All About Asset Allocation

by Richard A. Ferri

WHEN IT COMES TO INVESTING FOR YOUR FUTURE, THERE'S ONLY ONE SURE BET--ASSET ALLOCATION THE EASY WAY TO GET STARTED Everything You Need to Know About How To: Implement a smart asset allocation strategy Diversify your investments with stocks, bonds, real estate, and other classes Change your allocation and lock in gains

Trying to outwit the market is a bad gamble. If you're serious about investing for the long run, you have to take a no-nonsense, businesslike approach to your portfolio. In addition to covering all the basics, this new edition of "All About Asset Allocation" includes timely advice on: Learning which investments work well together and why Selecting the right mutual funds and ETFs Creating an asset allocation that's right for your needs Knowing how and when to change an allocation Understanding target-date mutual funds

"All About Asset Allocation offers advice that is both prudent and practical--keep it simple, diversify, and, above all, keep your expenses low--from an author who both knows how vital asset allocation is to investment success and, most important, works with real people." -- John C. Bogle, founder and former CEO, The Vanguard Group

"With All About Asset Allocation at your side, you'll be executing a sound investment plan, using the best materials and wearing the best safety rope that money can buy." -- William Bernstein, founder, EfficientFrontier.com, and author, The Intelligent Asset Allocator

Genres: Finance, Personal Finance, Nonfiction, Money, Business, Economics, Buisness

336 pages, ebook

First published September 15, 2005

Reviews

[C · Rating 5 out of 5]

The best book I’ve read on asset allocation. It’s a practical guide to constructing a portfolio based on modern portfolio theory (MPT). Full of recent data (2010), studies, charts and graphs, it’s relatively easy to read, but better for intermediate investors, not beginners.

Research shows that about 90% of portfolio performance depends on asset allocation. I liked the point that the goal of investing isn't to get rich; it's to not get poor. Ferri’s advice: don’t try to outguess the markets, but control what you can: costs, taxes, and risk. Buy, hold, and rebalance using low-cost mutual funds and ETFs. I’m a fan of Vanguard founder John Bogle and passive investing, so I agreed with most of this book, although I invest more aggressively than Ferri recommends.

I picked up this book after hearing Richard Ferri interviewed on The Index Investing Show.

Lessons
• Allocate across multiple asset classes to reduce risk.
• Invest broadly within each class to eliminate the specific risk of any single security.
• Keep costs as low as feasible, including taxes.
• Rebalance periodically (annually).

Early savers (20s and 30s)
• 6 months living expenses in checking or money market
• Short-term bond or CD for large purchases such as home
• 60-80% stocks and REITs
• 20-40% bonds

Why not to have 100% in stocks
• Most people can’t stomach the volatility.
• You need money to move into stocks in down markets.

Early Savers Moderate Basic Portfolio
• 40% US stocks (total US stock market index fund/ETF)
• 20% international stocks (total international index fund/ETF)
• 10% real estate (REIT index fund/ETF)
• 30% bonds (total bond market index fund/ETF)

Early Savers Moderate Multi-Class Portfolio
US stocks
• 25% core (total US stock market index fund/ETF)
• 10% small value
• 5% microcap
• 10% real estate

International stocks
• 5% Pacific
• 5% Europe - large
• 5% international small cap
• 5% emerging markets

Bonds
• 20% investment grade bonds (total bond market index fund/ETF)
• 5% high-yield bonds
• 5% inflation-protected bonds/TIPS

Asset location and taxes
Tax-deferred or tax-free accounts
• corporate bonds and bond funds
• CDs, agency bonds, mortgages
• high-turnover mutual funds
• REITs
• commodities

Taxable accounts
• low-turnover mutual funds, index funds
• broad market ETFs
• muni bonds

Real estate
• A well-diversified portfolio with real estate alongside stocks and bonds has higher returns.
• The long-term risk and return on US real estate has been on par with US stocks since 1930.
��� Use home ownership and commercial real estate investments as long-term investments.
• Hold a max of 10% in REITs.

Miscellaneous asset allocation notes
• The more asset classes the better, up to about 12. This reduces risk and increases returns.
• Include assets with no or low correlation.
• Globally, small and value stocks have higher returns due to higher risk. Add a small cap value fund to a total US market fund.
• Foreign bonds aren’t worth owning due to high fees.

• Skip commodities. They have no real returns; they don’t earn more than inflation in the long term.
• Skip hedge funds. They have high costs, lack of diversification, and poor performance consistency.
• Investing in collectibles can be worthwhile if done right.
• The real after-tax, after inflation return on T-bills is 0.
• Use “your age in bonds” as a guideline for the percentage of bonds to hold. Adjust according to circumstances.

[Thomas · Rating 4 out of 5]

Ferri has been extremely helpful in my financial education. Although I have read most of his material online, I decided to read this book to see if it would be a good read for some of my students and family members.

I think that every person should familiarize themselves with strategic asset allocation and passive index investing. I prefer a simple portfolio that I control and this book is helpful in helping you develop a asset allocation that meets your goals.

One critique, he could of more simply explained the different asset classes and market returns/risk. Minor criticism though.

