Thursday, April 21, 2016

The 5 Mistakes Every Investor Makes and How to Avoid Them, by Peter Mallouk

I admit that I was skeptical about Mr. Mallouk's book, expecting just an advertisement for his company, Creative Planning, and not providing much real value. I was wrong. The book delivers exactly what it promises, a fairly compelling story in favor of buy and hold investing.

The mistakes that are covered:
  1. Market timing. Or trying to do so. Mr. Mallouk shines a light on so called experts and calls them out as charlatans.
  2. Active trading. Between buying high and selling low, and trading costs, he makes a case for index investing.
  3. Misunderstanding performance. This section is really about not believing what you see in the press.
  4. Letting yourself get in the way. Another way of saying, buy and hold.
  5. Working with the wrong advisor. Mostly a discussion of conflicting interests and the value of a fiduciary advisor.
How about guidance? The title doesn't promise guidance, it only promises to illuminate big mistakes. It does just what it says. Yes, there are a few pages on how to think about a portfolio, but they are very basic. For example, the "I need 7 percent to hit my long-term goal" portfolio comprises 25% large cap US, 15% small cap US, and 20% international stocks, and 25% US and 15% international bonds.  Nothing too earth shattering here. Not much of a discussion about the relative benefit or problem with a market capitalization -based index.

So this made me wonder: how does Mr. Mallouk's firm justify its assets under management based fees? For picking five ETFs? For finding sector indices that compose the five portfolio asset groups in order to reduce market weighting impacts? Or for hand-holding that helps prevent mistake #4 (selling in a frenzy when the market declines)?

This is a good book. I could pick at some of the arguments, but my guess is that for 99% of individual investors, reading this would be valuable.

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