If you have the time and want to do your own investing, we highly recommend four books
that could significantly improve your investment returns and give you a disciplined
investment strategy that is easy to follow.
The first book on our list is titled Asset Allocation, 4th Edition by Roger C. Gibson.
Gibson heads up Gibson Financial Management, a very large financial management firm
in Pennsylvania. He is often quoted in the financial press, speaks at many financial
conventions and authors continuing education courses for Certified Financial Planner®
licensees.
He explains how futile it is to try to time the market and explains how to avoid common
investing mistakes by following a disciplined strategy. He recommends that periodically
rebalancing your portfolio will avoid the typical investor mistakes of buying high and
selling low.
His book is a bit technical at times but most do-it-yourself investors should be able to
grasp his advice.
The second book we recommend is Common Sense on Mutual Funds, (John Bogle,
1999, published by John Wiley and Sons). Bogle, founder of the well-known Vanguard
fund family and creator of the first index fund (Vanguard 500 Index Fund), makes a
strong case for investors to focus primarily on index funds in their portfolios.
Bogle postulates that even the best mutual fund managers cannot continue to beat the
market. He says that the returns of all mutual funds must eventually revert to the mean
average return of the market. This reversion to the mean, coupled with the higher costs
(compared to index funds) of managed funds due to high portfolio turnover and
marketing costs will eventually result in returns 1.5% to 2% below a low-cost index fund.
Bogle points out that the success of a mutual fund manager eventually leads to poor
returns as the size of the fund grows with popularity. The larger a fund becomes, the
more difficult it is to manage. Portfolio turnover increases as the manager searches for
good investment opportunities. Net returns eventually suffer. Index funds, on the other
hand, can continue to grow large without impacting fund costs or turnover. In fact, costs
often can be reduced as index funds get larger.
The third book we recommend is Unconventional Success, A Fundamental Approach to
Personal Investment (David Swensen, 2005, Published by FREE PRESS), another
classic that should be added to any serious investor’s reading list. It many ways, it is
similar to Bogle’s book. David Swensen is chief investment officer of Yale University,
where he produced a two-decade investment return of 16.1% (Last year’s return was
better than 18%!) . Like Bogle, Swensen provides a solid argument that the for-profit
mutual-fund industry fails the typical investor. High fees, portfolio turnover, taxes and
pursuit of profits hurt investors.
Similar to the investment approach that we use, Swensen says that investors need to
adopt a disciplined asset-allocation approach that avoids the emotional mistakes of
buying high and selling low.
Also, like Bogle, Swensen promotes the use of low-cost index funds and exchange
traded funds (ETFs) that track the overall market. He argues that few mutual funds can
beat the market indexes over the long run.
The fourth book we recommend is especially suited to investors who focus primarily on
individual stocks. The author is Pat Dorsey, Director of Stock Analysis at Morningstar®,
the mutual fund-rating company. Dorsey’s The Five Rules for Successful Stock
Investing, John Wiley & Sons, Inc., 2004, is an outstanding book that could be described
as a layman’s version of the investment approach of the famous investor Benjamin
Graham. The book lays out a sound method for identifying companies that are well
managed and whose stocks are attractively priced. The only problem is that following
the process outlined takes a lot of time and energy. You’ll have to be committed enough
to have the perseverance to complete the entire analysis. You’ll need to plan on making
it your new part-time job.
Although there are many other good investment books to read, these four should be
required reading for anyone that wants to manage their own money. There’s little doubt
in our minds that reading these books can have a significant positive impact on any do-it-
yourself investor’s investment returns. We’ll follow shortly with an article that highlights
some more books to read that will help you determine what your money’s role should be
in your life – the other important side to managing your own money.
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, November, 2007
Must-Reads for the Do-It-Yourself Investor
By David and Erin Patterson