[Sergey Morovshik · Rating 5 out of 5]

Книга хорошо готовит читателя к инвестициям, особенно новичка который планирует куда-то вкладывать средства. В основном рассмотрены инструменты и примеры для долгосрочных стратегий от 3-5 лет и более.
Все выводы и рекомендации автора подкреплены статистикой и графиками с рынка. Особенно понравилось, что уделено внимание, что инвесторы бывают разные и важно понимать куда ты отнесёшь себя. Пенсионер, молодой и зрелый инвестор сильно отличаются в подходе и как собирать свой индивидуальный портфель именно под свои потребности. А ведь мы по разному планируем своё будущее, кто-то хочет оставить наследство, а кто-то планирует обеспечить только себя, а что если вы заболели или наоборот в 60 сыграли свадьбу. В общем все описано в книге. Отдельно понравился раздел про риски и кто сколько может на себя взять, все не так просто, как кажется, но после мне стало понятно, почему я так долго не заходил в инвесторы и не мог переживать изменения рынка акций. В книге много примеров портфелей и ссылок на разные источники информации.
Для меня эта книга выступила в роли проводника - «инвестиции для чайника».

[Drew Canole · Rating 4 out of 5]

Gives the basics of what Asset Classes are and why having different allocations changes your investment risk. It gets really in-depth though, its certainly not just about Asset Allocation. It could be a great primer for anyone looking into investing.

He outlines 5 classes:
1-US Equity (I take this to mean your home country)
2-International Equity (I feel like developed, home country, and US can be grouped together, perhaps Emerging markets is a seperate asset class. As can small and micro-cap stocks if your overweigh them.)
3-Fixed-Income Investments (IE bonds)
4-Real Estate Investments (Beyond home ownership anyone can invest in REITs, I'm not sure how I feel about them)
5-Alternative Investments (here he basically advises avoiding commodities, futures, options, hedge funds, (probably) crypto, gold, collectibles etc because over time most of those have shown to have a poor risk/reward ratio than equity and fixed-income. Even gold, it has a good return over the past but the volatility is just as high as developed market stocks with way lower return.)

Your investment "pyramid" will consist (in this priority) of Cash for living expenses, long-term liquid investments (bonds, ETFs, etc), long-term non-liquid investments (house, businesses, etc ), non-discretionary assets (social security, pensions), and discretionary speculative (risky investments like individual stocks).

There's a chat about being aware of realistic market expectations and when to change your allocations.

I liked some of the stuff on behavioural finance. After all a plan is only good if you actually follow it.

- Investor's give too much weight ot recent information and too little weight to long-term fundamentals
- People tend to buy investments that have recently had a large run up in performance
- investors label investments as "good" or "bad" based on where the price is relative to the price they paid instead of the underlying fundamentals of the investment
- people are reluctant to admit an error in judgment. Consequenlty, many people pay high commissions and fees to brokers and advisors so that they have someone to blame.
- people consider the loss of $1 twice as painful as the pleasure of a $1 gain
- If by chance an investor happens to time the market correctly in the short term, it may lead to large losses in the long run.... attriute thier good fortune to their investment skill rather than luck.
- only investors who have an asset allocation at or below their tolerance for risk survive deep bear markets

[Todd N · Rating 5 out of 5]

I took my time with this book to absorb all the data. This is an excellent overview of the theory of asset allocation with plenty of examples mixed in. Highly recommended as a follow on to Intelligent Asset Allocator.

The first part of the book goes over the different asset classes in detail with a lot of examples. Then correlation is covered, showing how weakly correlated asset classes combined in a portfolio can reduce risk and increase return.

The end of the book is a little rushed. It covers (very briefly) the main points of behavioral economics and why an investor doesn't discover his or her true risk tolerance until it's too late. Four typical portfolios are covered with a handful of funds and then again with a large number of funds. There is a brief chapter about selecting an investment advisor, though anyone who made it that far into the book is most likely going to invest on their own.

It is now on my bookshelf between Faulkner and Flaubert. Ha!

[Tyler · Rating 4 out of 5]

This was a really helpful book that added a lot to my investment knowledge and helped me know how to make a plan for my future. I highly recommend it to anybody looking to better understand all the jargon about different types of assets and what they do and how to choose which ones might be appropriate for your portfolio.

Here are the notes I took for myself as I read, much of which is taken frum summarized points at the beginning of each chapter of the book.

Investment planning is critical to long-term success.
Asset allocation is the key element of investment planning.
Discipline and commitment to a strategy are needed.
There are no shortcuts to financial security.

Investment returns are directly related to investment risk.
There are no risk-free investments after taxes and inflation.
Practitioners view risk as investment volatility.
Individuals view risk as losing money.

Diversification reduces the chance of a large boss.
Rebalancing assets in a portfolio helps contain risk.
Correlations between asset classes are not static.
Low correlation among asset classes is preferred but difficult to identify.

Every investment in your portfolio should have a real expected return over inflation in the long term.

Owning several asset classes is better than owning a few.
Each new and unique asset class can reduce portfolio risk.
Choose asset classes that have positive real returns and lower correlation.
You can select a good asset allocation, but not a perfect one.

The perfect portfolio can only be known in retrospect. You just do the best you can based on realistic and rational expectations.

A portfolio with more asset classes is better than a portfolio with fewer asset classes, within limitations. Any diversification benefit tends to diminish after about 12 different investments [side note: Bogle said after 5], and the maintenance cost required increases.


Asset class risks should be fundamentally different from each other.
Liquid and low-cost funds should be accessible.

Potential asset classes for inclusion in your portfolio should have three important characteristics:
1. The asset class is fundamentally different from other asset classes in a portfolio.
2. Each asset class is expected to earn a return higher than the inflation rate over time.
3. The asset class must be accessible with a low-cost diversified fund or product.

