What about the content? Is it any good for the $4.97 I paid, or, (if you are not lucky to get the bargain) the $19.95 jacket price? According to the author Daniel Solin, this is the smartest book you’ll ever read because “it is simple. It is understandable”. And simple is good.

Between Chapter 1 and 35, the author talks about the follies of active (or what he calls “hyperactive”) investing as opposed to passive investing, where you buy and hold a diversified mix of index funds that track the entire financial market. There are interesting nuggets of facts and wisdom here and there. For example, between 1985 and 2004, the average annual return of all actively managed funds was a mere 3.7%, whereas the S&P 500 Index returned a whopping 13.2%.

None of this is new to an experienced investor, who is already well versed in the differences between index investing and stock picking. But this is where the story-telling skill of the author becomes important, because no matter how obvious the bottom line is, sometimes we all need hammering the point home (particularly when violent market swings cause even the most seasoned investor to make stupid mistakes).

The book gets interesting from Chapter 36, where the author starts talking specifics, beginning with his 4-step advice: 1) decide on asset allocation (proportion of stock and bond funds in your portfolio) based on your risk tolerance, 2) open account with one or more prominent fund families (Vanguard, Fidelity, T. Rowe Price) to set the ball rolling, 3) choose specific stock and bond funds offered by these fund families to build your portfolio, and 4) rebalance twice a year to reset the proportion back to the original asset allocation.

In short, the author does the following:

1. First, he presents four different asset allocation types, with increasing degrees of risk (and return): low risk, medium-low risk, medium-high risk, and high risk. Your choice of asset allocation depends on your risk tolerance (that in turn depends on your age and other circumstances).
2. Next, he builds the portfolio for each asset type using three kinds of index funds – total US stock index fund (that tracks the broad US stock market), international stock index fund (tracks major international market indexes), and total US bond index fund (tracks broad US bond market) – drawn from each of the three fund families.
3. He wraps up by suggesting you rebalance your portfolio twice a year (opinions vary on this – I rebalance once a year), to reset your portfolio composition back to the original asset mix.

These specific advices will hand-hold a first-time investor through the process of setting up a well diversified portfolio that is guaranteed to achieve at least the market return. And, “over the long term, simply achieving market returns will beat 95% of all professionally managed investment portfolios”. To a newbie investor, this alone should be worth paying $19.95 for this book. If you are a pro, search the bargain shelves of your favorite book store – you may get lucky too.

69-year old Earl Crawley, while making $20,000 a year as a parking-lot attendant, still amassed over $500,000 in investment asset. His secret? Two, in fact. The first is his good old habit of saving every “nickel and dime”, and the second is his lack of investing knowledge, summed up in his quote that I borrowed above.

Saving and investing, in that order (you must save to invest), are the two essentials for building wealth slow and steady. Saving is common sense, and to people like Earl, almost an instinct. Investing, by contrast, requires some learning. But, knowledge plays a self-limiting role in our investing decision, which in turn affects investing performance.

The two fundamental things of investing are where to invest and how to invest. That is, the assets that make up our portfolio, and the proportions in which these assets are allocated. Unfortunately, there are as many different answers to these two questions, as there are books written about them. The more we know, the more confusing they get, and even drawing up the simplest asset mix can become a difficult task.

Keep it simple.

Solution? Keep it simple. Beyond the basics, knowing more does not help much. It is a bit like the picture here. At first, the return of your investment (solid blue graph) goes up with your knowledge level, but after you are past the basics, your return hits a “saturation point”. After this point, more knowledge causes information overload, and the payoff does not show a commensurate increase; in fact, the return can even decrease, depending on the specifics of your portfolio (in investing, more knowledge is not necessarily better knowledge).

Know the basics

What are these investing basics? There are four steps to it:

1. Depending on your risk tolerance, build a portfolio with the right proportions of risk-free (money market, treasury bills etc.) and risky (stocks and bonds) assets.
2. For your risky assets choose among those that do not move in lockstep with each other (for example, stocks+bonds, domestic+foreign stocks, etc). This way, you can spread out the risk of market downturns, and reduce its impact on the return of your portfolio.
3. Build your portfolio with manageable number of assets. Adding too many stocks and mutual funds is an example of information overload; if you do not understand them, you do not know their return potential, and your portfolio return itself can suffer.
4. Once you set up your portfolio, hold on to it. Do not tweak your asset mix each time the market does something unexpected. As I said in an earlier post, there is no get-rich-quick scheme in investing; a “buy and hold” strategy is the only way to smooth out short-term market fluctuations, and gain from the long-term economic growth.

Again, keep it simple. Earl does exactly that. He is open to suggestions and stock tips, but uses his own common sense and gut instinct to make decisions on which stock to buy. He is a self-made investor. Why can’t we all be like him?