Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today

by Larry E. Swedroe

Book Overview

It's well known that the technology world is changing at a rapid pace due in part to innovations in computers, the Internet, telecommunications, and biotechnology. It is less well known that the financial world is in a far different place than it was just a few years ago as witnessed by the bursting dot.com and NASDAQ bubbles in March 2000. But even when financial markets change-especially when the change is irrational-investors need to return and...

• Format: Hardcover
• Language: English
• ISBN: 0312291302
• ISBN13: 9780312291303
• Release Date: June 2002
• Publisher: Truman Talley Books
• Length: 334 Pages
• Weight: 1.38 lbs.
• Dimensions: 1.2" x 6.3" x 9.2"

Customer Reviews

Great book, great advice

This book contains dozens of descriptions of classic investment blunders that even experienced investors make. I found that this book is not a classic Investment How-to, but rather a list of what to watch out for, how to spot snake-oil, and how to approach investing with a balanced index fund strategy that will beat virtually all professional money managers (especially after taxes and other expenses are considered). Numerous examples, studies, and professionally backed research is used to make hard-hitting points stick and shatter many myths that abound in the financial industry. Combine this book with Larry Swedroe's other works and you have a complete set of facts to make a winning portfolio that will survive and prosper in any market.

Asset Allocate with Index Securities

Modern portfolio theory (MPT) has an aggressive advocate in Larry E. Swedroe's RATIONAL INVESTING IN IRRATIONAL TIMES. Investors are advised to stick with index funds, tax managed funds, or exchange traded funds (ETF) and allocate across a range of asset classes. This investment strategy may be a little dull, Swedroe concedes, but his evidence for its soundness is compelling. This book is organized around 52 mistakes that investors make many of which might be avoided by adopting the author's strategy. Many of these mistakes are familiar to readers of the current crop of investment literature: Stay away from hedge funds, IPO's, market timing strategies, market gurus, yeserday's winners ("recency"), the misuse of margin, and high turnover portfolios. Recognize that many mistakes result from our own behavioral patterns including overconfidence in our skills, failing to sell our losers ("regret avoidance"), mistaking skill for luck, failing to rebalance over time to our basic plan, over-concentration in a company we think we know, etc. Much of this familiar territory. Where Swedroe distinguishes himself is in his relentless focus on a few key ideas that are logically developed and supported by recognized academic research. Financial markets are too efficient in their assimilation of new information for an active manager to consistently outperform a benchmark index. Lucky streaks are common but not proof to the contrary. News is by definition a surprise (viz., randomly occuring and unpredictable) and the evidence is strong that it is a "persistently important factor in stock performance". Active management will not anticipate the unexpected. Achieving "incremental advantage" over the market is therefore virtually impossible. Trading costs, tax issues, and the opportunity cost of having to hold cash in actively managed mutual funds are additional factors that make them structurally deficient. Separate studies by Mark Carhart and Russ Wermers support the underperformance of mutual funds relative to appropriate benchmarks. Meanwhile, the best way to reduce the portfolio risk of bad news in an uncertain world is to diversify. If your ouija board is warped, diversification might be a prudent strategy. The research of Fama and French, Ibbotson and Kaplan, and Brinson, Hood, and Beebower all reach a somewhat surprising conclusion: Far and away the most important factor in equity returns is not stock selection or timing. It is asset allocation based on market capitalization (size) and value (book to market, BtM). It is far more important to be in small cap value stocks or international growth than Industry Leader X over Competitor Y. Using indexed securities is an efficient way to deploy your assets to these broad asset categories. To be sure, Swedroe's argument for indexed securities over individual stocks and most actively managed mutual funds runs counter to an entrenched financial services establishment that is based on exclusive analyst recommendations,

Garrison Keilor reminds us

weekly that in Lake Woebegone, all the children are above average. Likewise, all investors are above average with the ability to time the market and know which stocks / segments / classes are the next to take off. Isn't this just about true? Curiously, Larry Swedroe disagrees. Larry has written a series of three books, this one being the third. The focus is on passive investing, asset allocation, the fact that none of us are above average, and the fact that none of the experts are above average. (Those that appear above average are just part of the statistical distribution and could not be identified in advance.) As Larry works through this book, he highlights the many ways each of us have shot ourselves in the foot repeatedly through the years. If I had known these investment errors 20 years ago and if I had possessed the courage to overcome them without falter, I certainly would not be working today. The timing of this third book which focuses on the mistakes could not be better timed than during the worst bear market since the period around 1929. Larry shows you how to not make mistakes such as taking too much risk, not being diversified, the importance of fixed income assets in the portfolio, the importance of not chasing the hot sector, and the list goes on and on. Yes, some of our trading friends will become wealthy. Yes, some who use actively managed funds will do very well. But, Larry guides one down the path that is known to be superior to most managed programs given time and expenses. I highly recommend that this book is a must read for every investor, novice or expert. All will benefit from the wisdom contained therein.John MacBain, Ph.D.

Good book for the ordinary person

If you are anything like me, those quarterly statements from your mutual fund company haven't looked too hot lately. Since misery loves company, I began lurking at the various forums on Morningstar's web site. Morningstar has several forums, and there are knowledgable folks on several of them. I was introduced to Larry Swedroe's books on the Vanguard Diehards Forum where several posters had made references to his books. Since they seemed to be rather knowledgable investors, I borrowed Larry's first two books from the library and read them. I learned much about efficient markets, risk, modern portfolio theory, asset allocation, investment plans, and developing a portfolio. Although the first two books were good, Rational Investing in Irrational Times is better for an ordinary bloke like me. It's not as theoretical as the other two and explains the mistakes investors make in simple terms. I really didn't have a proper perspective of risk until I read this book. The book helped me develop an investment plan that is the right one for my risk tolerance and goals. In that respect, it is a good book for those who invest in actively managed funds as well as those who invest in index funds. If you're not sure what I am talking about, you will after you've read the book.

Rational Investing in Irrational Times (Full Review Copy)

In this, his latest (and in my opinion, greatest) book, Larry Swedroe provides investors with a solid road map for avoiding the common investment mistakes that make it difficult, if not impossible, for them to reach their financial goals.On the Morningstar Vanguard Diehards Forum, we see posts on an almost daily basis from investors trying to recover from the very mistakes that Swedroe's book addresses.Larry's fluid writing style makes for easy reading by both novice and experienced investors alike.This book contains a wealth of solid information. It's a real gem, and should definitely be part of every investor's library. ...