Diversification does not simply mean owning several mutual funds with different names. The underlying assets in those funds need to be examined and compared.

Although the prices of commodities and precious metals go up and down like a roller coaster, commodities have no ability to create real wealth for a long-term investor.

The investment vehicle selected to represent an asset class or category in a portfolio should also provide enough diversification within the fund itself. Index funds do this by definition.

U.S. stocks have produced about 6 percent in real (inflation adjusted) compounded returns.
The U.S. stock market can be subdivided into many different categories.
Diversifying among these categories can aid a portfolio over time.
Mixing a broad index fund with small-cap value has produced the best results.

International equity provides currency diversification.
Developed markets include advanced countries.
Emerging markets and frontier markets expand into new geographic areas.
International equities exhibit size and style premiums.

Sample of fixed income allocation:
80% Aggregate Bond Index
20% TIPS
20% High-Yield Corporate Bonds

Real estate is a separate asset class from stocks and bonds.
REITs are a convenient way to invest in real estate
REITs have low correlation with common stocks and bonds at times.
Home ownership provides both a place to live and potential gains.

Recommends less than 10% of your equity in REITs because they are a narrow slice of the total market.

Don't invest in commodities, collectibles, hedge funds, amd other such speculative foolishness.

Realistic market expectations are important to investment planning.
Market volatility is more predictable than market return.
There is a relationship between market risk and long-term expected return.
Market forecasts are useful in the long term, but not in the short term.

A proper asset allocation is designed to match an investor's needs.
The overall risk cannot be above one's tolerance for risk.
The life-cycle method is a good place to start.

The most important thing a young person can do to build their account is to start early and save regularly.

Recommends early savers have a stocks/bonds ratio of 80/20 for aggressive investors, 70/30 for moderate, or 60/40 for conservative investors.

Sample Basic Moderate Portfolio for Early Savers:
40% Vanguard Total U.S. Stock Index
20% Vanguard Total International Stock Index
10% Vanguard REIT Index fund
30% Vanguard Total Bond Market Index fund

Sample Moderate Multi-Asset-Class Portfolio
25% Vanguard Total U.S. Stock Index
10% Vanguard Small-cap Value Index Fund
5% Microcap -- Bridgeway Ultra Small Company Market
10% Vanguard REIT Index Fund
5% Vanguard Pacific Stock Index
5% Vanguard European Stock Index
5% International Small-cap Value
5% Vanguard Emerging Markets Stock ETF
20% Vanguard Total Bond Market Index Fund
5% Vanguard High Yield Bond Fund
5% Vanguard Inflation Protected Securities

Recommends Midlife Accumulators have 70/30 stocks/bonds for aggressive investors, 60/40 moderate, 50/50 conservative.

Also recommends that during midlife you build up emergency savings to a whole years worth of expenses.

For transitional retirees with 3-5 years before retirement, he recommends having 1-2 years of living expenses in savings.

When you retire you can draw about 4% of your portfolio per year without touching the principal. If you retire early it will need to be less. If you want to leave a bigger estate you could withdraw less.

Asset Allocation for transitional retirees:
Aggressive 70/30 stocks/bonds. Moderate 50/50. Conservative 30/70.

Mature retirees recommended asset allocation: aggressive 60/40 stocks/bonds. Moderate 40/60. Conservative 20/80.

Staying below your maximum risk tolerance is critical to investment success

Asset allocation decisions are typically not permanent. Life changes lead to asset allocation changes.
Too much risk in a portfolio should be managed downward.
Estate planning needs eventually set asset allocation.

There Reasons to Change Asset Allocation
1. Your financial goal is well within reach.
2. You realize that you will not need all your money during your lifetime.
3. You realize your tolerance for risk is not as high as you thought it was.

What to do in a bear market just before retirement:
1. Don't increase risk.
2. Don't decrease risk.
3. Try to save more in the final years or months before retirement.
4. You may work a year or two longer.
5. If you decide to go ahead with retirement on your planned date, you may have to reduce spending for a time. Try spending only the interest and dividends your portfolio makes.

Expenses have a direct impact on investment returns and should be low.
Taxes can be controlled through proper management.
Discipline is the key to investment success.

[Matthias · Rating 5 out of 5]

Hands down the most useful book I have read in this space. I appreciate that it's on point, not repetitive, and backs up claims with data. I like that it's full of relatable, practical advice, takes into account different personalities and stages of life, along with examples for how to implement it.

It has aged well, too (last revision is from 2011.) This speaks to the book's quality and the fact that most of what it teaches are fundamental aspects to investing and asset allocation that only change very slowly with time, if at all. Some of these concepts it discusses (like the impact of volatility on your portfolio or how to define and interpret risk) I vaguely understood before but didn't realize how to reason about in practice until I read this book.

[Donald · Rating 4 out of 5]

I enjoyed this book because it presents a balanced view. It's critical of aspects of the financial industry when it needs to be. It walks through the math when it's appropriate. It lays out the basics of building a portfolio while emphasizing that you actually have to fit it to the realities of your life. It is based on principles so that you can react to changing times. As a first book on asset allocation it at least gave me the contours of what's involved so I can continue reading.

