The Four Pillars of Investing: Lessons for Building a Winning Portfolio
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The classic guide to constructing a solid portfolio―without a financial advisor!“With relatively little effort, you can design and assemble an investment portfolio that, because of its wide diversification and minimal expenses, will prove superior to the most professionally managed accounts. Great intelligence and good luck are not required.”William Bernstein’s commonsense approach to portfolio construction has served investors well during the past turbulent decade―and it’s what made The Four Pillars of Investing an instant classic when it was first published nearly a decade ago.This down-to-earth book lays out in easy-to-understand prose the four essential topics that every investor must master: the relationship of risk and reward, the history of the market, the psychology of the investor and the market, and the folly of taking financial advice from investment salespeople.Bernstein pulls back the curtain to reveal what really goes on in today’s financial industry as he outlines a simple program for building wealth while controlling risk. Straightforward in its presentation and generous in its real-life examples, The Four Pillars of Investing presents a no-nonsense discussion of:The art and science of mixing different asset classes into an effective blendThe dangers of actively picking stocks, as opposed to investing in the whole marketBehavioral finance and how state of mind can adversely affect decision makingReasons the mutual fund and brokerage industries, rather than your partners, are often your most direct competitorsStrategies for managing all of your assets―savings, 401(k)s, home equity―as one portfolioInvesting is not a destination. It is a journey, and along the way are stockbrokers, journalists, and mutual fund companies whose interests are diametrically opposed to yours.More relevant today than ever, The Four Pillars of Investing shows you how to determine your own financial direction and assemble an investment program with the sole goal of building long-term wealth for you and your family. Read more
Publisher : McGraw Hill
Publication date : July 8, 2010
Edition : 1st
Language : English
Print length : 352 pages
ISBN-10 : 0071747052
ISBN-13 : 59
Item Weight : 1.4 pounds
Dimensions : 6.3 x 1.3 x 9.2 inches
Part of series : PERSONAL FINANCE & INVESTMENT
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Top Amazon Reviews
Format: Hardcover
As the title suggests, the author presents within this book four essential pillars of successful investing. Each section of the book is then dedicated to investigating and detailing each of these pillars and they are: 1) Theory 2) History 3) Psychology and 4) Business. The first section on theory, is one which the author calls "the most important part of the book". In his words it "surveys the awesome body of theory and data relevant to everyday investing". This section centers itself around the "fundamental characteristic of any investment is that its return and risk go hand in hand." The second section on History postulates that "an understanding of financial history provides an additional dimension of expertise." The third section, Psychology, is one in which the author surveys the area of "behavioral finance". Where one "learns how to avoid the most common behavioral mistakes and to confront your own dysfunctional investment behavior." Last but not least the last section - Business - exposes how "the modern financial services industry is designed solely to serve itself." What sets this book apart from other investing books is the breadth of areas covered, and also the writing style which is both "understandable and entertaining". A highly recommended read for any investor regardless of level. Below are key excerpts from the book, that I found particularly insightful: 1) "The highest returns are obtained by shouldering prudent risk when things look the bleakest." 2) "Most small investors naturally assume that good companies are good stocks, when the opposite is usually true." 3) "Sine you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy. because it is the only factor affecting your investment risk and return that you can control." 4) "Bubbles occur whenever investors begin buying stocks simply because they have been going up." 5) "Buying assets that everyone else has been running from takes more fortitude than most investors can manage. But if you are equal to the task, you will be rewarded." 6) "There are really two behavioral errors operating in the overconfidence playground. The first is the "compartmentalization" of success and failure. We tend to remember those activities, or areas of our portfolios, in which we succeeded an forget about those areas where we didn't...The second is that its far more agreeable to ascribe success to skill than to luck." 7) "By indexing, you are tapping into the most powerful intelligence in the world of finance - the collective wisdom of the market itself." 8) "Rebalancing forces you to be a contrarian - someone who does the opposite of what everyone else is doing. Financial contrarians tend to be wealthier than folks who like to simply follow the crowd." 9) "Risk and return are inextricably enmeshed. Do not expect high returns without frightening risks, and if you desire safety, you must accept low returns." 10) "This book should be seen as a framework to which you'll be continuously adding knowledge." 11) "The overarching message of this book is at once powerful and simple: With relatively little effort, you can design and assemble an investment portfolio that, because of its wide diversification and minimal expense, will prove superior to most professionally managed accounts."
