Rational Expectations: Asset Allocation for Investing Adults

by William J. Bernstein

Rational Expectations is a clean sheet of paper in the wonky world of quantitatively based asset allocation aimed at small investors. Continuing the theme of the Investing for Adults series, this full-length finance title is not for beginners, but rather assumes a fair degree of quantitative ability and finance knowledge. If you think you can time the market or pick stocks and mutual fund managers, or even if you think that you can formulate an optimally efficient mean-variance asset allocation with a black box, then learn some basic finance and come back in a few years.On the other hand, if you know your way around risk premiums and standard deviations and know who Irving Fisher and Benjamin Graham were, and if you want to sharpen your asset class skills, you’ve come to the right place.

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

216 pages, Kindle Edition

First published May 28, 2014

About the author

William J. Bernstein is an American financial theorist and neurologist. His research is in the field of modern portfolio theory and he has published books for individual investors who wish to manage their own equity portfolios. He lives in Portland, Oregon.

Reviews

[Greg · Rating 4 out of 5]

Have read many of Bernstein's previous books, along with many, many other books on investing. This one was more an action plan summary rather than all the back-ground information. It assumes you already have a good base of asset allocation, and that you are cured of CNBC and Motely Fool and all the other stock-chasing games.

It fit in with many other books on the topic as to what the allocation percentages should be (roughly). It helped me settle on final allocation percentages, or at least confirmed that I was on the right track. It did have a bit more information on bonds and provided a different opinion than I had heard before - don't buy bond funds as the low risk part of your porfolio should be truely low risk. 2022 showed that bond funds are not really as low risk as one might think, so this was timely new information for me.

[Mark Zodda · Rating 3 out of 5]

Well-written, somewhat pedantic book about portfolio structure. While I only partially followed some of his mathematical proofs, I wasn't reading for the math, but for the allocation lessons he learned from them. However, these allocations really only cover those who are trying to accumulate their residual living expenses and how to construct a liability matching portfolio. If those two ideas don't apply to you then the book is even more limited in its value. The biggest distraction for me was his use of non-standard abbreviations like RLE and LMP that popped up after I had forgotten exactly why he was using these shortened forms. Other than the mathematical proofs, I'm not sure if this book has any greater value than his older works like "The Intelligent Asset Allocator" or "The Investor's Manifesto" because the overall concepts and suggested allocations seem very similar. Still worth a read.

[Leisurecan · Rating 4 out of 5]

Very hard-core guide for investing adults. If you believe the market is unbeatable and the future is unpredictable, then you should diversify. Avoid those hot stocks, avoid all-bond portfolio, avoid not taking enough risks. The goal for investing is not to get mega-rich but to not die poor. But it’s becoming harder and harder now because the affluence of capital leads to lower returns. Know your game, and know how to quit the game after winning.

[Enrique Mañas · Rating 4 out of 5]

Rational Expectations: Asset Allocation for Investing Adults contains several ideas for portfolio allocation, partially updated from previous books from William Bernstein (i.e., The Four Pillars of Investing and The Intelligent Asset Allocator). William advocated for a portfolio based on the Permanent Portfolio from Harry Browne, with a portfolio equally divided in bonds, stocks, cash and gold that gets frequently rebalanced, and that can navigate any kind of economic circumstances including economic prosperity, inflation, recession or deflation, and deflation.

This book includes a few less technical topics that I found intriguing.

- The future of equity returns in 2022 looks grim. A combination of widely available investing options, companies' growth, and more make it impossible that we will be able to see again the growth and profit rates we saw in previous decades. Generations after the 80s are facing a small economic prospect than their parent's generation.
- ETFs replicating bonds are not as optimal as ETFs replicating stocks.
- As he mentioned in his book The Four Pillars of Investing, avoid financial advisors. If they were really able to predict future market moves, they would not work as financial advisors, but they will mortgage all of their properties and become billionaires in a few years.
- During our early investment phase, financial crashes are a blessing. As we get older, we need to start reducing our risk exposition, and the author proposes a few alternatives (such as holding our age -10 in bonds).
- Interestingly, in a period long enough, a portfolio merely composed of stocks has always beaten bonds and other stocks alternatives.
- Contrary to other authors, Bernstein recommends allocating a certain percentage of the portfolio to foreign countries (he specifically mentioned some European and developing countries).

[Nicolas Perrault · Rating 5 out of 5]

Great, loved it. I had not quite realised how grim the future of equity returns look like. 3.6%? Looks like we're not in the 20th century anymore. Oh well, if that's what the market has to offer, I'll take it. Something that had not transpired in Bernstein's other books is just how hard it is to retire with a healthy nest egg. Keep your age in bonds, save 20% of your salary, and you've got about two chances in three of not starving to death before the age of 90. Sweet! (What if I live to 90 and have a bit more to go?) I have no clue how the average Joe will live his retirement if he does not even know this. The average American saves c. 5-6% of their salary. These people without a nest egg may become very vocal in the future, demanding that the government pay their bills by raising the taxes of those who had more discipline. I'm not looking forward to that.