[Shirley · Rating 5 out of 5]

I've read many books on investing and this is the book I would recommend that a new investor read before any others. It may be the only book on the subject they will ever need. The author does a great job of de-mystifying "modern portfolio theory" and providing practical advice on how to apply the research knowledge as an individual investor. His explanation of the technical support for allocation of investment dollars by specific asset classes is the best I've found. It won't satisfy someone who wants to dabble in technical analysis or an active management style, but still provides valuable information that must, in my opinion, form the backbone of any investment strategy.

[Đạt Tiêu · Rating 4 out of 5]

Interesting book, provided basic concepts on asset allocation and modern portfolio theory.
Some notes:

A. Introduction
1. why?
- Reduce overall portfolio risk
- Eliminate unique and specific risk related to a single security
- Keep all costs and taxes as low as possible
- Keep financial targets on track
-> Minimize risks and maximize returns

2. Some guidelines
- Risks can come from many aspects of life.
- Design portfolio (Investment policy statement) is important. Stick to it is even more important.
- 3 types of asset allocation: strategic allocation (buy-and-hold), tactical allocation and market timing

B. Investment planning (IPS): a must-have
- Create a plan -> Implement it -> Maintain it with some suitable adjustments
- A plan has: financial needs, investment goals, asset allocation, investment selection description and the reasons
- Asset classes classified based on discretion and liquidity:
+ Cash accounts for living expenses and emergencies (checking accounts, saving accounts, money market fund)
+ Discretionary long-term liquid investment (mutual funds, ETF, CDs, bonds, annuities)
+ Discretionary long-term illiquid assets (homes, properties, business, collectibles)
+ Non-discretionary assets (pension, social security, restricted stock)
+ Dicretionary speculative (commodities, stocks)
- Asset classes can be classified further in sub-categories like styles (growth, value)
investment rating (grade), market cap size, sectors (industry sectors, geographical sectors, ...)...
-> Should understand different kinds of asset classes, their characteristics (risk and return), the correlation between them.
-> Select an asset allocation mix that best suits financial targets and also best investments representing each asset class
-> There is no perfect investment plan, do not over-analyze

C. Risk and return
- There is no risk-free investment. T-bill is 'risk-free' but heavily affected by inflation and tax -> purchasing power decreases
- There are many ways to define risk:
+ Risk means losing money
+ Risk is to not achieve financial goals
+ Risk is volatility of price or return over a specified period
- Volatility is measure in units of standard deviation around the data average (normal distribution - bell-shaped)
- The order of asset class volatility: T-bill has the lowest volatility (less risky)
-> government bonds -> corporate bonds -> blue chips stocks -> small-cap stocks
- Annualize return (compounded return): all returns have some level of dependence on each other
- Simple average return: normal average return
-> The greater in standard deviation, the more different between these kinds of returns
-> The less volatility, the higher compounded return

D. Asset allocation basic concepts
- Total portfolio risk = Systematic risk (market risk or beta) + Unsystematic risk (Unique stock-specific risk)

- Diversification: the greater the number of stocks spread across all industry sectors,
the lower the unique stock-specific risk each stock has on overall portfolio return

- Rebalancing: get the portfolio back to its original asset allocation target
-> calendar-based or percentage-based implementation
-> reduce annual volatility of the portfolio
-> a way to do diversification
-> Sell a percentage of assets that outperforms and buy more of assets that do not

- Correlation(range from -1 to 1): the trend of two investments (one goes up whhereas the other goes down, or they both go the same way)
- Correlation between investments is dynamic. It changes from time to time.
-> All stock markets tend to have high correlation. Stocks and bonds(or bills or notes) often have low correlation.
-> Need to diversify in investments that have negative correlation (just in theory) or non-correlation/low correlation
By that, the stock-specific risk can be decreased.
-> High correlation investments means no diversification at all.
-> watch out for an optimal number of different investments. The more investments, the more maintainance costs (author suggestion: 12)

- Risk and return efficient frontier: a chart analyzes risk and return when mix 2 asset classes together
-> Adding multiple asset classes -> efficient frontier goes close to 'northwest quadrant' area (highest return with lowest risk)
-> reduce overall portfolio risk

E. A Framework for asset class selection
4 Stpes process:
1. Determine the portfolio risk based on: financial needs(required rate of return, time horizon, ...) and risk tolerance.
2. Select assets classes that fit the portfolio risk based on: unique risk, expected return, past correlation, tax efficiency.
3. Select best investments to represent each chosen asset classes.
4. Implement that asset allocation plan. Maintain and rebalance to control risk and enhance return.

-> Select asset classes that have
+ fundamental differences from each other (different categories, styles, market cap, rating, sector...)
-> avoid the overlapping (like funds have the same stocks) between asset classes
-> avoid asset classes have high correlation (like stocks in a same field)
-> analyze rolling correlation: how often correlation between asset classes shift together and by how much.
+ real expected return: higher return than inflation rate over time.
+ easy access with low cost
-> with funds: look for low expense ratio (shoule be around 0.5% annually), no sales load (redemption fee)

F. Portfolio management
1. Determining realistic market expectations
-> Personal expected return needs to be in line with the market expected return
-> The need for forecasting market expected return (with relative accuracy). Based mostly on historical data.