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Reviewed in the United States on March 3, 2013 by O. Halabieh
William Bernstein's new book, The Four Pillars of Investing, has been eagerly anticipated by readers of his first book - The Intelligent Asset Allocator. I think that readers of The Four Pillars will be just as happy as they were with the first book. Bernstein, together with a number of financial writers including Larry Swedroe and John Bogle, have written passionately about the merits of disregarding most of the preachings of the financial media and marketers and instead urge readers to take a sensible, rather than emotional, approach to investing. In an easily readable style understandable by most anyone, The Four Pillars provides an outstanding overview of basic concepts of risk in projecting portfolio returns and in explaining why so many investors spend so much money for worthless investing advice and management. The Four Pillars does a wonderful job of explaining the axiomatic principle that anticipated returns are related to the risk of an investment. I've found that Bernstein's greatest strength is that he is able to explain the mathematical and statistical underpinnings of investment theory in a way that most readers can understand. His writing is not overly technical and the book was a joy to read. Bernstein's discussion on the underlying reasons that actively managed mutual funds, stock picking and market timing only generate high costs and poor performance is excellent and quite convincing. I thought the book did a particularly good job of describing the mental factors involved in a long term investing strategy. The book was written after the technology crash and the events of 9/11 and draws on these events to explain the type of mental anguish which investors must anticipate over the course of a long term plan. Unlike many investment writers who simply advocate investment in equities because they historically have done better over the long term, Bernstein takes pains to advocate a diversified portfolio tailored to the investor's level of risk tolerance so that an investor can stay the course through thick and thin. For people who believe that they have a unique ability to actively trade their way to market beating returns - read this book and it will change your life.
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Reviewed in the United States on May 16, 2002 by C. Salt
I am an avid fan of Bernstein and his fellow travelers in the Efficient Frontier, Sharpe, and other innovations of Modern Portfolio Theory, so I was disappointed to see so little of this valuable information included in this book. I understand that this book was meant to be less intimidating to the novice and intermdiate investor alike, and he doesn't disappoint with accessible articulation and a witty style that should appeal to every reader. The two chapters on asset allocation, the ~one~ thing the investor is able to control, and the one thing which directly rewards the investor, doesn't explain the "frontiers" and why four assets or ten is best for the individual investor. The efficient frontier in layman's terms would have been especially helpful. On the other hand, dauntless pages were dedicated to diminishing returns (DR), which were clearly adumbrated for their importance. Then Bernstein concentrates on Vanguard investment opportunities, with only brief reference to ETFs (exchange traded funds). Vanguard is to be commended for bringing index-investing to the fore, but Vanguard's steep minimums and stiff penalties are impediments for the smaller investor and are downright subversive to the investor who does not believe in a "buy-and-hold" theory of investing. Many ETFs are more asset specific and can be had without excess cost through a discount broker. I wish Bernstein had discussed the merits and demerits of "buy-and-hold" as opposed to, say the Fabian and other methods of entering and exiting the market on certain MDAs (moving daily averages). I found Bernstein's lack of mention of mid cap stocks throughout the book puzzling. None of the hypothetical asset allocations in the book have any room for mid caps, which can enhance performance and reduce risk. For Bernstein, there are only large and small market capitalization - no middle capitalization. Also, foreign funds and ETFs of foreign assets (such as EFA for MSCI-EAFE index) are considered important, but get only passing and ambiguous comments. The graphs and tables are helpful for the most part, but many are out of date, and some lacked a marked differentiation in plotting more than one overlap, which made for challenging deciphering. The writing is effusive and accessible, making it a good introductory book and a refresher for bulls and bears alike. Overall, I found the book to be a tad bit too garrulous, but easy to read and informative . My cavils and criticisms aside, this book is truly one of the best books on investment in print.
