The Only Guide You'll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments

Preface xv

Acknowledgments xix

Part I: Investment Strategy in an Uncertain World

Chapter 1 The Uncertainty of Investing 3

Efficient Frontier Models 5

Chapter 2 The Investment Policy Statement 9

The Foundation of the Investment Plan 10

Part II: Asset Allocation

Chapter 3 Asset Allocation 17

The Ability, Willingness, and Need to Take Risk 17

When Conflicts Arise 21

Risk Factors 22

Chapter 4 Equities 25

Equities versus Fixed Income 25

U.S. Equity versus International Equity 28

Emerging Markets 30

Value versus Growth 31

Real Estate 34

Your Home 36

Collateralized Commodity Futures (CCF) 36

Socially Responsible Investing (SRI) 39

Chapter 5 Fixed Income 41

Credit Quality 41

Short-Term versus Long-Term Maturities 42

Municipal Bonds 44

Inflation-Protected Securities 44

Short-Term Fixed Income versus TIPS 46

Chapter 6 Alternative Investments 49

Convertible Bonds: Not Recommended 49

Covered Calls: Not Recommended 50

Fixed-Income Currency Exposure: Generally Not Recommended 51

EE Bonds: Recommended 52

Emerging Market Bonds: Not Recommended 52

Equity-Indexed Annuities (EIAs): Not Recommended 53

Gold: Not Recommended 54

Hedge Funds: Not Recommended 54

High-Yield (Junk) Bonds: Not Recommended 56

Leveraged Buyouts (LBOs): Not Recommended 57

Leveraged Funds: Not Recommended 58

Master Limited Partnerships (MLPs): Not Recommended 58

Mortgage-Backed Securities (MBS):Not Recommended 58

Precious Metals Equities (PME):Not Recommended 59

Preferred Stocks: Not Recommended 60

Private Equity (Venture Capital): Not Recommended 61

Stable-Value Funds: Generally Not Recommended 62

Structured Investment Products: Not Recommended 63

Variable Annuities: Not Recommended 64

Chapter 7 Liabilities and Asset Allocation 67

Mortgages 67

Prepay the Mortgage or Increase Tax-Advantaged Savings? 69

Other Liabilities 70

Part III: Implementing the Plan

Chapter 8 Individual Securities or Mutual Funds 73

Convenience 73

Diversification 74

Size Matters 76

Advantages of Individual Securities 76

Separate Account Managers 77

A Word of Caution 78

Summary 78

Chapter 9 Active versus Passive Management 81

The Evidence 82

The Search for the Holy Grail: Why Is Persistent Outperformance So Hard to Find? 85

The Value of Economic Forecasts 87

The Value of Security Analysis 88

Buy, Sell, or Hold? 89

The Tyrannical Nature of an Efficient Market 89

The Prudent Investor Rule 90

The Benefits of Passive Investing 91

Summary 92

Chapter 10 The Asset Location Decision 95

Exceptions 96

Order of Preference 97

Additional Considerations 97

Advanced Concept 99

Balanced and Lifestyle Funds 99

Chapter 11 The Care and Maintenance of the Portfolio 101

Rebalancing 101

Tax Management Strategies 104

Final Considerations 110

Part IV: The Investment Plan and Financial Security

Chapter 12 College Savings Plans 113

529 Plans 113

Coverdell Education Savings Accounts 115

Custodial Accounts 116

U.S. Savings Bonds 117

Financial Aid Impact 118

Chapter 13 Insurance 121

Risk Management 122

Payout Annuities 124

Long-Term Care Insurance (LTCI) 127

Life Settlements 130

Chapter 14 IRAs and Retirement/Profit Sharing Plans 135

Roth versus Traditional IRA 135

Five Key Facts 136

What to Do When Retirement Plan Choices Are Poor 141

IRA Conversions 143

Chapter 15 Social Security 149

Is Social Security a Balance-Sheet Asset? 152

Double Dipping Strategy 155

Chapter 16 Determining a Safe Withdrawal Rate 157

Monte Carlo (MC) Simulations 158

In the Absence of an MC Simulator 160

The Sequencing of Withdrawals to Fund Retirement 163

Chapter 17 Planning Beyond Your Lifetime 167

Estate Planning 167

Preparing Your Heirs 168

Conclusion 173

Appendix A Effective Diversification in a Three-Factor World 175

Appendix B Dollar Cost Averaging 181

Appendix C Reverse Mortgages 185

Appendix D How to Choose an Adviser You Can Trust 191

Notes 193

Glossary 197

Index 213