[Andrew · Rating 5 out of 5]

Somewhat of an update to the author's 2000 "The Intelligent Asset Allocator". The central idea throughout the book is the distinction between short-term "risk", and long-term "deep risk", and how to configure one's portfolio based on these two understandings of risk.

Highly technical with a lot of math and stats, but extremely valuable information that all investors should read. Rather than just regurgitating "don't time the market", it forces you to see exactly why not to do so.

I also like how the author weaves in some financial history lessons and interesting case studies to add further depth to his arguments.

[Preston L · Rating 4 out of 5]

Pretty solid book with good information. It keeps topics/opinions brief and blunt which I appreciate.

However, some data and opinions in book are slightly dated, but that’s to be expected of a book released in 2014. Also, the book can get decently technical at times.

Overall, it’s an 8/10. I learned some valuable information from it.

[Lowell Herr · Rating 4 out of 5]

Very good, but not equal to his first three investment books. Four Pillars and Investor's Manifesto are hard to beat when it comes to investment books. Bernstein stands close to alone when it comes to writing for The Common Person In The Street (T. C. Pits) investor.

[Tomek · Rating 5 out of 5]

Great book! Many useful tips from experienced investor. You will find here information about what to avoid, how to rebalance your portfolio (if you want to), how to fight with inflation and why diversification is so important.

[Antonio · Rating 5 out of 5]

Muy bueno, como siempre con el autor. A anotar: exigente en matemáticas ¡esas varianzas! y. en fin, el amigo Bernstein no es el más optimista del planeta, te recuerda el crack del 29 un párrafo sí otro también

[Niranjan · Rating 3 out of 5]

Rating this a 3 - just because I don't see many firm actionable insights which might a result of me having already read other investing books . There's in general some good investing history and good - to- have investing knowledge provided in this book.

[Barry · Rating 4 out of 5]

Like he does in most of his books, Bernstein delivers a wealth of valuable information. There’s less math than in his “Intelligent Asset Allocator,” but this is definitely not for beginners.

[Richard · Rating 5 out of 5]

One of the most challenging investing books I've read so far, but worth the effort if you already have some knowledge of finance.

[Raoul · Rating 5 out of 5]

Don't agree with everything, but this whole series is outstanding.

[Lukasz]

recommendation: [Episode 108: Dr. William Bernstein: Praying for a Bear Market — Rational Reminder](https://rationalreminder.ca/podcast/108)

[Mike Harris · Rating 3 out of 5]

Mostly a summary of the other books in the series.

[Value Investor · Rating 4 out of 5]

Nothing really new if you’ve read Bernstein’s other books but still good.

rebalance based on thresholds and lognormal distribution (10-1 on upside and 6-1 on downside)

[chris mukhar · Rating 4 out of 5]

I’m a big fan of William Bernstein, but this one was pretty basic.

[Jay · Rating 4 out of 5]

I'll start by saying I've read all of William Bernsteins other books so I am quite a fan to begin with. This book continues his investing for adult series, and is a good intermediate-advanced book for smalltime investors. His main concern in this book revolves around retirement planning and what is needed to achieve your goals. There is some market history,discussion of risk premium's as well as past returns sprinkled throughout the book as well.

If you are new to investing or two William Bernstein, I highly recommend "the four pillars of investing"as a good starting point.

[John · Rating 5 out of 5]

After you “tested” yourself to see whether you are an investing adult by reading his booklet “If You Can” (available for download online), then you are in for a bittersweet treat. The author’s realistic expectations of risk and return as well as of an average DIY investor might upset an investing child, but to an investing adult, they are foundational for the beginning, middle, and end of adulthood. The author’s points on risk, fixed income, and rebalancing are especially insightful.

[Chris · Rating 5 out of 5]

Excellent update

Updates author's prior works, especially the Intelligent Asset Allocator and summarizes some of the content of his shorter pamphlets. Recommended for individual investors saving for retirement. He goes not directly address saving for your children's college expenses.

[Todd · Rating 3 out of 5]

Pretty technical read about being an investing "adult". This should not be your first investing book you read. You really need a solid foundation to jump into this one. That being said, for being the difficult read that Bernstein can be at times, I can't say I took away to much from this...

[Ryan Harvey · Rating 4 out of 5]

Good info; pretty technical. Approach only with an investment background.

[Tim · Rating 5 out of 5]

This is a good book if you are already well versed in the theory of asset allocation, but would like to be updated on recent developments in the markets.

[Alen]

Nice update to previous work. Negates a lot of benefits of previous allocation methods. But that is the current state of investing.