William Bernstein's "The Four Pillars of Investing: Lessons for Building a Winning Portfolio"

The Four Pillars of Investing - at Amazon

I discovered "The Four Pillars of Investing: Lessons for Building a Winning Portfolio" on a number of lists touted as a must read for the novice investor; so I picked it up on my Kindle and began reading it through. As a beginner’s text, it is very straight forward and easy to understand. There is little math, and when there is, it is at best of a junior high level.

 The basic premise of the book is that there are 4 pillars that one must understand about the market before you can make sound investment decisions. He devotes a number of chapters to each of these concepts, but they mostly boil down to a few simple concepts:

1.       1. A knowledge of investment theory.

Risk and Return are inversely related. If someone has a risk free solution with high returns, they are likely trying to make money off of your lack of knowledge.

2.      2.  An understanding of the history of investing

History repeats (in regards to economic bubbles.) So do not get caught up in market crazes lest you lose it all. When everything seems perfect is the scariest time for an investor. When things seems the bleakest, the time to strike (invest) is at hand.

3.      3.  Insight into the psychology of investing

You must understand basic human psychology in order to avoid common pitfalls. This includes herd behavior. In other words, don’t invest in something because your neighbor is. People tend to love the latest hot stock (Facebook lol.) If you are following Bernstein’s tenants, then investing should be boring.

4.     

           4.  An awareness of the business of investing

      

      The investment industry is designed to take your money. Buying and selling frequently can and will eat into any gains you may see. If professionals consistently knew which stocks would be hot, then they would likely quit their jobs and become rich themselves.

With those four pillars Bernstein’s emphatic advice is to plan your risk tolerance level (he explains the concepts behind this) and then to divide your portfolio into broad index fund categories, eg. S&P 500, EAFE, Emerging Markets. Invest in various representative funds with little to no management costs and to stay in them for the long haul. Anything less than 10 years is ill advised.

He backs up all theories with plenty of historical examples and many charts, some of which can honestly become a little dry(not to mention the charts can be difficult to read on the Kindle) but he does a good job teaching market basics while promoting his investing theories.

 As a novice I feel that his advice has struck a chord and his theories resonate with me. The simplicity of his advice has alleviated much of the stress about how to go about planning for the future. And while I do not take everything he says as gospel, I do believe that I am much better prepared for my future in the stock market.

Review by Voracious Readers Society member, Thomas Shaw.