The Elements of Investing
Burton Malkiel and Charles Ellis are financial icons and thankfully for the rest of us, who are not, they’ve produced The Elements of Investing. This book is one of my investing favourites, written with straightforward facts and a bunch of do-it-yourself guidance that can be readily applied. In my opinion this book is a must have any investor.
Unlike one of my other favourite books, The Single Best Investment, this book focuses on indexing and not dividend-investing as a strategy to achieve financial freedom. As someone who uses a two-pronged strategy to work towards my retirement dreams, dividend-investing and indexing, I found this book an outstanding overview to cement my beliefs in the power of passive management for long-term investing.
I had so many great takeaways from this book I needed to break it down into three blogposts for you! Part 1 was posted last week. Here is Part 2. I hope you enjoy!
“The secret to success and enjoyment in so many parts of life is to know your capabilities and stay within them.”
Some of the equity ETFs “Burt and Charley” recommend:
Total U.S. Stock Market
- iShares Russell 3000 ETF (IWV:US)
- Vanguard Total Stock Market ETF (VTI:US)
Total World Ex-U.S. Market
- Vanguard FTSE All World ETF (VEU:US)
Total World Including U.S. Market
- Vanguard Total World ETF (VT:US)
“Just as you need to diversify by holding a large number of individual stocks in different industries to moderate your investment risk, so you also need to diversify by holding different asset classes. One asset class that belongs in most portfolios is bonds.”
“There is one final diversification lesson that we need to stress. You should diversify over time. Don’t make all your investments at a single time. You can reduce risk by building up your investments slowly with regular, periodic investments over time.”
“The right response to a fall in the price of one asset class is never to panic and sell out. Rather, you need the long-term discipline and personal fortitude to buy more. Remember: The lower stock prices go, the better the bargains if you are truly a long-term investor.” (I’m trying to do this more, not easy sometimes)
“Rebalancing will not always increase returns. But it will always reduce the riskiness of the portfolio and it will always ensure that your actual allocation stays consistent with the right allocation for your needs and temperament.”
“As in so many human endeavours, the secrets to success are patience, persistence, and minimizing mistakes.” (Very well said)
“Buy and hold a low-cost broad-based index fund and you are likely to enjoy well-above-average returns because of the low costs you pay.”
Burt’s (Burton Malkiel) asset allocation ranges for different age groups:
Age Range | % in Stocks | % in Bonds |
20-30s | 75-90 | 25-10 |
40-50s | 65-75 | 35-25 |
60s | 45-65 | 55-35 |
70s | 35-50 | 65-50 |
80s and beyond | 20-40 | 80-60 |
“The buy-and-hold investor who prudently holds a diversified portfolio of low-cost index funds through thick and thin is the investor most likely to achieve her long-term investment goals.”
Check out part 3 of 3 of my blogpost here.
What do you think about this from Malkiel and Ellis? Does it reasonate with you and if so, how?
Anything you try and live by here, in your journey to financial freedom?
Your turn readers, let me know! 
@MOA Agreed. Also copper mines, and oil cos for those with an aggressive streak.
@My University Money
I just flew to Canada from Shanghai last night. Interesting what you suggest about a possible housing bubble in China. I certainly haven’t read much on property prices in China (Other than an article on slowdowns in an English Shanghai daily I picked up at the airport) But I have spoken to some friends who live in Shanghai, and they chuckle at this: the Chinese government is building all kinds of things that are vacant…commercial stuff, mainly. My friends are suggesting that there isn’t a demand for it, but there’s a one track mentality at the moment: build, build, build. It reminds me of Alberta in the early 80s, and all the vacant half-built homes and buildings that sat forever.
These things, of course, are all interesting to ponder, but I don’t think recognizing (or not) recognizing bubbles in China (whether stocks or real estate) will help long term investors much. It leads to speculation, I think.
Besides, it isn’t growth, after all, that moves markets: it’s “surprise”. If we expect China to grow, that expecation will be “priced” into the market. Predicting growth is tough enough. But predicting the surprise of that growth (psychologically) is even tougher, because we don’t know what the aggregate consensus is always going to be. Of course, short term gains will be anyone’s guess, but long term, I like putting my eggs in every basket and virtually never watching that basket. It helps to keep my heart out of the game. INvestors who can master that, I believe, are those who will grow wealthy over time. With a globally diversified and rebalanced portfolio, you’ll beat almost everyone else in the game if you can keep your heart out of the matter. Easier said than done. Few pros can do that. But if you can, you’ll rock, as an investor.
Don’t try to “play China”. It is a mystery wrapped in an enigma, wrapped in an egg roll. Better to use resourcetocks as a proxy.
I feel the same way Dale, and we’ve got some great resource plays right here in Canada. Think pipelines and oil sands for starters.
Do you agree?
As always, thanks for your comment.
@My Own Advisor
My portfolio is still pretty small (being a young guy), and I’m not sure how to play Asia. I think that much of the diversified dividend portfolio you have for example is indirectly fairly exposed to the large-scale Asian markets at this point. What do you think of the most recent TIME cover touting China as a bubble? I just don’t see it. Maybe a small housing bubble (with that many people can you possibly build too much housing?) but slowed down growth is still growth right?
Young guy indeed! 🙂
I’m not really playing Asia, I only have one broad-market ETF of late: VWO.
https://personal.vanguard.com/us/FundsSnapshot?FundId=0964&FundIntExt=INT
I recall the top Asian countries in this index are China, Korea, and Taiwan. For me, that’s all I’m playing right now.
I don’t know if China is a bubble. They are ready to really kick-start (if not already) their industrial revolution so I personally don’t think there’s any bubble to pop, only one to grow. Demand FAR exceeds supply right now for most of Asia, China included. Housing growth may slow down, but that’s a cyclical sector anyhow. Over a ten-year span, I think you’ll find housing and other sectors in China on a significant trend upwards.
