The Investor’s Manifesto
November 27, 2009

The Investor’s Manifesto

The Investor’s Manifesto

“The reason that ‘guru’ is such a popular word is because ‘charlatan’ is so hard to spell.” —William J. Bernstein

The time is right for an investor’s manifesto. And William J. Bernstein has written it. I won’t say that it is the kind of world-changing document that Martin Luther nailed to a church door in 1517. Nor is it kin to Karl Marx’s manifesto of 1848.

But it is a clear and practical call to personal action.

This call to action doesn’t require rebellion against a corrupt spiritual authority. Nor does it suggest that we barricade the streets and hang bankers— even though it would be a much celebrated entertainment. No, this call to action lays out how and why we should rebel against the abuses heaped upon us by the financial sector, particularly those who handle our investments.

It also tells us that it is something we are capable of doing. And it tells us how to do it.

Here, in case you’ve been asleep for the last two years, is what the financial sector has done for us lately:

  • Helped create a bubble in housing prices that has led millions of homeowners to be “upside down” on the largest investment that most Americans ever make, their home. Equity in those houses is the largest part of net worth for the majority of all Americans.
  • Required a massive bailout of totally undeserving institutions whose reckless mismanagement ended in the largest financial wipeout in history.
  • Necessitated a need for perversely low interest rates so the same financial institutions have no cost for deposits but lend at a historically high “spread”— great for them, terrible for the people who actually save and invest, particularly retirees.
  • Caused millions of methodical investors to lose a major portion of their retirement savings as they approached a voluntary or forced retirement.
  • Contributed to a major global recession with consequences we will be living with for at least a decade.

Yet these same institutions resist even regulation when they richly deserve to be publicly broken up— organizationally drawn and quartered— so that they can never be “too big to fail” again. Worse, they resist successfully. It is now clear that the most populist and liberal president in decades is a pure Hamiltonian when it comes to financial institutions. The inmates are still running the asylum.

So what can we do?

We can take care of ourselves. We can starve the financial sector and, in doing so, feed ourselves. This is not a casual choice. It is a matter of survival. It’s us or Wall Street. It can’t be both.

And we know that if we need help, Wall Street will recommend cake.

So, how do we take care of ourselves?

Easy. I believe “The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between” (Wiley, $25) is the shortest and most lucid explanation of index investing and simple asset allocation yet written. Read it and you’ll have recipes for developing a portfolio. You’ll also understand why you should follow the recipe. His suggested portfolios on pages 90 and 91 can be started with no more than $17,000. Less if you use exchange-traded funds (ETFs).

The portfolios would cost about 0.20 percent to run. That’s about one-fifth the cost of typical mutual funds. It is one-tenth the cost of more expensive funds. And it is one-fifteenth the cost of the most heavily marketed insurance product, living benefit variable annuities.

As he points out in the book, the financial services industry favors expensive funds because it can extract 5 to 15 times as much revenue in a single year with conventional funds as it could with index funds.

The difference is return on our savings, in our accounts. Not theirs. As Bernstein puts it:

“People do not seek employment in investment banks, brokerage houses, and mutual fund companies with the same motivations as those who choose to work in fire departments or elementary schools. Whether investors know it or not, they are engaged in an ongoing zero-sum, life-and-death struggle with piranhas, and if rigorous precautions are not taken, the financial services industry will strip investors of their wealth faster than they can say .Bernie Madoff’.”

This is a must-read book.

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