** Model 1: Risk-adjusted return (bottom-up method)
- Volatility (acdemically defined as risk) is actually an indication of some economic risk.
- Over time, general asset class volatility return remains relatively stable.
-> Predict future exptected return for a asset class relatively to another asset
based on the volatility differences between those assets.
- Every investment has a unique risk. Basic expected return formula:
-> Total expected return = risk-free rate of return return + risk premium
-> Total expected return (nominal return) = Real expected return + Inflation rate
+ T-bill expected return = expected inflation risk (over maturity period) + real risk-free rate of return
+ T-bond expected return = T-bill return + term risk premium (interest risk premium)
+ Corporate bond expected return = T-bond return + credit risk premium
+ Equity expected return = Corporate bond long-term expected return + equity risk premium
+ Small-cap value stock expected return = Equity market expected return + small-cap premium + value premium
- There are so many factors contributing to the equity risk.
Each industry, style, sector, ... has a different risk (See other notes)

** Model 2: Economic factor forecasting (top-down method)
- Corporate earnings growth reflects in economic growth (GDP growth)
-> Predict future expected return base on earning growth
- Equity expected return = EPS growth + cash dividends + valuation change
+ Corporate earnings are a derivative from GDP growth
Earnings growth can infer from GDP per capita.
+ Cash dividends are paid out from earnings.
Pay-out ratio depends on many factors: economic outlook, investment oppoturnities, business policy...
+ Valuation change reflects into P/E.
Basically, P/E tends to move in the opposite direction as inflation rate does.
P/E is affected by market sentiment or investor earnings expectations.
-> The higher those factors, the higher expected return.
- Fixed income expected return = yield at purchase + change in yield
Change in yield = inflation rate change + real risk-free rate change (after inflation) + credit spread change

2. Building approriate portfolio
- Build portfolio based on life cycle characteristics as: early savers, midlife accumulators, transitional retirees, mature retirees
- Consider all possible factors that can affect the portfolio:
financial goals, career progress, family situation, risk tolerance, investing experience, health issues,
living expenses, personal strengths and weaknesses, behavior habits, ...
- For example: for a early saver, an approriate portfolio consists of 70% equity and 30% fixed income instruments
- A simple strategy called "your age in bond". For example, 30-year-old should have 30% asset in bonds, 70% in equity

3. Considering behavioral finance affect
- Financial markets are not the cause of investment plan failure, but investors behaviors and emotions.
- Some interesting notes on behviors of investors and pepole in general:
+ Care too much about current information, not long-term fundamentals.
+ Recognize "good" or "bad" investments based on the current price compared to the paid price.
+ Tend to buy investments which have recent good performance.
+ Tend to be overconfident of their information and knowledge.
+ Tend to be over optimistic when markets start to go up, and over pessimistic when markets start to go down.
+ Reluctant to admit errors on judgement.
- Be careful about your investment behaviors.
- Find out how much risk tolerance you can handle using:
+ Risk tolerance questionaire: find out the maximum risk tolerance.
+ Asset allocation stress test: list some specific or extreme cases and what should do in those cases.
-> Try to find out the actual risk tolerance that you can take.
-> Do not assume risk above your tolerance: it can make you abandon your investment plan someday.
- Rebalance the portfolio to reduce risk and increase diversification.

4. Making adjustment on asset allocation plan
-> Do not change asset allocation plan solely based on emotions (especially when markets go down).
-> Change only when personal financial goals/needs/situations change, have an assessment mistake or need to change risk tolerance level
- Things to do when times are tough:
+ Reality check: Income from investments is stable even markets go down?
Annual expenses can be covered by cash flow from dividends, interest, ...?
-> If yes, do not change asset allocation.
+ If still feel risky after reality check, -> sell 10% of equity, or even sell another 10% (an that's it)

5. Controlling fees, costs and taxes
- Keep investment costs (transaction cost, broker fee, commission) as low as possible.
- Manage a efficient tax strategy.
+ Some types of account are taxable (stocks), some tax-deferred (pension, social security), some tax free (municipal bonds)
+ Different investments have different tax brackets: corporate bond interest has higher tax rate than stock dividend.
-> Distribute approriate investments across these types of tax location
+ Use tax swapping and tax lots by DCA (dollar costing averaging) strategy
- If need to go with funds, choose unmanaged passive index funds with tax efficiency and low expense cost.

[Andrej Cermak · Rating 5 out of 5]

Very well written book about asset allocation and portfolio planning. It starts by explaining the basics, continues with the selection of assets, then gives examples of asset allocations with respect to one's age and financial situation, and finishes with tips on fee and tax management.

One thing I'd point out in this book is that it suggests REITs as diversification option, but according to new studies this might not be that beneficial and brings an idiosyncratic risk to your portfolio.

[Konstantin Kryzhanovskii · Rating 4 out of 5]

Неплохое чтиво по азам портфельного инвестирования. Будет полезно на старте. Похоже, правильным вариантом чтения книги будет: чтение Выводов по каждой главе. Сама книга содержит долю избыточной информации. Например, описание мысли о том, что кол-во акций в портфеле нужно сокращать на 10% в определенном случае занимает пару абзацев.

[Krenzel · Rating 3 out of 5]

With the current banking crisis and volatile markets, many investors are facing a lot of stress. Unfortunately, they may feel even more panicked if they are watching CNBC or listening to their brokers instead of doing their own research and developing a long-term strategy that will give them confidence during market downturns. In his book, "All About Asset Allocation," author Richard A. Ferri (a portfolio manager, professor of finance, and Chartered Financial Analyst) gives readers the investing basics they need to know before investing and, more importantly, provides concrete portfolio ideas that can be adapted to develop a successful long-term investing plan.

