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Index Funds: The 12-step Program for Active Investors
The financial services industry has a dark secret, one that costs global investors about $2.5 trillion per year. This secret quietly drains the investment portfolios and retirement accounts of almost every investor. In 1900, French mathematician, Louis Bachelier, unsuspectingly revealed this disturbing fact to the world. Since then, hundreds of academic studies have supported Bachelier's findings. This book offers overwhelming proof of this, and shows investors how to obtain their optimal rate of return by matching their risk capacity to an appropriate risk exposure. A globally diversified portfolio of index funds is the optimal way to accomplish this. Index Funds is the treatment of choice for wayward investors. Below market returns in investment portfolios and pension accounts are the result of investors gambling with their hard earned money. This 12-Step Program will put active investors on the road to recovery. Each step is designed to bring investors closer to embracing a prudent and sound strategy of buying, holding, and rebalancing an index portfolio.
- GenresFinanceNonfiction
392 pages, Hardcover
First published January 30, 2005
3 people are currently reading
42 people want to read
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Displaying 1 - 4 of 4 reviews
June 30, 2007
Should be required reading for anyone with a 401k. Really cool graphics to go along with it.
July 7, 2021
Great book that I should read again for my own good as it hasn't cured me of my bad habit of stock picking
December 24, 2021
A little dated but a good summary of the advantages of passive investing.
October 8, 2008
Just the other day at work, a co-worker came to my office to show me the 12-month returns for various asset classes. Whether it was international companies, small companies, large companies, stocks or bonds, they had all gone down over the past year. She has all her money safely tucked away in Treasuries, the only asset class to show a positive return on her print-out, so in her mind her strategy to take everything out of the stock market a couple of months ago was the right decision. The expression on her face was blank as I told her I was sticking to my investment plan, which includes buying more stocks, and I added that stocks were selling at a discount and now was a great time to buy. I will keep trying but I don’t know if I will ever convince her that market timing is not a good idea. The unfortunate thing is, a book like "Index Funds: The 12-Step Program for Active Investors" would have the most impact on someone like my co-worker, but in all likelihood the only ones reading it are people like me, who are already converts to the passive indexing approach. Even though the goal of this book is to show why index funds are best for investors, it still provides valuable information for those of us who are already using index funds.
Although, for the most part, "Index Funds: The 12-Step Program for Active Investors" covers familiar ground for Bogleheads like myself, in his book, author Mark T. Hebner makes some very compelling arguments to either convince active investors to switch to index funds or reinforce the beliefs already held by passive investors. Hebner is particularly good at taking academic theory and explaining it with a common-sense argument that is easily understandable. His discussion of the random walk theory (p. 69), market timing (p. 86), the dimensions of risk exposure (p. 146), and the relationship between risk and return (p. 148) are especially strong. In particular, investors debating whether to go with a total market strategy or whether to tilt their portfolios toward small stocks and value stocks will appreciate the discussion about the dimensions of risk exposure, where Hebner provides research showing that returns are almost entirely determined by the percentage of the portfolio composed of stocks, the amount of small company stocks in the portfolio, and the amount of "value" stocks.
In addition to explaining some of the theory behind passive investing to support the idea that investors should be sticking to index funds, Hebner also provides some practical advice through his discussion of an investor’s risk capacity. An investor’s risk capacity, he says, is based on five factors, including (1) time horizon and liquidity needs, (2) attitude toward risk, (3) net worth, (4) income and savings rate, and (5) investment knowledge. Investors can go to www.ifa.com to take a survey relating to these five factors, and IFA will provide them with a composite score. For each score, IFA gives readers a sample investment plan. For example, after I took the survey, IFA gave me a score of 55 and provided me with a sample investing plan, which suggested allocating 35% of my assets to bonds, 45.5% to U.S. stocks, and 19.5% to international stocks, and further broke these suggestions between large and small company stocks, value stocks, and emerging markets. This served to confirm the asset allocation strategy I currently have in place and gave me ideas for how I can make small tweaks to my investment plan.
Whether investors are deciding whether to convert to a passive indexing approach or, like myself, are already passive investors, Mark Hebner’s "Index Funds: The 12-Step Program for Active Investors" includes some valuable information to help investors develop an appropriate investing plan. While this book reinforced my belief in a passive investing approach, I was disappointed that the book seemed to favor style over substance with a lot of unrelated and unnecessary graphs and charts that, in all honesty, I did not take the time to bother with. Although there was some substance provided – particularly the link to the IFA website and the discussion about risk capacity – I would not consider Hebner’s book to be an essential investing book. For now, I have gotten my market timing co-worker started on "The Bogleheads’ Guide to Investing," by Taylor Larimore, and if I can give her one more recommendation, it will be for a book less interested in glitz and more interested in a straightforward explanation of investing basics, "The Four Pillars of Investing," by William Bernstein, which is still the best book on investing that I have read.
Although, for the most part, "Index Funds: The 12-Step Program for Active Investors" covers familiar ground for Bogleheads like myself, in his book, author Mark T. Hebner makes some very compelling arguments to either convince active investors to switch to index funds or reinforce the beliefs already held by passive investors. Hebner is particularly good at taking academic theory and explaining it with a common-sense argument that is easily understandable. His discussion of the random walk theory (p. 69), market timing (p. 86), the dimensions of risk exposure (p. 146), and the relationship between risk and return (p. 148) are especially strong. In particular, investors debating whether to go with a total market strategy or whether to tilt their portfolios toward small stocks and value stocks will appreciate the discussion about the dimensions of risk exposure, where Hebner provides research showing that returns are almost entirely determined by the percentage of the portfolio composed of stocks, the amount of small company stocks in the portfolio, and the amount of "value" stocks.
In addition to explaining some of the theory behind passive investing to support the idea that investors should be sticking to index funds, Hebner also provides some practical advice through his discussion of an investor’s risk capacity. An investor’s risk capacity, he says, is based on five factors, including (1) time horizon and liquidity needs, (2) attitude toward risk, (3) net worth, (4) income and savings rate, and (5) investment knowledge. Investors can go to www.ifa.com to take a survey relating to these five factors, and IFA will provide them with a composite score. For each score, IFA gives readers a sample investment plan. For example, after I took the survey, IFA gave me a score of 55 and provided me with a sample investing plan, which suggested allocating 35% of my assets to bonds, 45.5% to U.S. stocks, and 19.5% to international stocks, and further broke these suggestions between large and small company stocks, value stocks, and emerging markets. This served to confirm the asset allocation strategy I currently have in place and gave me ideas for how I can make small tweaks to my investment plan.
Whether investors are deciding whether to convert to a passive indexing approach or, like myself, are already passive investors, Mark Hebner’s "Index Funds: The 12-Step Program for Active Investors" includes some valuable information to help investors develop an appropriate investing plan. While this book reinforced my belief in a passive investing approach, I was disappointed that the book seemed to favor style over substance with a lot of unrelated and unnecessary graphs and charts that, in all honesty, I did not take the time to bother with. Although there was some substance provided – particularly the link to the IFA website and the discussion about risk capacity – I would not consider Hebner’s book to be an essential investing book. For now, I have gotten my market timing co-worker started on "The Bogleheads’ Guide to Investing," by Taylor Larimore, and if I can give her one more recommendation, it will be for a book less interested in glitz and more interested in a straightforward explanation of investing basics, "The Four Pillars of Investing," by William Bernstein, which is still the best book on investing that I have read.
Displaying 1 - 4 of 4 reviews