Contents

Acknowledgements

About the author

Read this first

Part 1  Introduction

1  Introduction to markets and portfolios

Where do we hope to end up?

2  What is an ‘edge’ over the markets – and do you have it?

The competition

It is hard to pick the right moment

The costs add up

Should we give our money to Susan and Ability?

You need to pick the best mutual fund out of 10 for it to make sense!

Outside stock markets

Being rational

3  What are the key components of the rational portfolio?

Asset split in a rational investment portfolio

Understand the level of risk you are comfortable with

Don’t put all your non-investment eggs in one basket

Reducing tax has a large impact on long-term returns

Paying too much in fees destroys asset growth

Implementation of the rational portfolio

Speculate less, sleep better!

Part 2  The rational portfolio

4  The minimal risk asset – safe, low-risk returns

Buy government bonds in your base currency if credit quality is high

Consider diversifying even the very low risk that your domestic government fails

Match the time horizon

What will the minimal risk bond earn you?

Buying the minimal risk asset

Summary

5  World equities – increased risk and return

Only buy world equity index trackers

The advantage of diversification

What are world equities?

Expected returns: no promises, but expect 4–5% after inflation

Lars’s predictions

In summary

6  The risk of equity markets

Understanding the risk you take to get returns

You can lose a lot!

Don’t assume that markets always bounce back

Diversification and the false sense of security

Risk rethought

7  Adding other government and corporate bonds

Adjusting the rational portfolio

The rational portfolio allocations

Return expectations of the rational portfolio

Special case: if you want a lot of risk

8  Thinking about non-portfolio assets

What else do you have?

Other assets

Not just geography

The institutional investor

Other assets rethought

9  What is omitted from your rational portfolio and why

Avoid investments that require an edge or those you already have exposure to

Residential property – don’t do it unless you have an edge

Private investments (or ‘angel’ investing)

Other asset classes left out

Part 3  Tailoring and implementing the rational portfolio

10 Financial plans and the risks we take

Building your savings

The super-cautious saver

Risk/return

Generalising the examples

Keeping it real

Reacting to disaster

A few ways to think about portfolio allocations

Stages of life

A few rules of thumb

Do you need a financial adviser?

11 Expenses

An expensive, active choice

Patience

Believing in an edge can be expensive

Tax and the rational portfolio adjustment

12 Products and implementation

Total expense ratio tells you the cost of owning the product

The best ETFs: liquid, tax efficient and low cost

Index-tracking funds

Comparison sites

Execution

Trading is expensive and pulling the trigger can be nerve wracking

Rebalancing your portfolio

Summary

Part 4  Other things to think about

13 Pension and insurance

Defined contribution pension plans

Annuities and insurance

14 Apocalypse investing

Gold as security

If not gold, then what?

How could 2008 and 2009 have happened?

15 A wish list aimed at the financial sector

Enhanced independent comparison sites

Risk expertise

Tax advice

Customisation

16 Conclusion

Appendix

A For the brave: portfolio theory and the rational investor

B Inflation-protected bonds

C The standard deviation

D Adding government bonds to the rational portfolio

E Adding corporate bonds to the rational portfolio

F Asset classes left out of the rational portfolio

G Portfolio risk when adding government and corporate bonds

H Tax considerations for the rational portfolio

I Liquidity and the rational portfolio

 J Physical or synthetic ETF?

Index

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