"All About Asset Allocation" is divided into three parts. The first two parts cover investment planning, basic investing theory, and investing opportunities (e.g., Treasury bonds, international stocks, small value stocks). Here, Ferri covers the basics that many readers likely already know, as he describes modern portfolio theory, explaining that financial risk is not only necessary but desirable, since the higher the risk a portfolio assumes, the higher the expected return. A portfolio’s long-term return is not determined by stock picking or market timing, as brokerage firms or the financial press suggest, but rather through asset allocation. Ferri explains how risk can be controlled through asset allocation and emphasizes the importance of annual rebalancing a portfolio.

Ferri goes beyond investing basics in the last part of his book, which gives concrete ideas for readers managing their investment portfolios. Ferri breaks investors into four categories: early savers (those in the beginning stages of beginning their careers and families, generally aged 20 – 39), mid-life accumulators (those established in their careers and families, generally aged 40 – 59), preretirees and active retirees (those about five years before retirement or in retirement, generally aged 60 -79), and mature retirees (those who are fully retired and not as active, dealing with long-term care or estate issues). For each of these groups, Ferri describes practical strategies and gives asset allocation ranges, or ranges from aggressive to conservative for how much of an investor’s portfolio should be in stocks versus bonds. For each of these groups, Ferri also gives two sample portfolios, including one basic portfolio (usually four low-cost index mutual funds) for those investors who want to keep things simple and one more complex portfolio (usually about twelve funds) for those investors who want to maximize the benefits of diversification and take more risk through small-value index funds. In addition to the sample portfolios, Ferri offers a stress test investors can use to test if their hypothetical portfolio is too risky, by testing it against the bear markets of 2000 through 2002. Ferri also concludes with a recommended reading list.

After reading "All About Asset Allocation," investors should have a basic grasp of investing principles as well as asset allocation guidelines they can use to implement a long-term investing plan. While Ferri does a good job explaining the investing basics, for beginning readers, I would suggest also reading William J. Bernstein’s classic, "The Four Pillars of Investing," which is the best book I have read covering these basic investing principles. However, Ferri extends beyond "The Four Pillars" by providing sample portfolios readers can easily adapt as part of their long-term investing strategy to give them confidence in times of turbulence. While many of the books out there explain the importance of low-cost mutual funds and developing an asset allocation strategy, only a few provide actual guidelines and strategies to implement this philosophy. In providing these practical solutions, Ferri makes "All About Asset Allocation" a valuable addition to the field of low-cost index fund books currently available.

[Daniel · Rating 4 out of 5]

This book could be really good but unfortunately is let down in a few areas.

Rick has a good, consistent way of demonstrating and measuring the advantages of diversifying between different asset types. In doing so he also gives a good explanation of modern portfolio theory and the "efficient frontier".

Here's where it falls short:
It is myopically written for Americans. While I can understand that the author might want to stick to the environment and laws with which he is familiar, it would have at least added great value to the book to point out key approaches that people in other countries might adapting for their situation. But it is as if the author has never even considered that possibility that there might be non-Americans who would find the information useful. One example is that he suggests being overweight in US stocks but does not explain if this is due to "home bias" or because there is some other expected advantage to be gained from doing that. By contrast, Meb Faber in his book "Global Asset Allocation" recommends that investors should resist the temptation of home bias.

It is littered with mistakes. Typos, grammar and a couple of factual mistakes. This being a digital copy of a second-edition book by an experienced author, that's been published for 5 years, I'm dismayed by how many basic errors I picked up. Things like the word "by" instead of "buy" which is used throughout (as in "by and sell").
If there are so many obvious and careless mistakes in the book, it makes me wonder how reliable the contents is. If this book was only fictional entertainment it would count simply as being irritating. But this is a book on whose contents important decisions will be made and can have great impact on peoples life. It is of great importance that it be thoroughly proof-read and the spelling, grammar and facts be 100% correct.

[Alexa · Rating 1 out of 5]

How does this book maintain such a good review average? While it contains a few good pieces of information, the writing is absolutely horrible.

The entire book reads like a high school student essay. You know the type - where the student has to repeat their thesis and main points ad nauseam. This book could be trimmed to less than half its current length and not lose any valuable information. And never mind all the spelling and grammatical mistakes too... (How is this the book's second edition and still written so poorly??)

Where an attempt was made to dumb down financial knowledge for the layman, the task was confused with an exercise in redundancy. I understood the concept the first time around; the additional 10 paragraphs rephrasing the same thing did not deepen my understanding, they just frustrated me. The unending supply of graphs was pointless as well.
There were a few interesting and good points made in the book, and for that I am thankful that I read this as an ebook on my tablet so I can easily refer to my small list of highlighted notes.

My last complaint for this book is that it was all American. A small section aimed at international readers would have been nice.

If anyone were interested in reading this book, I would instead recommend reading Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School; it covered nearly all the same topics, was more succinct, and better explained the topics and terms taught.

(On a random note: I used the search function and "free lunch" shows up 9 times in the book - of which 4 instances span pages 42-48. Thankfully for my sanity, page 250 actually WAS the last time it showed up in the book.)

[Marshall · Rating 4 out of 5]

This is the best nuts-and-bolts investing book I've read. There are a lot of investing books out there that explain how investing works, but they come up short when it comes to explaining exactly how to put together an investment portfolio. This book is the opposite. It focuses entirely on putting together a portfolio, explaining what pieces are needed and why, but it assumes the reader has a general understanding.