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Reviewed in the United States on September 30, 2003 by D. S. Heersink
Bernstein's advice is to take a long step back from the daily market reports and concentrate on understanding how the markets work, the 'four pillars', and design your own investment strategy. Bernstein persuades us that with relatively little effort we can build an investment portfolio that is diversified, minimally expensive, and superior to most professionally managed accounts. An ability to estimate the long term return of the major asset classes is a critical skill. Failing to diversify across those asset classes is an investor's biggest risk. Students of modern portfolio theory (MPT) will find FOUR PILLARS to be a companion volume to Larry E. Swedroe's RATIONAL INVESTING IN IRRATIONAL TIMES. The markets are "brutally efficient". Avoid actively managed funds and use index funds to tap into the "collective wisdom" of the market. Market timing, stock-picking, and technical analysis don't work. Indexed securities may be a little dull, but the strategy outperforms the gurus. The first 'pillar' of the book is devoted to investment theory and historical returns of various asset classes. It's the longest section and some of the best material is here. In "Measuring the Beast" there is the the clearest explanation I have read of the dividend discount model (DDM) that is used to determine 'fair value'. This chapter also gives us the Gordon Equation to estimate market returns (Market Return = Dividend Yield + Dividend Growth Rate). Bernstein's conclusions are unsettling: The return of stocks and bonds will likely be similar in the future and their rates of return will probably be lower than in the past. There is no question that having an historical perspective on investment manias and crashes is an important second pillar of understanding for the informed investor. This history has been told before, but the material fits nicely. Bernstein's third pillar analyzes the behavioral errors investors routinely make. A need for excitement (viz. investors drawn towards low-probability/high-payoff situations) and a fundamental misunderstanding of risk/reward that leads investors to conclude that "great" companies must be winning stocks are just two errors that stand out. The fourth pillar of Bernstein's work is his shakiest. His caricature of the investment establishment that includes the brokerage community, mutual fund companies, and the media is painted with broad angry strokes. He is simply incorrect to say that brokers have no fiduciary responsibility towards their clients (It is required by the National Association of Security Dealers, NASD). On the other hand, his incisive analysis of the 401(k) retirement system is an important alarm. Bernstein's closing chapters address some of the big questions investors ask. His "back of the envelope" calculation for retirement nest eggs is as helpful as discovering a Leatherman Tool in your back-pocket. In a variety of investment scenarios the author ably demonstrates the application of his ideas in a specific and flexible manner. But it is fair to say that a typical portfolio will include US and foreign index equity assets with an emphasis on value (versus growth), short maturity bonds, and a real estate index fund. Serious investors will want to read this book.
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Reviewed in the United States on January 3, 2003 by dennis wentraub
Format: Hardcover
Bernstein is a skeptical realist when it comes to investing: we can never really expect to do fabulously, because in order to do so one must shoulder extraordinary risk. The first pillar, The Theory of Investing, I found to be the most useful. Here the author schools us in the relationship between risk and reward of various types of asset classes. Bonds, and their historical precedents, prestiti, in the Venetian republic, and consuls, in France, serve to illustrate the considerable risks of holding long-term debt instruments. The solution is short-term loans, and for the rest of the book this becomes ingrained in the reader. As nations rise and fall risks, and returns, of holding debt change in the inverse. The lesson here is don't expect high interest rates in advanced economies. Which leaves us looking to stocks as the growth drivers of our portfolios. I found the remaining three pillars, history, psychology, and business of investing to be less useful and covered well elsewhere. By now everyone has heard the mantra, don't try to beat the market, minimize costs, buy index funds. Bernstein repeats these recommendations. But one thing is interesting. If, as the author maintains, conventional wisdom is usually wrong, then should the (current) conventional wisdom to "buy the market" and index be questioned? I don't have the answer to that. Also, with stocks, the only safe period is 20 years or more, as the author illustrates. It might be unrealistic to expect today's late-saving Boomers to make up for lost time with a heavy stock allocation in their portfolios if they are looking at just a decade or less before retirement. Curiously, this long time horizon for stocks would seem to counter the author's contention that only value stocks can be expected to have a higher return. In the short-term, yes, but if we are investing in stocks for the long term I am not so sure it makes sense to mostly focus on value stocks. This brings us back to short-term debt instruments and how crucial they can be to minimizing next egg catastrophe. But they are boring and have very low return. But maybe that is the point: if you find investing exciting, you are probably doing it wrong. The most important decision you can make is asset allocation. Bernstein does an excellent job illustrating some example asset allocations for some fictional investors at different ages. and points in their careers. This is emphasized so strongly that there are NO individual stock examples, as the expected long-term returns of different asset classes are what is important in constructing a portfolio.
