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Worry-Free Investing A Safe Approach to Achieving Your Lifetime Financial Goals, by Zvi Bodie, Michael J. Clowes
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Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals
- Sales Rank: #251004 in Books
- Published on: 2003
- Original language: English
- Number of items: 1
- Dimensions: 9.25" h x .87" w x 6.42" l,
- Binding: Hardcover
- 242 pages
- Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals
Most helpful customer reviews
28 of 30 people found the following review helpful.
Good Case Overplayed
By dennis wentraub
Investors still numb from their stock market losses in recent years will find some solace in the message of Worry-Free Investing by Zvi Bodie and Michael J. Clowes. They argue that stocks are "not safe in the long run" - a dismissal of Wharton School Professor Jeremy Siegel's extensively documented work on the subject. It is the nature of equity prices to be uncertain. The unpredictable risk of future stock market returns stems from the unexpected, 'random', flow of information that changes investor's perceptions of a company's value. Their argument is a bit heavy-handed. Equity prices may move unexpectedly in the intermediate term, but over the long run they appear to be positively linked with advances in our economy as measured by our GDP and mirrored in our standard of living. That should give some reassurance to long term investors, but the connection gets no mention here.
The authors make the case for investing in inflation adjusted, government protected I Bonds and TIPS (Treasury Inflation-Indexed Securities also called Treasury Inflation Protected Securities). Focusing on the major goals of saving for retirement and providing for college education costs, Bodie and Clowes show how much an investor needs to save today. If the calculations seem a bit heady, readers are referred to the book's companion web site 'calculator'. At the heart of worry-free investing as defined by the authors is the defense of an individual's future buying power rather than the building of incremental wealth.
Stocks have been widely touted as the only reliable hedge to inflation. However, during the 1970's sustained inflation ravaged stock market returns on an (inflation) adjusted basis. Had TIPS and I Bonds existed, they would have outperformed a diversified basket of stocks. Indeed, most investors today should use TIPS and I Bonds alone, we are boldly told. And all investors should invest at least some of their retirement assets in these two investment tools. Unfortunately for those inclined to follow this last advice, it is not clear if many (or any) company sponsored retirement plans (401(K)'s etc.) offer these products.
The author's focus on inflation at a time when it is barely detectable may seem problematic, but a recovering economy, growing budget deficits, and a weakening dollar carry their own consequences. In the end, Bodie and Clowes overplay their case for I Bonds and TIPS. Not all products and services in the economy adjust in lockstep as do these bonds with Bureau of Labor Statistics measures of inflation. As a consequence a near exclusive reliance on these bonds may prove comforting but ultimately ineffective to reach a desired goal. Still, the understanding and use of these investment tools could prove important in a balanced portfolio in the years ahead. Now is the time to look at the issue.
8 of 19 people found the following review helpful.
Should 401ks TIP?
By A Customer
Remember this name -- Zvi Bodie. Bodie is a professor of finance and economics at Boston University School of Management and like many academics has an idea that is theoretically sound but impractical to implement in the real world. Bodie's idea is that the Federal Government should mandate 401(k) plan vendors to offer government issued inflation indexed bonds (TIPs) to 401(k) plan participants. Such a law would protect their retirements he argues, and should be part of 401(k) reform.
"It seems somewhat ridiculous that the government is not recommending these," Bodie told the 401kWire.com. "The simplest way would be for the government to mandate that one of the core options under 404(c) to be TIPs."
So far he reports that his recommendations have fallen on deaf ears in Washington (no members of Congress have contacted him and he has not contacted the Department of Labor). That should reassure industry insiders. What should catch your attention though is that Bodie's ideas have a small chance of catching on inside the US Treasury.
"There was a call by the Treasury department for ideas on how to stimulate the demand for TIPs," explained Bodie. In response he shared his ideas with Peter Fisher who manages the national debt issued by the Treasury. He also landed an opinion piece on the topic in the Financial Times of London.
Bodie first started working on the concept for JP Morgan. The New York City based firm engaged Bodie to explore ways to add the instruments to the 401(k) plan that it offers to its own employees. Bodie told the 401kWire.com that his understanding was that the product would eventually have been rolled out to other JP Morgan defined contribution clients. The engagement ended when JP Morgan merged with Chase.
Undeterred, Bodie is still pursuing the concept even without government fiat. He is now forming a new company in partnership with Harvard's Nobel Prize Winner Bob Merton and an unnamed but "senior level and experienced Wall Street executive" to pursue the concept of offering TIPs to 401(k) investors. "There will be a press release in the next couple of weeks" detailing the effort, he said.
"Everyone who we have mentioned this to responds quite enthusiastically," said Bodie.
Bodie's idea is theoretically simple. "Participants in 401k plans are not made aware of the risks of investing in their own employers stock. And they are not made aware of the risk of even investing in diversified equity funds," explained Bodie. "People say that if you invest in equities for the long-term that you do not have risk -- that is wrong."
That idea is buttressed by the fact that the price for options rises as the maturity of the instrument lengthens. If the risk of equities decreased over longer holding periods that price should be falling instead of rising. He adds that none of the investments in 401(k) plans, including stable value funds, are guaranteed to beat inflation.
"Most plans do not have an investment that allows them to make a long-run hedge against the inflation risk," he added. "Suppose the rate of inflation from now on is 3 percent per year. You want something to guarantee that the dollar would be worth a dollar in 30 years."
It was this fact that led him to idea to add TIPs to plans. With those instruments participants could lock in a real, and known, return for their retirement.