This book is based on passive investing and Modern Portfolio Theory, so if you're trying to learn how to beat the market or get rich quick, this is not the book for you. It will teach you how to maximize growth and minimize risk in line with the market.

The book has a simple formula in its presentation. It goes through all of the major asset classes and a few minor ones, explains how each of them works, and why they're needed in a diversified portfolio: stocks, bonds, real estate, commodities, and international. Part three shows you how to put these together to build a portfolio that will meet your needs and risk tolerance.

[Oli · Rating 3 out of 5]

Fine refresher on asset allocation and rebalancing. The discussion of taxes and fees is quite clear and helpful. I liked the overview of asset classes and related low cost funds, as well as the discussion of life cycle considerations. The prose is not very inspiring but the language is clear. If you are new to the topic, I would suggest Bernstein's books instead.

[Richard Staves · Rating 3 out of 5]

Don't read it unless you are a geek like me.

[Greg Faxon · Rating 4 out of 5]

A well organized and helpful guide, if a bit redundant at times.

**Key points**

-Choosing an asset allocation is like choosing a career. It’s the main predictor of investment returns and you should put serious thought into it.

-The asset classes you choose, and in what proportions, matter more than how you invest in each asset class.

-Diversification, including with international stock, small cap stock, and REITs, can help increase overall returns in the long run because they lower the return volatility of your portfolio. Avoid commodities, gold, and hedge funds.

-You must take some degree of risk in order to enjoy market upturns. But you have to be honest about your risk tolerance. This soul searching must be done in a bear market when you don’t know what will happen next. Most people overestimate their risk tolerance, and traditional questionnaires often aren’t reliable. There’s no reason to take more risk than you need to - just enough to reach your goals.

-Holding your age in bonds (as a percentage) and the rest in equity/REITs is a good starting point when you’re young but you may need to adjust this number up or down depending on your overall financial and life situation (e.g. family health, job security, etc). For example, a single 50 year old who has secure income sources, a ton saved, and no dependents will likely want to have less than 50% in bonds because they can afford to take more risk. He calls this revised version your “allocation age” in bonds.

-Once you determine your asset allocation, don’t screw around with your portfolio, especially in bear markets when you get anxious. The market has always eventually recovered and you lock in your loses by selling when you’re nervous. If you find yourself doing this, or if you’re hesitating to invest on your usual schedule and at your usual allocation, you’re learning your real risk tolerance and should permanently allocate 10% more to bonds. Don’t change back to the old allocation when times get good again.

-The author recommends rebalancing annually. While it’s tempting to buy more of the well performing asset, the counterintuitive right move is to buy the under performer and return to your chosen allocation. Although the author doesn’t condone trying to time the market, this rebalancing makes it less likely that you’ll be buying high and selling low. These annual reviews are a time to consider adjusting your plan - but these adjustments should be based on life changes and not based on market fluctuations.

-Keep taxes and fees low. Bond funds, high turnover mutual funds, and REITs do best in tax free accounts; index funds and municipal bonds do best in taxable accounts. ETFs have certain tax advantages over mutual funds. Tax loss harvesting and quarterly dollar cost averaging can save you money. Stick to low expense ratio funds and be wary of hiring investment advisors - both can cost you hundreds of thousands or millions of dollars over the life of your investments.

**Quotes**

“The object of this particular game is not to get rich — it’s to not get poor.”

“Control what you can control: costs, taxes, and risk. Then let the markets take care of the rest.”

**Actions**

-Create an investment policy, a simple and concise document outlining your allocation, that is easy to understand and follow.

[Mark Dantonio · Rating 5 out of 5]

ISBN= 0071429581 Richard Ferri


This book takes a detailed look at a topic that most people would feel is less than interesting. It does a good job at explaining what asset allocation is including less common asset classes such as REITs and Hedge funds. I felt it also did a good job at explaining risk and all of its forms. However, the highlight of the book to me was the myriad of charts. The charts did a real good job of explaining the efficient frontier and the Capital market line. Ferri does a real good job at visually showing how allocation works in greater detail with a number of relevant examples. The chapters that deal with correlation of assets were also particularly good because of the descriptions and especially because of the charts. The book goes deeply into each asset class: equities, bonds, hedge funds, REITs and some subcategories by devoting a chapter to each one. Ferri tries to really explain the relationship of charts and correlations between them. He even discusses how correlations change over time and how an investor needs to watch them. The last part of the book was very good because it discussed the effects of fees on assets. Ferri goes into a lot of detail, again with charts, to explain the insidious effects of fees on a portfolio. Finally the author goes into a fair amount of detail on how to deal with taxes. Ferri explains how to engage in legal tax swaps and even uses detailed examples of how to use various lots to combat the evil effects of taxes. He even explains how to trade on losing or winning asset and buy another of the same type so one’s allocation is not altered in order to “Harvest” losses. Ferri give a lot of advice on taxable vs. non-taxable accounts and how one should invest in each. I enjoyed the book and I really liked the charts. However, the book is probably too much for someone that just wants a quick understanding of asset allocation. If you are real interested in trends and statistical inferences regarding correlation and the like then this is the book for you.
Mark D

[Paula ϟ · Rating 5 out of 5]

Now, it's not unusual that I take notes while reading books. In fact, my habit of taking structured, summarized, and handwritten notes was developed directly from an arduous curriculum of business and accounting courses and four sections of the CPA exam. Nonetheless, I digress. I must have taken a solid 20+ pages of notes from Ferri's book, not to mention several highlights. One of the best books I've read all year hands down. Albeit, you may have to contain some spark or interest in finance to really get into it, I would recommend it to anyone looking to learn the why behind asset allocation strategies. Rick breaks down risk appetite, several charts, data, numbers, formulas, and pros and cons of passive investing. While you may not think finance is sexy, this book is definitely sexy.

