexity is often used as a mechanism for talking investors into unnecessary purchases, when all most need is a deeper understanding of conventional options. This book explains which issues you actually should pay attention to, and which ones are simply used for an illusion of intelligence and control.

  • Keep up with—or beat—professional money managers
  • Exploit stock market volatility to your utmost advantage
  • Learn where advisors and consultants fit into smart strategy
  • Build a portfolio that makes sense for your particular situation

You don't have to outsmart the market if you can simply outperform it. Cut through the confusion and noise and focus on what actually matters. A Wealth of Common Sense clears the air, and gives you the insight you need to become a smarter, more successful investor.

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