Book Review: All About Asset Allocation


all-about-asset-allocation-summaryHey gang, time for another book review. The last review in this series was my A Random Walk Down Wall Street review.

Today, I’m reviewing Rick Ferri’s All About Asset Allocation. Rick Ferri is a somewhat well-known blogger (his website is here), and he’s written six investment books, including this one. Rick is a champion of the low-fee, index fund-heavy approach to investing.

All  About Asset Allocation summary

The book is about, as you might expect, how to go about allocating your assets. How much of your investments should be in stock? What percent in bonds? How about real estate?

This is a top-down approach to investing, where one first decides on asset allocation, and then goes out and implements that strategy. This is opposed to the bottom-approach favored by value investors, which consists of buying whatever securities are worth less than their intrinsic value.

Thus, the book is about deciding on where to put your money. There’s at least on famous study indicating that your asset allocation determines most of the variance in your returns so, if you subscribe to a top-down approach, this is an important point worth spending some time on.

As I put it in my extended All About Asset Allocation summary, the advice in the book can be summed up thusly:

  1. Determine a set of non-perfectly correlated asset classes to build a portfolio out of. Securities like stocks, bonds, commodities, real estate, and so on.
  2. Taking into consideration your risk tolerance, decide on an allocation between those assets.
  3. Once that’s done, precommit to rebalancing your portfolio once annually to ensure that you maintain these targets.
  4. Stay the course.

All About Asset Allocation review

So, what did I think about the book? First, let me tell you what I liked, and then I’ll tell you what I didn’t.

Positives

The book is written in a very clear, straightforward manner, such that I have a hard time beliving that anyone will come away from it confused about its main message. This is a strong plus. The author does a great job at demystifying investing and not hiding behind jargon.

I also enjoyed that the book contains a lot of different charts. This helps break up the text, and makes it more readable and understandable. I’m a bit envious, really, because one of the weaknesses of Top Financial Advisor is that I haven’t been including enough graphics. But that’s just like, my opinion, man.

Beyond that, the book held my attention well, and I burned through it in less than a week.

Negatives

The book’s biggest weakness, and depending on how you lean, maybe this isn’t a weakness at all, is that the author is a Boglehead. These are people who have taken the gospel of Vanguard founder John Bogle and created a religion out of it. They preach index funds and low cost investing with a fervor rarely seen outside of the political arena.

Maybe they’re right, and the markets really are so efficient, and market-wide returns so stable, that value investing and other strategies are a waste of time. But the ideology is still annoying, just like, even if you’re a Democrat, you can still notice that know-it-all Democrats and pundits on MSNBC are more annoying than not.

The other negatives, as far as I’m concerned, is that I came away with less than a very strong understanding of the theoretical underpinnings of asset allocation. A lot of the ideas about the subject rely on the relationship between risk and reward, which has a weak at best relationship to the empirical evidence. I understand why diversification works but, beyond that, I’m not very confident that constructing a portfolio has any guiding star.

Should you buy this book?

With the negatives out of the way, on the whole, I thought it was pretty good. If you’re interested in learning more about asset allocation, it’s hard to go wrong with the book.

Consider buying a copy.

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