Final note: Despite his well-known "Core Four" portfolio model, I assure you, Ferri's book is genuinely all about asset allocation. There's no sales pitch here, just a wealth of well-researched and clearly presented knowledge.

[Claudiu · Rating 5 out of 5]

Richard Ferri does a really good job illustrating the benefits of diversifying your portfolio, when to do it and when not to do it. He lays out the historical data and demonstrates why diversifying into assets that have low correlation among themselves reduces risk and increases returns.

The book is structured into three parts. First, he familiarizes the reader with the workings of Modern Portfolio Theory. Next, he analyses in detail each of the main asset classes (stocks, bonds, real estate, and a small chapter on "alternative investments"). And finally, he explains how to build a portfolio while taking into account your age, needs, and risk tolerance.

If I were to be picky and find criticisms of this book I would say:
- Ferri's allocation to US stocks is a bit too large - he recommends 66% of the stocks portfolio to be in US stocks, even though the market cap of US was under 50% of the global market cap when the book was written;
- in the sub-chapter about forecasting market returns, I was surprised to see no mention of the CAPE ratio (or something similar).

That being said, this book was a great read and is still relevant today.

[André Pinto · Rating 4 out of 5]

Broad exploration of multiple areas related to portfolio management, from a passive investment advocate.

The author contextualizes the process of asset allocation into a risk / return analysis, explaining investment categories, providing examples of index funds, ETFs and portfolio allocations.

From historical analysis and tax implications, technical discussions about correlations and volatility, to personality tests and how to adapt your investments throughout your life; the author provides an incredibly rich and broad perspective into the world of investment, without making the mistake of being too abstract.

Like almost every other investment book, this was also written from the American investor perspective. Nevertheless, I still recommend the book for new or future investors outside the USA. It will help you understand the environment in which you will be operating and hopefully come up with better decisions.

[Vỹ Hồng · Rating 4 out of 5]

This is a very informative book about asset allocation. The meat of the book is in part 2, where the author discusses different investment products. Each chapter contains descriptions about a variety of assets in a class and lots of historical data on their risks, return, and correlation with other assets. Other parts include asset allocation basics and portfolio management. They are easy to follow and very educational. I came away with more confidence in portfolio building, and investing in general.

One thing I wish the book has more is the sample portfolios and their comparisons. The author gives 2 sample portfolios for each of the 4 life stages (early savers, mid-life accumulators, pre-retirees/active retirees, and mature retirees), but that doesn't seem enough to provide a good case study.

All in all, this is definitely a worthwhile read if you want to learn more about the characteristics of different investment products and how to use them to build an efficient portfolio.

[Felipe (fcy) · Rating 4 out of 5]

I started reading this book because I wanted to understand why the financial planner was recommending adding a small-cap value fund if I already own a total market fund (which includes all those small-cap value stocks). Not only this book also recommends it goes into great details on the reasons and the "proof" to do it. And not only for stocks but all kinds of investments one can make. This book has so much information, I'm still parsing it.

If I had to gripe about one thing would be that now I want to build my own risk-and-return efficient frontier charts but the book doesn't teach you how to make your own for your own portfolios.

[Donna Robbins · Rating 4 out of 5]

This was my first book on the topic and I learned quite a bit; probably too basic for some people. A reviewer described it as repetitive, but the "All About..." books are primers, so continually reinforcing earlier ideas seems appropriate. Ferri's writing style is engaging and easy to follow. I read the 2nd/2009 edition which was published 10 years ago, but I'm betting most of the information is basic enough to still be relevant.

[Nicola · Rating 4 out of 5]

An excellent treatment of asset allocation principles and strategies, the only major downside is that, like most personal investment literature, targets US investors. If you live in a different country, you need to adapt the asset allocations to your environment and check which index funds or ETFs you can buy, how investment taxation works in your country, etc. Still, I consider this work a must-read for all private investors.

[Dani · Rating 5 out of 5]

Loved, loved, loved this book. It is well written, contains a lot of detailed information on the different investment asset classes available and the risks associated with them. I learned so much from this book. Rick Ferri explains the complicated financial world in a way that the average person can understand.

This is more about understanding the asset classes and their risks so that you can decide what assets to invest in and less about how to implement an investment plan.

[Si Hong · Rating 4 out of 5]

Book for simple asset allocation

Key Message is to know your risk tolerance, stick to your asset allocation plan.

In bear markets, buy even more of equity stocks to hit your asset allocation amount
In bull markets, sell off your equity stocks due to reversion to mean.

Asset allocation is based on age, but key to ask yourself is whether in a bear market would you do the above and stick to your original asset allocation amount

[Brice · Rating 5 out of 5]

Pretty heavy

This is going to be a heavy read for most. It might be a good idea to put this on your book shelf and read up on the subject and get the basics before picking this one up. But they book will explain why you should do everything by breaking down the math. Heavy read, but worth it.