The concept faces at least to major hurdles, either of which could sink a product build around the concept. The first is that to lock in the return participants must buy TIPs in their raw form and not as a part of a mutual fund. For the industry that would likely add a recordkeeping headache that few providers would want to take on for so unsexy a product.
The second is that small market for TIPs. That market is estimated to be less than $150 billion in total assets currently. Meanwhile, nearly $2 trillion is now invested in 401(k) plans. Moving even a small proportion of those assets to TIPs would swamp the market.
Of course, it would also juice demand for the bonds and please the Treasury. Let's not give the Feds any ideas.
-Sean Hanna
88 of 89 people found the following review helpful.
Brilliant, important, imperfect
By A Customer
Investment authorities have long recommended diversified portfolios of stocks, bonds, and cash as the best way for investors to pursue their financial goals without courting too much risk. In *Worry-Free Investing*, Zvi Bodie and Michael Clowes cast a gauntlet before this conventional wisdom. Most investors, they argue, should forget about traditional asset classes--especially stocks--and should abandon traditional approaches to risk management, like building a diversified portfolio and gradually decreasing its allocations to risky assets over time. Those saving for retirement or for a child's college education should instead invest in "risk-free" assets, such as inflation-protected bonds and annuities, and certificates of deposit with yields indexed to the cost of college tuition. By relying exclusively on such instruments, the authors contend, investors will never risk losing their nest eggs (as they would with stocks), will ensure that their purchasing power never diminishes (as it might with bonds or cash), will stand a much better chance of achieving their financial goals, and will sleep soundly at night. They will become, as the title promises, "worry-free."
While Bodie has been making his case in academic journals for several years, this book marks his first attempt to reach the masses. To both authors' credit, their manifesto is remarkably accessible--much more so than most investment books aimed at a popular readership. The language is grammar-school simple, and important lessons about risk are presented not just in dull graphs and statistics, but through poignant personal stories: of the hardworking couple in their sixties, whose dreams of a comfortable retirement are shattered when an unexpected market correction teaches them that stocks are not "safe" in the long run; of the thrifty saver who spends her working years scraping together a nest egg, and her retirement in equally joyless frugality because she's afraid of outliving her assets; of the brilliant student who's been admitted to Stanford, but whose bear-mauled college fund can only support an enrollment at Penn State. Readers who have never been moved by impersonal tales of compound returns and standard deviations may find the human tragedies here more compelling (if they can agree with the authors that it's tragic to have to attend Penn State), and thus may come away from the book strongly motivated to develop sound financial plans. But others may find the authors' rhetoric patronizing, emotionally exploitative, and tendentious, particularly since many of their anecdotes are simply tales of greed, and not exempla of the conventional investment wisdom (what financial advisor would recommend a portfolio heavy with stocks to a couple two years from retirement, or to a parent whose child is already applying to college?).
Manipulative rhetoric aside, there is no doubt but that Bodie is brilliant, nor that his ideas deserve the careful consideration of every serious investor. Following his advice to shift our investment strategies from risk spreading through portfolio diversification, to risk transference through things like inflation-indexed annuity contracts, could very well improve our chances of reaching our financial goals. How disappointing it is, then, to read that some of the instruments the authors recommend most highly--inflation-indexed annuities, principal- and inflation-protected equity participation notes--currently do not exist! We can only hope that Bodie and Clowes are right that consumer demand will eventually produce them.
Equally disappointing, albeit for different reasons, is the authors' failure adequately to disclose the main risks of their worry-free approach, particularly the risk of a decline in real interest rates. As fate would have it, real rates began to drop sharply even as this book went to press: TIPS and I Bonds, the real-return bedrock of the worry-free retirement plan, now yield about half what they did just a year ago. This means that it takes much more savings to be worry-free now than the figures in the book suggest. Moreover, the recent decline in real rates has coincided with a contraction in economic growth. This coincidence is in fact a normal occurrence: real interest rates tend to be positively correlated with economic growth rates. Accordingly, the worry-free investor, who must step up her savings as real interest rates decline, will have to save the most precisely when the economy is at its worst--i.e., when the rest of her finances, including labor income, are most vulnerable. If she doesn't accelerate her savings in a decelerating economy, she may begin to fall behind in the pursuit of her financial goals, and never be able to catch up. (Interestingly, the worst times for the worry-free investor may be the best times for the equity investor who is still accumulating assets, since stock prices generally fall along with real interest rates. Thus, even if he were to invest less money, his dollars might buy more shares of stock, and the shares he bought would have a higher expected return.)
Bodie and Clowes also fail to mention the risks that attend Social Security--risks that worry many young investors much more than the vicissitudes of the stock market. The authors acknowledge that a complete reliance on TIPS and I Bonds to fund retirement would require an improbable increase in most Americans' savings rates; hence the worry-free approach to retirement relies heavily on the government's guarantee of a healthy stream of Social Security income to supplement personal savings. Readers who are genuinely concerned about the future of Social Security may therefore conclude that a worry-free retirement plan would do as much to heighten as to relieve their anxieties.
Given the reservations that must be attached to this book's recommendations, readers who know little about investing would do well to follow the advice of the tenth chapter and seek out a knowledgeable financial advisor who can evaluate their needs and assess the likelihood that a worry-free program will address them. More seasoned investors can probably judge the merits of *Worry-Free Investing* for themselves. After reading it, they may wish to revisit some of the canonical works that Bodie and Clowes so brilliantly challenge, especially Jeremy Siegel's *Stocks for the Long Run*.
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