The Intelligent Portfolio: Practical Wisdom on Personal Investing from Financial Engines

Foreword ix

Preface xi

Acknowledgments xvi

Introduction to Financial Engines xviii

Chapter 1 Now it’s Personal 1

A Changing World 2

The Grand Social Experiment: 401(k) 6

The Knowledge Gap 7

The Traditional Advice Model 8

Institutional Tools of the Trade 10

Chapter 2 No Free Lunch 25

I’ll Take the one with the Highest Return. . . 26

A Little Bit of Latin: Ex-Ante and Ex-Post 28

How are the Prices of Risky Assets Set? 29

The Link Between Risk and Return 31

When High Risk does not Mean High Return 34

Hidden Risks and the Peso Problem 36

How Much Risk Am I Taking? 38

Risks and Returns of Different Assets 42

Does it Pass the Blush Test? 47

Chapter 3 History is Bunk 49

History and Expected Returns 51

The Past is not the Future 52

History is Sometimes not What it Seems 55

Investing with Perfect Hindsight 57

The Lucky and the Skillful 60

Chapter 4 The Wisdom of the Market 73

The Efficient Market? 74

What is the Market Portfolio? 78

What does the Market Portfolio Look Like? 79

There’s no Place Like Home 81

History of the Market Portfolio 83

Betting Against the Market 85

Avoiding Unintentional Bets 87

Risk and the Market Portfolio 89

The Market’s View of Future Returns 91

Market Portfolio Simulations 97

Final Thoughts 98

Chapter 5 Getting the Risk Right 101

How to Measure Risk 103

Asset Mix and Short-Term Loss 106

Risk and Portfolio Outcomes 109

Risk and Time Horizon 113

Factors to Consider in Selecting a Risk Level 120

Examples of Informed Investor Behavior 121

Chapter 6 An Unnecessary Gamble 125

A Different Sort of Beast 128

The Risk of Individual Stocks 130

The Implications of Individual Stock Risk 132

Expected Growth Rates 136

The Biggest Mistake in Retirement Investing 142

What About More Than One? 144

Do You Feel Lucky? 149

How to Invest in Stocks Safely 150

Hidden Costs 152

Dealing with Unwanted Stock Risk 154

Chapter 7 How Fees Eat Your Lunch 157

It’s Basic Arithmetic 158

Big Business 160

For Every Winner there Has to Be a Loser 161

It Still Adds Up to Dollars 164

A Wide, Wide World 167

How Fees Eat Your Lunch 168

It’s a Heavy Load to Bear 175

Fees and the Bigger Picture 176

Practical Considerations 179

Chapter 8 Smart Diversification 183

The Goals of Diversification 184

The Big Picture 185

Why Hierarchy is Bad for Portfolios 189

The Value of Asset Class Diversification 193

Diversification Ain’t What it Used to Be 197

Diversification and Investment Choices 198

The Big Picture: Part II 205

The Search for Better Diversification 211

Chapter 9 Picking the Good Ones 221

The Stuff that Matters 224

It’s About the Future 227

Risk Tolerance and Fund Choice 227

Investment Style 228

Fund Expenses 232

Predicting Mutual Fund Performance 233

Rating Funds 236

Putting the Pieces Together 257

What it Takes to Rank Among the Best 259

Chapter 10 Funding the Future 263

The Benefits of Being Flexible 264

Taxable and Tax-Deferred Savings 266

How Much do you Need? 269

From Wealth to Income 271

The Myth of Absolutes 275

Risk, Time, and Savings 281

What it Takes to Get there 291

Chapter 11 Investing and Uncle Sam 295

Why you don’t Want to Minimize Taxes 297

How Taxes Impact Investment Returns 298

The Impact of Personal Tax Rates 301

Tax Efficiency of Asset Classes 303

Asset Placement 306

Mutual Fund Tax Efficiency 308

Municipal Bonds 312

Capital Gains and Losses 316

Putting it All Together 319

Chapter 12 Wrapping it Up 321

Appendix The Personal Online Advisor 331

Notes 335

Glossary 347

About the Author 357

Index 359