It is easy to forget personal investing fundamentals when stock prices hit new highs one week, fall sharply the next and then rise again in no reliable pattern, as they have been doing this year. So now is an ideal time to reread — or perhaps pick up for the first time — three excellent books by people who are particularly good at explaining the building blocks of a solid portfolio.
In the first of these, Andrew Tobias promises in his title that he is offering “The Only Investment Guide You’ll Ever Need” ($15.95, Mariner Books). And in the book, which has been continually updated since it was published in 1978, he covers a great deal of important territory, although some of the advice by now may sound familiar. He includes nostrums like this: Buy only investments you understand. If the projected return sounds too good to be true, stay away. You’re going to have to take some risk and buy stocks to stay ahead of inflation. Never forget the impact taxes can have on returns.
Solid counsel, but it is not why the book is worth reading. Mr. Tobias’s ideas about saving money — you can’t build a portfolio without savings — are his real gems. And the reason for that is his approach. He combines humor — it starts with the dedication, “to my broker — even if he has, from time to time, made me just that” — with common sense presented in an uncommon way.
For example, you may already know that you shouldn’t carry credit card debt, because the interest rates can drain what you are able to sock away; you can lower your insurance premiums by increasing deductibles (allowing you to save more) and buy in bulk when items you consume frequently are on sale.
But when Mr. Tobias explains it, doing things like this seem as if they would be financial brilliance on your part instead of drudgery.
“Why put $1,000 into the stock of some utility and earn $40 in annual taxable dividends if you can put the same money into insulation and save $350 — tax-free — on your utility bill?” he asks.
But what should you do if you actually save money by following Mr. Tobias’s suggestions? John C. Bogle has some good ideas in “The Little Book of Common Sense Investing” (Wiley, $24.95).
Let’s get the negatives out of the way first. Mr. Bogle can be hectoring. (“You ignore these rules at your peril.”) And, perhaps because it was published a decade ago, the idea of owning international stocks or bonds gets little attention.
That said, in clear, convincing fashion he lays out a solid strategy for getting “your fair share of stock market returns.” That isn’t difficult, he writes. “Successful investing is all about common sense.”
Among his common-sense ideas:
■ Since timing the market is virtually impossible, you should buy and hold stocks.
■ Being diversified minimizes risk.
■ Because transaction costs and brokerage fees can eat up a significant portion of your returns, invest heavily through low-cost index funds.
That last isn’t surprising since Mr. Bogle is founder and former chief executive of Vanguard, the mutual fund company known for its index funds. But he argues everyone should be a fan of the funds.
“Simple arithmetic suggests, and history confirms, the winning strategy is to own all the nation’s publicly held businesses at very low cost,” he writes. “By doing so you are guaranteed to capture almost the entire return they generate in the form of dividends and earnings growth. The best way to implement this strategy is indeed simple: buying a fund that holds this market portfolio. Such a fund is called an index fund.”
Of course, one reason most of us try to create a solid portfolio is so we can live the kind of life we want when we get older. The final book grabs me partly because of my age. And as I wrote two years ago, I found two things appealing about “The Charles Schwab Guide to Finances After Fifty”(Crown Business, $26), written by Carrie Schwab-Pomerantz.
First, Ms. Schwab-Pomerantz thoroughly answers her target market’s most common questions. For example, if you are 50 and older, don’t have much money stashed for retirement and wonder what you should do, she says start saving at least 40 percent of your income immediately.
Conversely, if you are in good financial shape as retirement looms, you may wonder whether you should pay off your mortgage. Ms. Schwab-Pomerantz, a certified financial planner, shows you how to do the arithmetic to decide. You multiply your current mortgage interest rate — say 4 percent — by your tax bracket. Let’s assume 30 percent. That means your mortgage is only costing you 2.8 percent (since you get to deduct the interest you pay).
So, paying it off is equivalent to a 2.8 percent risk-free return. If you are pleased with that, especially since you know you will own your house free and clear, pay off your mortgage. If you think you can earn more elsewhere, keep paying the loan and invest the money you would have used to pay off the mortgage.
The other nice thing is that Ms. Schwab-Pomerantz — the daughter of Charles Schwab, the founder of the mutual fund company that bears his name — treats her readers like adults who know the personal finance basics.
For example, she says, when it comes to retirement planning, you need to answer only three questions: What do you expect to spend each year in retirement? How much money will you need in savings/investments to support that spending? And how much more do you need to save to get from here (where you are now) to there (the point where you can fund the retirement you want)?
If your projections show you coming up short, she says, you should postpone retirement. That “would allow you to build a bigger retirement portfolio and shorten the time you’ll rely on savings,” she says, and it could also increase your Social Security benefits.
These three books are at the top of my list. If I expanded it, I would include “The Intelligent Investor” by Benjamin Graham (Collins Business Essentials, $8); “Stocks for the Long Run” by Jeremy J. Siegel (McGraw-Hill, $40) and “Making the Most of Your Money Now” by Jane Bryant Quinn (Simon & Schuster, $35).
They, too, are worth a second read, or a first if you haven’t had the pleasure.