Thanks for the insightful comment! 🙂
The problem I have with a strategy based exclusively on index funds is the lack of cash flow generated from say, a dividend-oriented investment strategy. It’s just my take on things.
To a Canadian investor, the dividend tax credit makes dividend investing even more attractive.
With that being said, I have recently started index investing in an individually held non-registered account, and my plan is to employ a moderately active strategy. For now, I’m mainly buying in on the lagging indexes but over time, this may change. With market swings come opportunity, and adjusting weightings (within reason) accordingly may be advantageous in some cases to allow for above-average gains in the years to come.
I like Vanguard products and have positions in VEA & VTI.
Great post! Looking forward to part III.
Cheers,
TWC
@TWC,
I think an indexed-only strategy is OK, but it’s not for me, since I prefer having some dividend-income from established companies.
Owning a bunch of XDV and CDZ is simply not the same. Besides, you hold that stuff (ETFs) unregistered, you get hit with capital gains and no dividend-tax credit. Also, why bother paying management fees with dividend ETFs if you have an opportunity to hold almost as many of the same companies outright? Direct stock ownership simply makes so much sense to me on many levels; when you are diversified. Am I missing something my friend? 🙂
I got started in indexing (and continue to do it) because of it’s simplicity. I don’t have time nor money to be diversified as much as I need to, maybe ever. If I eventually hold 200 stocks in my portfolio, maybe I won’t need to index but I can’t see that happening. Maybe 30+ stocks, is more realistic. So, I index. I can thus set and forget part of my retirement dream and let it run on autopilot. That’s a great feeling.
So you hold those indexed products non-registered? That is interesting, I don’t think I knew that. I knew you bought some VEA and VTI, but why non-registered if I may ask? Curious.
As always, thanks very much for your contribution to the blog. You always have great details to share!
For retirees 60+ growth stocks don’t cut it in todays sideways markets. Currently bonds don’t either what with the low yields etc. Dividends pay the bills while growth(?) stocks don’t. Dividend stocks also seem to be growing as more people chase yield. Hi-yield bond funds can be an alternative way to have some bonds in your portfolio. I like FAY.UN and CHB. Growth stocks can work only if you trade them regularly in the current choppy markets. Buy and hold does still work for dividend paying stocks.
Thanks for stopping by Stu!
Stu, just to clarify, are you saying retirees who are 60+ or 60+ stocks wouldn’t cut it in today’s markets? I hear ya with the bonds, they aren’t yielding much but I would argue some holdings in 60+ dividend-paying stocks would certainly provide many retirees with some valuable income.
I looked at FAY.UN, very surprised by the yield!
http://tmx.quotemedia.com/quote.php?qm_symbol=FAY.uN&locale=EN
Is that sustainable? The payout ratio is over 100%.
The Claymore product (CHB) is rather high yield as well (over 7%), a monthly distribution is rather nice.
http://tmx.quotemedia.com/quote.php?qm_symbol=CHB
I think buy and hold definitely works forinvestors who are willing to own established companies that have a strong history of paying dividends, and not be speculative.
Do you index or dividend-investor or both Stu? Again, thanks for your contribution.
@My Own Advisor
When Canadian Vanguard funds come out, I want to get the emerging market index fund (non-hedged), so that I can diversify geographically. I would buy VWO, but I don’t have any US cash right now, so when I convert from Canadian $, I have to pay brokerage the conversion fee.
@Peter,
I like the idea of going non-hedged. The more I read about hedged products, the more I’m convniced over the long-haul the extra fees are not worth it.
I’m not a big fan of the brokerage conversion fees (either). Who is? I need to find a US $ RRSP. BMO has one now. Questrade has one as well. I’m going to look into those this winter and weigh the pros and cons.
Thanks for stopping by. I appreciate your comments!
For the recommended bond allocations, age should not be the only factor. Your temperament and risk tolerance plays a factor as well. Hence, someone in his 20-30’s can still have 30-40% bonds if their personality dictates it.
I am waiting for the Canadian Vanguard funds to come out (end of November I believe), so I can buy them using Canadian $ , without having to convert to US$.
@Peter,
I think you’re like me, as I age, my risk tolerance is sure to go down and I will over time, only increase my allocation to bonds. I’m approaching 40 in a couple of years, so my goal is to have close to 40% bonds. That said, I have DB pension, which I consider a big fat bond.
Good on you Peter and the Vanguard products. I own a few Vanguard products, but only in my RRSP. I wonder how much Vanguard will take-off in another few weeks? Any predictions?
Any particular ETFs you’re looking at?
Thanks for your comment!
Overall, it’s amazing to me right now how many people are “down” on equities. Sure, there are some short term obstacles, and a multi-year deleveraging process that the world economy has to go through. But with an exploding consumer class around the world, I don’t understand how people honestly believe the global market will stay down for the next 20 years.
One thing I specifically like is the fact that they used extremely broad based ETFs. So often we just assume the S&P 500 index will track the whole market, but I like the Russell 3000 better as those small caps have traditionally offered substantially more growth than the established companies.
@MUM,
I hear ya. Folks down on equities, that’s fine by me. Cheaper stocks. I love when companies go on sale! I definitely foresee an exploding middle class in Asia but little growth in the U.S. Just way too much debt.
I don’t own IWV (Russell 3000) but did start a small position in VTI. It has 900 companies I recall, which is plenty diversifed for me. You’re right that the Russell 3000 has so many small caps, you can take advantage of all those small companies on the verge of great growth.
Speaking of the exploding middle class, are you investing in Asia much?