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Reviewed in the United States on October 9, 2017 by ARTHUR F.
Format: Hardcover
I have started devoting time to understanding personal finance and retirement over the past year. I've listened to multiple pod casts and read about six books on the subject. I avoided this book because it was written in 2002 and obviously, now, out of date (the 2010 update was a short, and rather useless, post-script). The investment strategies that I have gravitated to have been simplicity and indexed funds, especially Vanguard. I have not looked into whether or not this was one of the foundational books which made an argument for this strategy or not, but no book has been close in quality. Until completing the book I was honestly skeptical that a good knowledge of theory, history, and understanding of the financial business was important to me. I see now that I was wrong. Even after reading other books, I have evaluated investment options completely wrong. I finished the book one day ago, so I would rather wait a year before making this statement, but presently I feel this is one of the top 5 most important books I have read. An absolute game changer. I could not suggest more strongly that you read this book, regardless of how much you buy his advice at the end of the book, I think the foundational knowledge you receive in the first three quarters is absolute gold. Regarding the antiquity of the book, its actually irrelevant and surprisingly improves its punch. The book was written during the dot com meltdown and before the housing bubble. In retrospect, yet again nothing is new and the solid foundations discussed in the book have held true. My only criticism is the last section felt very much like 2002 advice and not generalized enough, which I think can be problematic. It is touched on in his post script, but I think a complete revision would be more appropriate when describing the book as a new edition.
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Reviewed in the United States on December 17, 2018 by RWM
Format: Kindle
This is a the best summary I have read for why it makes sense for most investors to use index funds rather than try to pick stocks or actively managed mutual funds. The writing is clear, simple to understand and well supported by the many studies cited. Mr. Bernstein certainly has done his research and sets forth a very compelling case. There were a couple of things I wish had been addressed that were not, and that are generally not addressed by anybody who tries to make the argument for passive investing. First, while it is admittedly very difficult to beat the market averages, it is and has been done consistently by a small number of investors and mutual fund managers. And it is not at all difficult to identify who they are. There is so much information readily available online about mutual funds with outstanding long term results. Of course, as Bernstein points out, those results revert to the mean the more word gets out about those funds and they grow their assets beyond a manageable size. But there are always other managers right behind them trying to get recognized who then turn into superstars. Has any study been done about the effectiveness of selling a fund when it becomes average and replacing it with a fund that now tops the rankings? He doesn't say. Second, and more importantly, what happens if everybody follows his advice and invests only in index funds? Who is left to push stock prices higher? If nobody is out there trying to beat the averages, is the only upward pressure on prices the new money being invested in index funds? I'd like to see answers to those, because it seems like the indexing argument only makes sense if a lot of people are not indexing.
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Reviewed in the United States on August 14, 2014 by Mike Brown
Format: Hardcover
This was the book that got me started on successfully spreading out my investments. I, too, took a hit with the big recession, but nothing like what happened to most of my friends. I did not cash in my investments after the fall in the market, and just rebalanced with new purchases. This has been very successful for me. The book appealed to the logical side of my brain, and following my own research, I diversified my "portfolio" to include foreign bonds and stocks, but all in targeted no-load mutual funds. My broker has had several classes in portfolio management and I was not only able to keep up, I was able to add to the class. This may not be the easiest of his books to read, I can suggest his later books for those who have not had some exposure to the market. But, for my way of thinking, it has enough depth to meet my needs, and the back-up research he has done helped convince me that his premise is a good one. It helped me in time to ride out the rough spots, and now the market is looking up and it is time to rebalance my "portfolio".
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Reviewed in the United States on December 8, 2013 by L. Booth